• APRIL 22, 2002

VisualSoft: Improving performance

VisualSoft continued with its turnaround in 4QFY02. The company saw a sequentially growth in topline of 5% and net profits rose by 16%. The sharp rise in net profits was due to the company managing to improve operating margins by controlling its costs.

(Rs m) 3QFY02 4QFY02 Change FY01 FY02 Change
Sales 244 257 5.2% 1,314 1,020 -22.3%
Other Income 16 18 14.5% 42 60 42.1%
Expenditure 180 183 2.2% 671 734 9.3%
Operating Profit (EBDIT) 65 74 13.6% 642 287 -55.4%
Operating Profit Margin (%) 26.6% 28.7%   48.9% 28.1%  
Interest - -   - -  
Depreciation 22 23 8.5% 40 80 98.8%
Profit before Tax 59 69 15.7% 645 267 -58.6%
Extraordinary income/(expenses) - -   (20) - -100.0%
Tax 4 4 7.0% 7 13 82.7%
Profit after Tax/(Loss) 55 64 16.3% 618 254 -58.9%
Net profit margin (%) 22.6% 25.0%   47.0% 24.9%  
Diluted number of shares (m) 19.7 19.7   19.7 19.7  
Diluted Earnings per share* 11.2 13.1   31.4 12.9  
P/E (at current price)   20.7     21.0  

In 4QFY02, VisualSoft clocked a 5% sequential growth in revenues from the solutions business. The products business also showed a reversal in trend and grew sequentially. The company earned 97% of its revenues from solutions business and only 3% from products business. During the quarter VisualSoft

VisualSoft’s solutions offerings are in the areas of enterprise application integration (EAI), application infrastructure management and re-engineering, embedded systems and new technology development. Of the total solutions revenues 31% came from onsite projects and 69% came from offshore projects. The new clients added during the quarter totaled to 7. This takes the number of active clients of the company to 52. The reason for concern is that the average billing per customer for the company translates to US$ 0.4 m (Rs 20 m). Smaller projects are generally not mission critical and can be shelved or postpone when the client is looking at cutting costs. The company earned 64% of its revenues from the US. Of the remaining 29% came from Europe and 7% came from other geographies.

For FY02, VisualSoft clocked a decline in topline of 22%, while the fall in net profits was steeper at 59%. VisualSoft’s trouble had started in 4QFY01, when it came out with a profit warning. Its product sales were badly hit due to the slowdown in the US economy. For four consecutive quarters the company’s high margin product sales saw a sharp decline. As a result, the operating margins steadily deteriorated.

Particulars FY01 1QFY02 2QFY02 3QFY02 4QFY02 FY02
Growth in product sales (QoQ) 86.1% -57.3% -79.9% -38.3% 3.7% -88.5%
Products (% contribution to revenues) 47.3% 19.2% 4.7% 2.8% 2.7% 7.8%
Services (% contribution to revenues) 52.7% 80.8% 95.3% 97.2% 97.3% 92.2%
OPM 48.9% 33.9% 22.0% 26.6% 28.7% 28.1%

VisualSoft meanwhile decided to focus on the services business that had a steadier revenue stream. In 3QFY02, the company registered a sequential growth in topline due to increase in revenues from its services business. The company managed a strong performance on the solutions front. Revenues from the solutions business grew by 51% in FY02. This is a considerable feat considering the current market environment. It was the 89% decline in revenues from solutions that caused the revenues for the full year to decline by 22%. The full year FY02, the company earned 92% of its revenues from solutions and 8% from projects.

As of now the detailed break-up of the revenues is not available. We will update the report as soon as the numbers are available. At the current market price of Rs 271, the stock is trading on a P/E of 21x its FY02 annualised earnings. While much larger, software stocks like Satyam, Hughes and HCL Technologies are trading at similar valuations, the case in favour of VisualSoft is that due to its smaller size its topline and bottomline can grow very swiftly.

However, it is the small size that is the company’s disadvantage. Corporates in the west might not be comfortable to work with lesser-known companies like VisualSoft and would like to work with the bigger software companies. Also, software majors like Wipro and Infosys, have much deeper pockets to sustain pricing pressure.

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