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Follow UsBangalore-based Mascot Systems is among the top11 software services exports
companies in the country. However, due to its volatile performance, the share
price of the company has been on a roller-coaster ride since it was listed about
two years back. The company, which achieves more than 76% of the revenues from
onsite activities and 53% of revenues from a single client: GE has seen
increasing investor concern on its business and client risks. Mascot Systems
floated an IPO comprising of 30,00,000 shares of Rs 4 each at a price of Rs 480,
aggregating Rs 144 crore in April 2000. The company raised funds to meet its
expansion plans of setting up new offshore development centers in India. The
company is an 88% subsidiary of Mastech Systems Corporation, a part of NASDAQ
listed iGate Corporation in the US.
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Website: www.mascotsystems.com
No 1, Main Road, Area of specialization: Revenues (March 2002): |
Mascot provides software solutions in the area of application maintenance
outsourcing, E-business, business intelligence, ERP, and mobile commerce with
focus on the manufacturing, BFSI and service industry, retail and telecom
verticals. In the year ended March 2002, Mascot achieved revenues of Rs 407.38
crore and net profit of Rs 45.36 crore, which were higher by 20% and lower by 3%
respectively over the previous year. Mascot achieved 41% of its revenues from
manufacturing, 29% from BFSI, 19% from the services industries and the balance
retail and telecom. In terms of horizontals, revenues from e-business formed 30%
of the revenues, application maintenance outsourcing formed 29%, customized and
web-enabled solutions formed 17%, and application re-engineering formed 15%
whereas revenues from business intelligence formed 7% of the total revenues.
Mascot’s major customer, GE, contributes to more than 50% of the total
revenues, which besides providing revenue visibility is also a cause for concern
in terms of lower billing rates and profitability. Revenues from GE have been
steadily rising over the past 6 quarters and stood at 56% of the total revenues
in the second quarter ended September 2002. Mascot’s next four clients
contributed to 17% of the revenues.
Mascot’s efforts to move business offshore are yet to yield positive
results with almost 63% of the revenues coming from onsite operations in the
second quarter of fiscal 2003 although these have declined from 85% a year back.
In the second quarter, the company had 765 employees based onsite as against 910
offshore. The company has large offshore development facilities at Bangalore,
Pune, and Chennai measuring a total of 1,88,000 sq.ft. Among its efforts to
reduce onsite revenues and improve profitability the company is executing a
complete project on US-based blended rate. Mascot is currently working on three
such projects, which contributed to 30% of the second quarter revenues but also
had an impact on its profitability. Mascot expects the profitability to improve
as it shifts the work offshore but gets paid on blended rates.
Over
the past few quarters, Mascot has been initiating a series of measures to reduce
the onsite ratio in order to improve its profitability. The results are yet to
show up as Mascot’s operating margins, which stood at just 12% in fiscal 2002
and have further declined in the first two quarters of the current fiscal. In
terms of revenues, Mascot’s quarterly revenues peaked at Rs 111.34 crore in
the quarter ended September 2001 and have declined sequentially since then. In
the second quarter ended September 2002, Mascot reported revenues of Rs 89.32
crore, down 20% y-o-y and 2% q-o-q. Its net profit stood at Rs 6.31 crore, down
55% y-o-y and 22% sequentially. Operating margins declined from 9% to 8.3% due
to higher direct cost relating to onsite activity. Indirect operating costs
however declined 7% sequentially due to the cost reduction efforts taken by the
company. The company added 51 employees, taking its total strength to 1642. It
added 11 new clients during the quarter as against 15 in the immediate previous
quarter. Its active clients however remained at the previous quarter level of
76.
Mascot has recently enhanced its presence in Germany and Australia apart from
making inroads in the Chinese market through a partnership with China based IT
Services Company Haihui Sci-Tech with whom Mascot would execute offshore
development projects in China.
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Mascot currently trades at Rs 125 discounting the projected March 2003 EPS by
13 times and March 2004 EPS by 10 times. The stock declined from the levels of
around Rs 220 to Rs 160 after the announcement of the first quarter results. It’s
share price has further declined to Rs 123 after the announcement of the second
quarter results. After the announcement of the first quarter results, there were
expectations of improvement in operating margins and offshore revenues. However,
Mascot has been unable to sustain the improvement in operating margins in the
second quarter. While the company is confident of improving its margins in the
coming quarters, we remain concerned, as its OPM is one of the lowest among its
peers and even some smaller companies. This could be due to the over dependence
on the single large client-GE. Based on the performance of Mascot in the second
quarter, we do not expect substantial improvement in the company’s performance
in the current fiscal. We expect to see a positive impact of Mascot’s efforts
in improving margins and profitability only in fiscal 2004. Consequently, any
major improvement in valuation of the company in the immediate future is ruled
out. Underperformer
Sushanto Mitra is the founder
of Technology Capital Partners