Profile & Prospects-Silverline Industries.(Listed on BSE & NSE)
Hi Satish:
Here is an interesting company in India,looks like an interesting story.I do have small position in it, thought you guys might be interested.
BTW:I am not finished reading 'In Light of India' yet but I have already found a couple of points I disagree with but that shouldn't take anything away from Octavio Paz as a writer and an 'Indologist',I'll tell you about it later,perhaps I should finish the book first. Have you reread any of his books yet? If so find anything
to contradict Rajamony's (Sp?) contentions I posted earlier?
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Silverline Industries
The winning edge
Silverline Industries is well placed due to its expertise and global tie-ups, says Gurunath Mudlapur of Khandwala Finances.SILVERLINE Industries Ltd (SIL) was the 18th largest software exporter from India during financial ‘98. Its focus on offshore development for sectors like telecom, banking and hospitality sectors, has enabled it to operate at very high margins in the past.
By gaining expertise in these lines of businesses and with over 15 Fortune 500 companies as its clients including Nynex, JP Morgan, First Data Resources, Bank of America, etc., its future topline growth is assured.
The contributing factors to a potential upside in the company's performance over the medium term include:
A $35 million order book position to be executed in the next twelve months should enable it to show excellent topline growth in financial ‘99 and beyond as most of these orders would possibly be renewed;
A breakthrough with Platinum Technologies Inc, a billion dollar per annum revenue operator, should result in both adding value to the SIL's software services skills (over the medium term) as well as accelerate its future revenue growth, a key factor affecting its growth in the past.
The completion of its expansion plans which will almost treble its manpower capacity (so will the revenues) and its moving up the value chain through long-term Platinum Nexus, demand a definite re-rating of the stock valuations.
Acquisitions by the parent company for Silverline Technologies Inc. should result in better and stable billing revenues for Silverline Industries India over the medium term in the form of offshore software development works.
Third quarter performance
THE excellent third quarter results with a Rs 139.8 million profit write-offs, fuelled by operating margins of over 51 per cent (more one time in nature), the highest in the sector, makes us very buoyant on the better earning prospects in the coming quarter for the company. The primary reason for the company to operate at such high margin is because most of its incomes come from only offshore services. This is not the case with other software companies due to their relatively low margin onsite activities. Part of the operating margin in the third quarter could be attributed to the prior execution of Y2K related, one time, fixed cost projects during the quarter. Accordingly, all our future forecast have been revised upwards to reflect our new expectations of the company's performance. As a result, we expect the company to remain a sector out-performer over the next few quarters easily.
Investment argument
THE company currently has an order book position of US $ 35 million , significantly higher than last year. Most of these orders are long term in nature, renewable on a half-yearly basis. It strategy of focussing on select segments of the software business, would enable it to grow at higher-than-industry growth rates, well beyond the year 2001. Further, the commissioning of its own infrastructure facilities for software development should result in almost trebling of revenues in financial 2002 (full year reflection of performance).
The Platinum Technologies alliance would greatly add value directly to the business of SIL. Platinum is currently looking for ways and means to improve its profitability, after a spate of acquisitions in the past, through better cost management and higher operating margins. This gives good synergy for SIL in term of contract leveraging, a key growth parameter, as it would be able to act as a low cost software development base for platinum technologies in future. So this would be a win-win combination.
The low manpower cost (due to its domestic sourcing) would enable it to continue to operate at current high operating margins over the long term. SIL's increased focus on high value-added products/services such as multimedia , internet and intranet applications and ERP should all contribute to a significant portion to its revenues growing beyond FY 2000.
SIL has many global leaders as its customers. Silverline Technologies Inc, a US-based group company markets its services and also handles SIL's front-end operations.
We believe that unlike its competitors, where learning future technological trends is a constant evolving and time consuming process, SIL would be able to learn the same by its medium-term exposure to Platinum Technologies. This is especially true in areas such as RDBMS related software development , systems and data warehousing, which are complementary in nature. This offers substantial scope for the company to improve its average skill levels involved in executing its projects in the future and also in deriving higher margins. This should lead to an enhanced PE re-rating over the medium term in terms of stock valuations.
Based on fundamentals and future plans, the company would accrue complete benefits of its expansion plans beyond FY 2001. The impending warrant conversion by the promoters increasing their stake to 76 per cent depict their commitment to SIL India. We believe that current stock valuations already reflect the concern relating to equity dilution .
Further, since all this would be enhanced for augmenting its long term growth plans, we foresee that this should not at all be a restraint for investment decisions now.
By the end of calendar 2000, we expect the company to become a zero-debt company. This should give the company enormous flexibility to leverage in the future, enabling it to exploit emerging opportunities to their maximum, thereby further improving operational performance in future. A healthy advantage for the company and indirectly to the shareholders.
Business profile
THE revenue mix (from the local perspective) is predominantly from software exports (95 per cent ). Y2K accounts for about 20 per cent of its total revenue. By limiting its exposure to Y2K, the company has already minimised the impact of elimination of the income stream beyond calendar 2000.
The other major segments from where its revenues accrue are legacy systems maintenance and client-server migrations.
Industry
TO understand the functioning of the software companies in India, it is imperative to understand the potential of the global markets. This is imperative as the major source of revenue for the software companies is derived from overseas clientele.
Internet economy
THE internet economy basically consists of technology deployment, marketing and sales, content creation, professional services, education and training to support internet-based applications.
The size of the internet economy for the year ‘99 is estimated at $124 billion in the US and $44 billion in western Europe. For the year 2000, this is expected to grow to $170 billion in the US and $65 billion in western Europe.
With the benefits that Internet Services are providing for every dollar of investment in the USA, the payback expected under a five-year timeframe is estimated at a dollar-fifty. The benefits would accrue through a combination of commerce conducted on the worldwide web as well as the contemplated productivity savings.
ERP Implementation
THE worldwide Enterprise Resource Planning (ERP) consulting and integration services market is expected to grow at a compound annual growth rate of 17 per cent, while the client server segment is expected to grow by 25 per cent over the next five years.
For the year ‘97-98 the ERP software market is estimated at $8.5 billion on a compounded annual growth rate of 27 per cent. It is expected to grow to $ 22 billion by the Year 2002.
Similarly, the ERP training and education services is also expected to grow to match the emerging ERP trend. For the year ‘97-98 the ERP education and training service market was at $770 million in ‘97. The same is expected to grow to $1001 million by 2002.
Y2K market
THE total Y2K market was estimated at about US$ 300 billion to US$ 600 billion. Though the millennium bug has to be resolved in a short span of the time, one need not think that the business ends there. Many companies are contemplating and in turn focusing on the post-Y2K problems.
As per leading researchers on software trends, the Y2K market continues to exist in the form of maintenance. This ensures that though the business potential is here to stay till 2000, the maintenance potential is assured virtually to perpetuity.
Indian infotech
THIS is a sector the prominence of which has increased only in the last decade. Increasing competition in the domestic economy as a result of liberalisation, the first IT Policy of ‘86 and India's efforts to integrate itself into the global economy, have all resulted in IT becoming a necessity for every business entity in order to survive over the medium term.
The gross Indian IT sector has been estimated at $5.03 billion during financial ‘98. Over the past five years, the domestic IT market has grown at a CAGR of 33per cent.
During financial ‘99, on a YoY basis, the IT demand is estimated to grow to $6.44 billion.
These growth rates are higher when compared to the overall global IT demand growth trends and could be attributed to the smaller base of the sector as well as the current very low penetration levels in the country, leaving enormous growth potential.
(Courtesy:Economic Times,March-22-99) |
