VisualSoft Technologies' services business has shown promising growth in the last few quarters
Going by its performance in the last quarter, VisualSoft Technologies, the Hyderabad-based, Rs 102 crore company seems to have successfully pulled off complete transformation of its business strategy.
With a sharp downturn in its products business, which shaved off almost 50 per cent of its revenues in 2001, the company could very well have become one of the first mid-sized victims of the dotcom bust. But the management's timely decision to shift focus to IT services and solutions business seems to have saved the day.
Given the difficult conditions where business was hard to come by, many were apprehensive about the company's new strategy. But the management comfortably surpassed its revenue growth guidance of 30 per cent in services business during the last fiscal.
Services revenues grew by 36 per cent to Rs 94.09 crore, while the performance of the products business remained muted, contributing to only 7.8 per cent of revenues. In fact, the products business reported a segmental loss of Rs 1.18 crore as against profit of Rs 29.84 crore by the services business.
The performance of the services business has been encouraging in this fiscal also, growing as it did by over 22 per cent to Rs 55.32 crore, while product revenues plummeted to Rs 2.46 crore for the first six months of the current fiscal.
The services business has grown largely on the back of healthy client additions in the past few quarters, including two Fortune 500 insurance clients. Some of the new clients added in last fiscal are already part of the company's top 5 revenue generating client list.
Financials: The highlight of the second quarter results was the reversal in declining trend on a year-on-year basis, with both topline and earnings vaulting by 28 per cent to Rs 29.91 crore and 72 per cent to Rs 15.44 crore, respectively.
The tight control on costs has resulted in a marked improvement in operating margins, which have grown by 550 basis points to over 33.6 per cent compared with 28.08 per cent in FY02.
On a half yearly basis, it's revenues have bloated by 11.4 per cent to Rs 57.78 crore, while earnings are up 15 per cent to Rs 15.44 crore. The results are in line with the management's guidance of 25 per cent growth in services revenues and bottomline growth of 25 per cent in FY03.
On the flip side, analysts are concerned that the capex involved for VisualSoft's proposed business process outsourcing (BPO) venture could be a drag on profitability in near future. Besides, the idea of hiving off its newly developed products to a separate company hasn't been taken to very kindly by the markets.
Valuations: VisualSoft scrip has witnessed heightened activity in the past few months, making it one of the most expensive mid-cap software stocks.
At the current price of Rs 194, the scrip is trading at 11 times its estimated FY03 earnings as against a forward P/E of around 9.5 times attracted by comparable companies such as Blue Star Infotech, Geometric Software and other. Investors can accumulate the stock on declines.
