SSI Limited's entry into the software development business augurs well for the company and is likely to be rerated. Buy the stock, says Aravamuthan Sasikant
SSI Limited (SSIL), the Chennai-based software education company focuses on the higher end speciality training software business. The company has also entered the software development business recently which will further add to its growth trajectory in the coming years.
SSIL has built up a strong brand franchise in the south with 25 own centres by June 1998 and a further 25 franchisee network. It is expanding its network with emphasis on both own centres as well as through franchisees. Currently it has 118 owned centres against 98 owned centres a year back. Likewise it has increased its franchisee network from 24 in the previous year to 52 centres in June 1999.
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The speciality training market is expected to grow at a much faster pace than the conventional IT training market and SSIL stands to gain. Last year it added Oracle Financials training to its portfolio as part of its increasing stress on ERP training. It has managed its growth over the years via company owned centres.
It has now, however, decided to expand its training network by leveraging its brand equity and appointing a number of franchisees to help it grow at faster rate in the coming years. The number of franchisee centres is expected to increase from 24 in 1998 to 110 by 2000.
This could dilute its brand equity as SSIL may find it difficult to exercise control on its franchisees in order to maintain the quality of training. It has systems in place for checks and balances to maintain quality of its services. Revenues from franchisees are expected to amount to 28 per cent of total revenues in year ending June 2000.
It recently announced plans of entering software development. It has already set up a wholly owned subsidiary in the US, called Clientsoft Inc. This subsidiary will be used both for marketing as well as onsite work. It plans to achieve a software turnover of more than Rs 25 crore in the current financial year. SSIL has already made a foray into offshore software development by setting up a software development centre in Chennai.
SSIL's foray into software is being viewed as a positive move by analysts. Earlier the company had planned to hive off the software development business into a subsidiary but investors didn't take it well so it kept it as a division. Here, SSIL intends developing a basic product which can then be upgraded or adapted with the help of supporting components to meet changing needs or a closely related application. This is in sharp contrast to current service based approach which typically involves developing new software on a project basis for even similar needs.
This new division is being set up at a cost of Rs 23 crore and will have marketing offices in the US, UK and Japan. It will target banking, insurance, healthcare and the utilities segment. SSIL plans to start with delivering solutions for small systems and move up the value chain to manage large projects. This will be done through India development centres or virtual organisations in collaboration with international companies to outsource group activities.
SSIL's performance has always been better than the industry standards of 40 per cent. It posted an impressive 81.2 per cent growth in sales for year ending June 1998. Net profit grew an impressive 63.10 per cent to Rs 10.08 crore in spite of interest cost rising 184.34 per cent to Rs 3.27 crore. In the last nine months of 1998-99, net profit grew 125 per cent to Rs 12.26 crore compared to previous period. SSIL enjoys the highest margins in the business; operating profit margin stood at 47.03 per cent in June 1998 and net margin was 24.06 per cent. Though growth will reduce margins, analysts are not worried.
Ajit Chandgude, senior analyst, Anand Rathi Securities, says, "It is natural that margins will fall on the back of an aggressive expansion. Even then SSIL will still have excellent margins which will be the highest in the industry." For June 1999, the company is expected to double net profit to about Rs 20 crore.
While the main volume growth will still come from the education business, software development will start contributing in a major way from 1999-2000. This should result in the company being rerated more in line with the software industry. SSIL is available at 28 times 1998-99 projected earnings. Buy around Rs 450.