MASCOT SYSTEMS: Bitten by the Slowdown

Bangalore-based Mascot Systems provides software solutions with a focus on

design, deployment and management of software applications solutions that

support businesses. During the year ended March 2001, the company derived 32% of

its revenues from application maintenance outsourcing, 26% from e-business

solutions, 17% from customized and web solutions, 10% from business intelligence

and 9% from application re-engineering. Mascot’s focus is on manufacturing,

financial services, service industry, retail and telecom. A major portion of the

company’s revenues comes from its onsite activity, making about 82% in 2001,

with the balance coming from offshore. The offshore revenues have marginally

increased over the past four quarters and these stood at 19.6% in the fourth

quarter. Mascot expects these to increase in the coming years.

Mascot’s

performance in the year ended March 2001 was impressive with revenues of Rs

340.33 crore surpassing its projections of Rs 323.37 crore at the time of the

IPO. Net profit at Rs 46.64 crore fell short of the estimated IPO targets by 6%.

However, the company’s performance in the fourth quarter was unimpressive with

revenues growing only 3% over the third quarter and net profit rising by less

than a percent. The operating margins too dipped sharply from 17% in the third

quarter to 13% in the fourth quarter. The fall in the operating margins was due

to higher US operating expenses and writing off the software expenses. Despite

the disappointing Q4 performance, Mascot expects its topline to grow by 40% and

bottomline to grow by 60% in fiscal year 2002.

Mascot currently trades at Rs 120, discounting our projected March 2002 EPS

by five times and March 2003 EPS by three times. The share price has declined

sharply in the past three months due to the affect of US slowdown. At the

current price, Mascot’s valuations look attractive. Mascot’s high onsite

business, low operating margins, and poor fourth quarter performance is a cause

for concern, which perhaps explains the low valuation. However, Mascot has set

up impressive infrastructure and plans to expand further in the offshore area.

This should help it improve the offshore ratio and margins in future. Mascot

provides good opportunity in the short to medium term and one can take a

longer-term view after the company’s performance in the half of the current

year. Hold.

Sushanto Mitra is the founder

of Technology Capital Partners



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liability is accepted for losses based on the information presented here.