VISUALSOFT TECHNOLOGIES: All Out for Services

Over the past few years, the Indian IT sector has grown leaps and bounds

largely due to the performance of the services segment although the success of

products has much greater potential. Most of the companies have been reticent to

take the product route due to the lack of resources to market the product as

well as a relative lack of understanding of end user requirements. As Indian

companies spend more time with overseas customers, we may yet see a product

story from the country.

Among companies that were among the most sought after in the stock market

thanks to its promising product story is Hyderabad-based VisualSoft

Technologies. VisualSoft performance was outstanding until 2001, thanks to its

high margin product line of business. With the dotcom bust, product revenues

declined sharply as they were largely focused on the Internet. Consequently,

VisualSoft’s share price, which touched a high of Rs 3,500 during 2001,

slumped to below Rs 100 in 2002. The services segment however remained stable

and continued to grow over the last two years

VisualSoft Technologies was formed in December 1995 by D V S Raju,

ex-promoter and ex-Joint Managing Director of Satyam Computer Services (Satyam).

Raju headed the marketing division of Satyam and resigned in 1992. He worked as

a consultant for the next four years and finally set-up VisualSoft Technologies

(VisualSoft) in 1995. VisualSoft entered the capital markets in October 1996 and

managed to get subscribed in what was one of the worst times for the capital

markets.

The company raised Rs 3.15 crore from the market, which was used to fund its

Rs 6.75 crore project to set-up a 5000 sq. ft. software development facility at

Hyderabad.

VisualSoft has posted impressive performance since its inception, surpassing

its own projections despite delays in project implementation. This was possible

with a focus on new technologies and products backed by a strong marketing bias.

VisualSoft rewarded shareholders with a liberal 2:1 bonus last year and its

current equity capital stands at Rs 18.75 crore.

While

the promoters hold 44 %, Body Corporates hold 18%, Mutual Funds hold 10%, NRIs

and FIIs hold 3% percent with the balance 25% being held by the public.

VisualSoft is a technology-focused company with specialization in the

development of software products and software services. VisualSoft provides

services in the area of R&D outsourcing, consulting, product development

outsourcing, and professional services such as e-business, ERP outsourcing,

knowledge management, business intelligence, and security. The company is

focused on insurance, retail and distribution, consumer electronics, healthcare,

and the utility business verticals.

VisualSoft achieves almost 72% of its revenues from offshore activities. In

the products segment, VisualSoft’s focus is on components relating to

application and frameworks, which also allows it to provide solutions in a

shorter timeframe and maintain higher margins. VisualSoft has developed a number

of products and components with the most prominent being in the area of Java and

COM/DCOM.

However, the company faced difficult times in 2002 as the demand for its

products slumped following the dotcom crash.

VisualSoft’s revenues fell for the first time by 22% to Rs 102.04 crore

largely due to the 88% fall in product sales. While revenues from services grew

by an impressive 49% to Rs 94.09 crore, those from products were down to Rs 7.95

crore.

Revenues from the products segment fell below the Rs 1 crore in the third as

well as the fourth quarter of 2002.

VisualSoft witnessed the falling demand for the products in the first quarter

of fiscal 2002 and therefore decided to focus on the stable services segment.

Revenues from the products segment, which formed 52% of the total revenues in

the year ended March 2001, were down to 8% of the total revenues in the year

ended March 2002 and further declined to 4% of the total revenues in the nine

months ended December 2003. The company’s decision to focus on services seems

to be working as the company has reported decent sequential growth in the

topline and bottomline in the first three-quarters of fiscal 2002.

In the third quarter ended December 2002, VisualSoft’s revenues were up 6%

q-o-q and 29% y-o-y to Rs 31.57 crore whereas the net profit was up 4% q-o-q and

51% y-o-y to Rs 8.36 crore. Revenues from services were up 6% sequentially to Rs

30.40 crore whereas those from products were down by 8% sequentially to Rs 1.17

crore. VisualSoft’s operating margins continue to improve as the company has

focused on the services segment in the past five quarters VisualSoft’s OPM has

increased from 21.98% in the second quarter of fiscal 2002 to 34.56% in the

third quarter of fiscal 2003. Despite the improvement in the operating margins,

the net profit in the third quarter was up marginally by 4% sequentially to Rs

8.36 crore on account of higher tax provision. Compared to the corresponding

quarter of the previous year however, net profit was up by 51%.

VisualSoft’s current active client stands at 62 compared to 47 in the third

quarter of previous year. The company added four clients during the third

quarter with one each in the Insurance and Technology/IP segment. The company

also increased the share of revenues from its top five clients from 29% last

year to 37% in the third quarter of fiscal 2003. In terms of geography, revenues

from the US constitute 66% of the total revenues whereas those from Europe stand

at 27% with the balance 7% from rest of the world. VisualSoft added 31 employees

during the third quarter to take the total staff strength at 598.

VisualSoft is currently traded at Rs 197 discounting our estimated march 2003

EPS by 12 times and March 2004 EPS by 9 times. VisualSoft’s share price had

dipped to a low of Rs 100 during and has since gained on expectation and

subsequent announcement of impressive results. With plans to focus on services,

VisualSoft is on the path to meet its 25% growth target. While the product

segment is expected to remain subdued, we expect services to grow at the

industry level for the next few quarters. Overall, VisualSoft is expected to

grow its revenues by 21% and net profit by 43% in fiscal 2003. In terms of

valuations, we believe that VisualSoft is evenly priced considering its size and

its growth prospects. Although we do not expect any downside from the current

levels, we expect the stock price to move in line with the market. Market

Performer.

Sushanto Mitra