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Nucleus Software Exports: Not realizing full potential - Outside View by Luke Verghese
 
 
Nucleus Software Exports: Not realizing full potential

A very nonchalant performance from a company which can achieve much more if only the management made an effort in that direction

What's in a name?

The front cover of the annual report gives the name plate as Nucleus Software. But that is not the full name. Why the word Exports has NOT been added to its name is not very clear -not that it matters -but still. A New Delhi based company it is 24 years vintage as a corporate entity and does not have very much to show for it at the end of the day. Of the 2,312 employees on its rolls at the end of the financial year-- the vast bulk of 1,677 nos. are based out of its three offices in Noida. It has ten other offices -five based out of India and five based offshore offices. The next biggest staff strength of 250 is surprisingly based out of Jaipur. Third in line in the office sweepstakes is Pune with 120 employees. The foreign offices in Tokyo and Amsterdam make do with seven members each. These may well be support offices or something. The company also boasts of six siblings including four based offshore, and one step down sibling based in Singapore.

The company provides software solutions to the Banking and Financial services industry-from retail banking to corporate banking. The revenue receipts are grouped under two business segments-Projects and Services and the Products segment. The latter accounted for 92% of revenues in 2012-13 against 94% previously -- with the former ringing in the balance. More specifically the standalone company generated revenues from operations of Rs 2 bn against a similar sum previously. Interestingly enough the way the income streams are carved up shows that the biggest single market is India followed by the Middle East, the Far East, South East Asia, Europe, and lastly Others. Thus the Asian region including the Middle East accounts for over 82% of all revenues. (The most profitable market however is apparently the Middle East market). Other income brought in a sizeable sum of Rs 239 m (relative to pre-tax profits) against Rs 230 m previously. The profit before tax amounted to Rs 497 m against Rs 438 m previously. Thus, other income which principally arises from non-revenue related factors is a major constituent of the bottom-line. Since it calls itself an 'Export' company it may interest readers to know that the foreign exchange earnings amounted to Rs 1.5 bn, the same as previously. Thus exports constituted 75% of mainline revenues against a similar percentage previously. That is not anything more than what the stalwart IT companies are achieving anyways. (The consolidated group on its part achieved revenues of Rs 2.9 bn against Rs 2.8 bn previously. The profit before tax amounted to a commendable Rs 600 m -relative to the profitability ratios of the standalone company- against Rs 483 m previously).

The other income factor

The 'other income' makes for interesting reading. The vast bulk of this income is made up of interest income on bank deposits, dividend income from investments, net gain on sale of investments, and net gain on forex calls. There is also some miscellaneous income to add colour and a wee bit of write back of excess provisions. The company is also very cash rich -as the year end financials make out. It also boasts of zero debt. It had cash and bank balances amounting to Rs 904 m at year end and current investments valued at Rs 1.5 bn. It has also dished out confetti amounting to Rs 102 m to its siblings under the head long term advances plus a sum of Rs 0.5 m under the head short term advances. With such strong financials one would have expected the company to move forward in leaps and bounds in terms of sales and profits. It also whacks a punch in the net worth that it has accumulated over time. The reserves and surplus at Rs 2.87 bn towers over the paid up capital of Rs 324 m. As one can see, the entire reserves position has emanated from profits that accrued over time.

For the matter of record the promoters who apparently principally appear to be the Dusad family control over 57% of the paid up capital. One of the bigger promoter shareholder's goes by the name Nucleus Software Engineers Pvt Ltd. One wonders what this company does for a living.

The revenue streams

The revenues for the year have however been stagnant and 'other income' is a major constituent in the bottom-line. Where the company scores big is in the cash that it generates from operations. It helps that IT companies make do with only marginal inventories, with the trade receivables in 2012-13 amounting to only around 100 days sales, and that the current assets consisting of trade receivables and other current assets almost cancel out the current liabilities consisting of trade payables and other current liabilities. The company generated positive cash of Rs 660 m from operations during the year against a much lower Rs 43 m previously. This substantial change in cash flow generation was mainly due to the massive positive turnaround in the position of trade debtors at year end.

It also helps that the company spends not more than a dime in fixed asset creation. Total spending on gross block amounted to a relatively minor Rs 69 m against an even lower Rs 30 m previously. The company boasts a historical gross block of Rs 920 m consisting of both tangible and intangible fixed assets of which Rs 589 m (64%) has been written off. The company could consequently indulge in the pleasure of buying and selling debt securities to the hilt. It cumulatively bought and sold securities of the value of Rs 7.6 bn. It appears to have made some money in the bargain-some Rs 10 m it would appear. With no worthwhile outlet for the surplus cash that the company generated during the year the natural beneficiaries were the cash balance which rose to Rs 905 m from Rs 736 m and the current investments portfolio which too rose to Rs 1.5 bn from Rs 1 bn previously.

Solid financials

The year end increase in the cash solidity of the balance sheet which has basically arisen from the management's inability to profitability deploy its surplus funds in its business is rather unfortunate. As it is over 70% of the revenues from operations emanate from Products segment-implying perhaps that it is doing what it knows best-continue to do product work for third parties. It does not have any branded products of its own on offer. The company goes on to add that the software that it develops is largely in the area of 'origination and management of retail loans' and in the 'management of corporate liquidity by banks'. I have no knowledge of the size of the overall market in its area of specialisation and for what the company is able to bring to the table. But the company goes on to add that the software solutions on offer are working successfully in 50 countries and across more than 150 installations. While the former figure is impressive, the latter figure does not appear to add up to much.

There is no direct mention of how the company will tackle the problem of generating more revenues in the near future--suffice to making some generalisations about how a combination of economic growth, new emerging markets, cloud computing, and the increasing demand from SME enterprises are anticipated to boost growth. To make up for the lack of any action plan, the company has allocated one full page of its annual report to chortling about all the awards and accolades that the company has earned for itself over the past one year. Why, then, have the awards etc not translated into increased revenues?

The several stepneys

The company controls the operations of several stepneys in an apparent effort to try and take its good work forward. To be precise there are six direct siblings and one indirect sibling. The permanent capital investment in them totals Rs 132 m --after writing off the investment of Rs 41 m in two of the siblings based in the USA and in the Netherlands respectively. The largest single outstanding investment is in Nucleus Software, the Indian offspring, and amounting to Rs 100 m. Then there are the loans that it has advanced to two of its siblings amounting to Rs 107 m. And, by the way only one of the siblings -VirStra I-Technology Services declared a dividend during the year amounting to Rs 30 m. What exactly is the policy for dividend declaration by its siblings is a mystery wrapped in an enigma. However, getting a monetary return on investment is the last objective of any parent.

From what I can make of the related party transactions the parent sells 'software development, services and products' to four of its siblings-Nucleus offspring in Singapore, Japan, USA, and the Netherlands. The total sale value of such software etc amounted to Rs 210 m with the largest recipient being Japan with Rs 138 m. The total sale value of such software amounted to a slice over 10% of all such revenues accruing to the parent. The parent in turn purchased software worth Rs 4 m from one sibling.

The Netherlands based sibling appears to be a total 'gone case' if that is the right turn of phrase-and for no fault of its own it appears. On a paid up capital of Rs 28 m it had negative reserves of Rs 40 m and counting. On revenues of Rs 9 m, it generated a pre-tax loss of Rs 9 m. In the preceding year the figures were dramatically different at Rs 71 m with a pre-tax profit of Rs 1 m thrown in. What is quite inexplicable here at first sight is how this company made a loss equal to its revenues--as the revenues that it generated was from the sale of software that it in turn had purchased from the parent. Unless that is there were standing costs which had to be met. The parent sold the sibling software worth Rs 8 m. This unit is apparently being scaled down or phased out for god knows what reason.

The American sibling also has negative reserves far in excess of its paid up capital but appears to be on the mend. On revenues of Rs 163 m it ponied up a pre-tax profit of Rs 9 m. It realised a profit in the preceding year too. It also purchased software valued at Rs 11.3 m from the parent -- for resale one presumes. It apparently generates software of its own. The interesting aspect that is clearly evident is that both these siblings have been extended kid gloves treatment by the parent as regards recovery of sales dues. Against sales of Rs 11 m to the American sibling the trade receivables amounted to a relatively bountiful Rs 38 m at year end. Similarly, the figures for the Netherlands sibling read as Rs 8 m and Rs 27 m respectively. One hopes that the parent can recover its dues from the latter sibling.

More of the same

The biggest capital investment as stated earlier is in its Indian sibling going by the same name as that of the parent. It also has the additional benefit of receiving largesse in the form of a loan to the extent of Rs 91 m from the parent. For all the 'good intentions' of the parent this company too appears to be a non performer. It boasts of negative reserves and managed to pony up revenues of only Rs 8 m in the latest accounting year. Needless to add it reported a pre-tax loss. The situation was no different in the preceding year. One is at a loss to understand what this undertaking is all about.

The company which is the largest beneficiary of sales to siblings is the Japanese offspring. The sibling generated revenues to the tune of Rs 321 m (it purchased software worth Rs 138 m from the parent) and posted a pre-tax of Rs 28 m. This company apparently generates its own in-house software too. For some absurd reason the parent even wrote off dues by this company to the tune of Rs 5 m in the preceding year. Anything goes appears to be the mantra here. It is however the Singapore company which is the flag bearer in this pack. On a small capital base of Rs 27 m it has reserves of Rs 228 m. It generated revenues of Rs 702 m and posted a pre-tax profit of Rs 35 m.

The other flag bearer of sorts is the oddly named company VirStra I-Technology operating out of home base. This company too on a low capital base generated substantial revenues and posted a hefty profit also. But its Singapore based offspring sporting the same nameplate is an oddball of sorts. On a capital base of Rs 9 m it had negative reserves of Rs 9 m. But the real story here is something else. On revenues of Rs 26 m it ran up a pre-tax profit of Rs 26 m and with no tax provision to boot. Now how does that count for a superlative performance! How can such fancy results be made possible? If so then they should start working on their other laggard siblings also, especially Nucleus Software Ltd in which the parent has invested a bomb. The central purpose of generating such mega profits in this instance appears to have been orchestrated to reduce the accumulated losses of Rs 32 m at the previous year end.

As one can see the siblings are a bunch of oddballs of all hues and unpredictabilities. And this is almost in keeping with the main body of the revenues.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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