SOFFIA SOFTWARE: Financial Apps to Telecom

The brief phase of immature investing in IT stocks last year has been

followed by a prolonged phase of selective investing indicating maturity among

investors. While the dream of the Indian IT industry to emerge as a super power

in the IT sector remains in place, the long road to success is full of

challenge. The investors, now with experience behind them, are no longer looking

at the name tag alone but focusing on the performance of the companies, their

ability to sustain the same in light of the dynamic nature of the industry and

the ability to raise resources to meet the goals.

Chennai-based Soffia Software has also gone through similar phase of sharp

rise in the share price followed by steep decline. The small-sized company is

moving at a rapid pace in the domestic and exports market and facing tough

challenges to raise and utilize resources efficiently to maintain its pace in

the coming years. Soffia is currently traded at Rs 80 with a 52-week high of Rs

600 and a low of Rs 113.

Background: SW product

Chennai-based Soffia Software was formed in 1994 by Venkata Subramani and

associates as a software development company concentrating on application

products and projects. The company came out with a public issue of 3 lakh equity

shares at par in 1996. The promoter and current managing director Subramani is a

chartered accountant with more than two decades of experience, including ten

years of experience in the software industry. Soffia was formed to develop

products in the financial area. The company has grown from a small organization

in the early years to more than 400 professionals today.

The company was initially focused only on software products for the domestic

market. However, over the last 2—3 years, the company has made inroads into

the export market in a big way, resulting in marked improvement in its financial

performance. The company’s revenues, which stood at just Rs 60 lakhs in the

year ended June 1998, have spurted to Rs 13.84 crore in the year ended June

2000. Similarly, the net profit too has increased from Rs 1.34 lakh to Rs 4.13

crore in the same period.

Operations: Mixed

Soffia has segmented its business into five different units. These are

products, domestic projects, telecom, education and global operations. Soffia

achieves major revenues from software exports focused on the US markets and

these formed 71% of the total revenues that the company achieved in the full

year ended June 2000. In the exports market, the company provides services in

the area of e-commerce, datawarehousing and networking. The company achieved

revenues of Rs 9 crore from software services, out of which 52% were from onsite

activities whereas the balance were from offshore activities.

In

the domestic market, the company is engaged in providing software services and

IT education apart from development and distribution of its own software

products. The company achieved domestic revenues of Rs 4.82 crore in June 2000

out of which projects contributed Rs 1.98 crore, IT education contributed Rs

1.67 crore and products contributed Rs 1.17 crore.

Soffia Infology is the company’s IT education division with three training

centers located in Chennai. The company has tied up with IBM and trained more

than 1000 professionals in 2000. The training courses provided by the company

include IBM e-business solutions training and other Web-based courses in Java,

ASP, XML, EJB and multimedia course.s. The company provides training for

individuals and corporates as well as in-house requirements. The company

currently owns all the three centers and plans to expand its training operations

by setting up more centers in the coming years, possibly through the franchise

route.

In the products segment, the company gets revenues from its three existing

products whereas the fourth product, eMpower, was launched recently. Its

products include Sofia an income-tax accounting product, designed for chartered

accounts or tax consultants in the field of taxation. SofPay is payroll software

with time management integrated with tax solutions.

Soffia currently operates from Chennai where it has two operational software

development centers spanning an area of 29,000 Sq ft. The company had 229

software professionals at the end of June 2000, which has increased to 362 at

present. The company also has four marketing offices at Bangalore, Delhi,

Hyderabad and Mumbai and overseas offices in USA, UK, Middle East and Singapore.

Telecom plans

The company’s telecom product group is expected to be instrumental in the

company’s future growth. The company’s focus in the telecom segment will be

in the area of WAP, mobile computing, secure e-commerce and operation support

systems. The telecom product division has developed a mobile computing software

for the insurance industry Surveylance distributed network architecture (DNA)

and a rapid action development tool for developing WAP applications, WAPDbTool.

The company is in touch with insurance companies in India and abroad for

marketing Survelayance. The company plans to leverage on its expertise in

e-commerce and Web-based applications to provide solutions in WAP and mobile

space.

In the financial products segment, the company recently launched eMpower, a

human resource management system product developed on Microsoft DNA and Java

server pages. The company has sold the product to Johnson & Johnson and it

plans to market the product both in the domestic as well as the international

market.

The company expects the software services segment to be one of the major

thrust areas and plans major investments in expanding its infrastructure for

software development. The company plans to set up a 1,00,000 Sq ft facility at

Chennai for a total cost of Rs 36 crore and the company has already incurred Rs

6 crore for the cost of land and development. The company plans to meet the

balance of Rs 30 crore through a mix of internal accruals, debt and equity

placement out of which more about 50% would be from internal accruals. The

company’s plans over the next two years are investing in software development

centers and setting up new offices in Singapore, Australia, Germany and UK apart

from upgrading the existing offices in the country. The company also plans to

acquire companies in the US and it has already identified two companies for

acquisition. The investment will be funded by the funds raised through GDR/ADR

issue planned in the year 2001, for which approval has been taken from the

shareholders.

While services and products, both in financial and telecom segment, will be

focus area of the company, Soffia plans to hive off its software training

division from its next accounting year starting July 2001. The software training

division, Soffia Infology will be an independent company managed by a CEO with

ambitious plans to increase its centers in southern India following the

franchisee model. Despite the growing concerns on the competition in the IT

education segment, Soffia is confident of competing successfully with major

players such as NIIT, Aptech and SSI.

Financials: Improving

Although the company has been in existence for more than 6 years, the

financial performance of the company was not been inspiring in the beginning.

Soffia was focused on software products in the initial stage of operations and

has only recently changed its business model to provide a mix of both software

products and services. The performance in the year ended June 2001 reflects the

impact of the change in the business model of the company. The company clocked

revenues of Rs 13.84 crore as against revenues of Rs 2.42 crore in the

corresponding previous year. The net profit in the same period zoomed 566% to Rs

4.13 crore in the same period. The spurt in the net profit was a result of

improvement in the operating profit margins from 38% to 41%.

Similarly, the performance in H1 ended December 2000 has been excellent with

revenues jumping from Rs 20.89 crore to Rs 4.42 crore and 397% higher net profit

of Rs 6.66 crore. Going ahead, the company expects to close the year at more

than 50 crore and hopes to further grow to about Rs 80 crore in the year ended

June 2002. However, the growth in revenues will be possible if the company is

able to fund its capital expenditure plans on time. Soffia plans to invest about

Rs 30 crore in the current year through a mix of internal accruals, equity and

debt. We believe that the company will have to go for higher debt component, as

its internal accruals would be insufficient to meet the requirements.

Investment potential

Soffia is currently traded at Rs 80 discounting its projected June 2001 EPS

by about 3 times and June 2002 EPS by 2 times. The stock was initially listed on

Madras Stock Exchange and got listed on the Bombay Stock Exchange about two

years ago and more recently on the NSE. On the BSE, the stock touched a high of

Rs 600 during the boom period of January 2000 and has since receded to the

current levels of Rs 100.

Soffia is at a very crucial position of operations where it has to grow at

more than industry rate to meet investor expectations and at the same time

invest substantially in increasing its infrastructure to meet the growth target.

We feel that the company will face problems in generating sufficient internal

resources to meet its investment plans and at the same time, any major dilution

in equity would affect the sentiments on the stock. The share has declined

substantially since the company passed a resolution to raise funds through ADR

issue and private placement of equity. Considering the current holdings of the

promoters, the company would have to resort to raising debt to meet its

investment plans. At the same time, the company needs to create strong domain

expertise in more than one vertical in order to sustain growth in future. Soffia

has taken steps in this direction and has set up a telecom group to explore the

fast-growing segment. We are confident about the company’s ability to create a

mark in the telecom segment.

With growing competition among the small companies, we feel that companies

with expertise in a vertical segment will have an edge in terms of billing rates

and generating sustainable business model. We believe that Soffia is at a

critical juncture in its history where it has to balance the investors’ need

for growth and risks of diluting equity and raising higher debt. As far as the

existing product line is concerned, we feel that the market for these products

is extremely crowded and the company may not be able to create its distinct

position without significant marketing budgets.

On the positive side, the company has the lowest equity base among its peers

in the software industry. Going ahead, we do not expect major equity dilution

considering the low promoter holding. The stock has dipped sharply from Rs 130

to Rs 80 in the past few days and we expect minimum downward risk at these

levels. While the stock will further rise with the improvement in the market

trend and on the announcement of its quarterly performance, we feel that a major

re-rating will occur once the company finalizes its plans of raising funds from

the various sources. Hold.

Sushanto Mitra is the

founder of Technology Capital Partners



The views reflected here are of the author and not of this publication. No
liability is accepted for losses based on the information presented here.