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xpertwriter's review
Investment Sector: IPO / Secondary Offering Submitted by Xpertwriter 
, CEO At E-HostingJunction.com
at Spectrum Resumes , Inc
3 months ago Add Tag |
Netsol Technologies Limited Financial Review
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NetSol Technologies Limited is a majority owned subsidiary of NetSol Technologies Inc, USA. It is a multinational provider of enterprise software and IT services to the financial industry. NetSol became the first software company in Pakistan to list its securities on the Karachi Stock Exchange in FY05.
The company's IPO was oversubscribed by 1.1 times and was the most successful IPO of the year. It offers a wide range of Information Technology solutions, consulting services and customized application softwares. Some of its products include Technology Outsourcing, Systems Integration, Application Development, Processes Consulting, Business Intelligence Consulting and Information Security Consulting. NetSol's most popular product, LeaseSoft, has boosted its position in the leasing and assets hire purchase management vertical.
NetSol caters to different sectors such as leasing and finance, insurance, banking, government, defence, manufacturing, health, education and IT. The company has a stronghold in the Pakistani market and a growing presence in other parts of the world. It has off-shore IT operation facilities and exports to Asia Pacific region, Australia, Europe, USA and Middle East.
NetSol became ISO 9001:2000 certified in 1998. In August 2006, NetSol was awarded the highest quality standard for software development, Capability Maturity Model Integration (CMMI) Level 5. The company then aimed to achieve the ISO 27001 certification, an internationally recognized standard for Information Security Management and recently NetSol's Asia-Pacific division's Lahore based IT campus "NetSol Village," has achieved ISO 27001 certification. NetSol has been successful in generating higher revenues every year. The company's main sources of income are software licencing, software development and maintenance services. The company's operations in Pakistan contribute 20% while exports constitute a major 80% of the its total revenue earned every year.
NetSol has witnessed a rising trend in its revenue due to high generation of income from local operations and exports. NetSol's local revenue increased (by 288%) from Rs 46 million in FY05 to Rs 179 million in FY07. The company's export revenues stood at around Rs 390 million in FY05 and increased to Rs 748.5 million in FY07, with a major boost of an 89% during the FY07. Due to this substantial growth in NetSol's exports it received the 'FPCCI Best Export Performance Award' in 2005-06. NetSol is expected to maintain its rising trend of revenue in the future as well because the revenue earned during the period July-07-March-08 (first 3Q of FY08) is Rs 893 million vis-a-vis Rs 637 million earned during the same period in the last fiscal year.
PROFITABILITY
The overall profitability picture of NetSol has been promising, showing that the company's operations have been effective over the years. The gross profit and net profit margins of the company fell slightly in FY05 and then dipped further to a great extent in FY06. NetSol's cost of sales increased by 65% in FY06 whereas the revenue earned was only 16% higher as compared to FY05. Lower growth in revenue in FY06 can be attributed to the fact that NetSol's exports which constitute around 80% of the total revenue grew by only 1.2% and although local revenue increased by 138%, it formed only 20% of the revenue. Because of the lower margins on local revenue, the gross profit was 11% lower and this translated into a 42% lower net profit for FY06. Thus the return on assets (ROA) and return on equity (ROE) ratios were also impacted and decreased in FY06.
The profitability ratios recovered in FY07. Higher revenue due to an 89% increase in exports and a 63% in local revenue along with controlled increase in cost of sales resulted in higher gross profit margin in FY07. The net profit increased mainly due to higher value licence sales and effective control over costs. It was further boosted by increase in other income such as rental income and gain on foreign currency translations. ROA increased which showing that the company was able to earn a higher return with the assets under its control in FY07.
The profitability situation is expected to improve in FY08 as NetSol has already posted a higher gross profit and net profit during the first 3QFY08 compared to the GP and NP in FY07. The gross profit for 3QFY08 is around Rs 26 million higher than the gross profit of FY07. Net profit during July-March-08 was around Rs 452 million, already 28% higher than the total net profit of FY07 (Rs 352 million). ROA and ROE have both fallen slightly during July-07- March-08 due to higher increase in assets (32%) and equity (35%) with respect to the growth in net profit (28%).
LIQUIDITY
NetSol's liquidity position improved from FY04 to FY06 because the current assets increased more in proportion to current liabilities. In FY07 the current ratio decreased because the current assets grew by 56% while the current liabilities increased by 138%. Short term financing of the company increased in FY07, due to high export refinance and addition of running finance, resulting in the substantial increase in current liabilities for the period. Some of the current liabilities (amounting to around Rs 137 million are interest/markup bearing liabilities) such as short term financing and lease liabilities maturing within one year.
The working capital of NetSol has been continuously increasing, showing the company's ability to meet its short-term debt and operational expenses quite comfortably. Cash and bank balances constitute 7% of the total current assets in FY07. Accounts receivables form a major part of the current assets and as NetSol's volume of business is increasing the amount of accounts receivable is also increasing such as accounts receivable in FY07 grew to Rs 319 million as against Rs 151 million in FY06. These receivables are unsecured; however, the management expects to recover them. Moreover, the company follows an effective cash management and planning policy to ensure timely availability of funds and takes appropriate actions when new requirements occur.
ASSET MANAGEMENT RATIOS
The total asset turnover ratio of the company was the highest in FY05 when the revenue had increased substantially. It came down from its level of 0.65 in FY05 to 0.48 in FY06 because the revenue in FY06 grew by only 16% while the asset base increased at a higher pace (53%). However, in FY07 the revenue growth rate improved and thus total assets turnover ratio of the company improved. The revenue/equity ratio has experienced a similar pattern as the total assets turnover ratio. We can deduce that overall NetSol has been able to generate a sufficient volume of business on its total asset investment.
The debtors' turnover ratio of the company has been declining except for a rise in FY06 when there was only a slight increase in the accounts receivable of the company. The overall declining trend of debtors' turnover ratio shows that it is taking longer for the company to recover its receivables and convert them into cash. Likewise, the average collection period is also increasing. In FY06, the average collection period was 109 days, which increased to 126 days in FY07 and during the 3QFY08, it took 171 days to recover the receivables.
The accounts receivable are increasing as the total revenue of the company is increasing. However, the management appears to be confident about recovering its unsecured receivables from its customers. NetSol applies credit risks to its customers, monitors credit exposure towards the customers and makes adequate provisions against doubtful debts. The total debt to asset ratio describes how NetSol has been financed over the years. The companies' reliance on debt or credit was higher during FY04 and FY07.
However, overall, NetSol is not a highly leveraged company. Lease payments (for assets such as vehicles and computers) and short term financing form a major portion of the liabilities of the company. Although the growth of assets has been slowing down over the years, they have been increasing more in proportion to the liabilities, except in FY07 when the liabilities grew by 164% while assets grew by 51%. The liabilities grew to such an extent because of more short term financing, higher credit transactions and credit taken from related parties such as the parent company NetSol Technologies Inc and the subsidiary TiG NetSol (Pvt) Limited.
The companies operating fixed assets and intangible assets (which include in house developed and underdeveloped software) increased considerably. NetSol has made long term investments in a subsidiary company. The debt to equity ratio has followed the pattern of debt to equity because the growth in equity has outpaced the increase in liabilities. Till March-08 the company's share capital stood at Rs 497.8 million as 172,648 ordinary shares of Rs 10 each were issued as fully paid bonus shares.
The earning per share ratio of the company fell drastically in FY06 due to a decline in profitability. As the profits picked up in FY07 and July-March-08 the EPS also rose. However, the effect of this fall in EPS in FY06 seemed to have reflected in the price of NetSol's shares in FY07 when the average stock price fell. The average price of NetSol's stock in FY06 was Rs 40.4/share, which dropped to Rs 36.6 in FY07. During July-March-08 the stock price increased impressively to Rs 110.7 as investors' expectations increased with the rising profitability of the company.
The P/E ratio was relatively higher in FY06 showing that the investors expected the company's earnings to rise in FY05 but since the earnings fell the investors' expectations dampened and reflected in a falling P/E ratio in FY07. As the earnings stabilized stock price rose during the second half of FY07 and has continued to improve till 3rd Quarter FY08. The book value per share has been increasing consistently. Despite the price fluctuations the share price has been higher than the book value, showing that investors have had confidence in the company's management and believe that the management has created a business worth more than the resources it has.
FUTURE OUTLOOK
NetSol's performance is expected to improve in terms of the revenue growth and profitability. In the local market, NetSol has built goodwill in the government as well as the private sector. NetSol's local revenue has been increasing and is expected to improve in the future. NetSol's performance during the initial quarters of FY08 has been very impressive. It experienced growth in its services, licence sales and maintenance fees. Its IT consulting services business also grew as the company expanded its range of vertical market expertise and entered the fast growing market for hospital management systems (HMS). It has a new contract with a major public sector hospital. The company's operating efficiency has also being improved.
It has recently signed a contract with a leading bank to assess and assist it in the process of conforming to the framework of the Basel II capital accord as per SBP regulations. It will help the bank in adopting the Internal Ratings Based (IRB) approach of the Basel accord for credit risk. The company has been quick to realize that after SBP's directions for banks to implement Basel II, Pakistan has become a growing niche market for Basel II advisory services and this offers great opportunities for NetSol in the future.
Export revenue forms a major part of NetSol's total earnings and thus it is making the efforts to increase its exports. NetSol's main product, LeaseSoft has been very popular in China and other countries of the Asia Pacific region. Now, NetSol is all set to take it to North America and European markets. These new markets offer higher value for IT products and services and NetSol expects to generate more business by entering these lucrative markets. At the same time NetSol is making efforts to further penetrate the Asian Pacific market and for this purpose it aimed to open an office in Thailand. Outsourcing is an area of focus now for NetSol.
It is focusing on outsourcing activities using its current facilities in San Francisco and London. Recently, NetSol has achieved a huge contract with the North American captive finance division of a major Asian-based automobile manufacturer. According to the agreement NetSol will be providing product licencing, software customization, system implementation, ongoing maintenance and support services from NetSol's financial solutions. With this contract, NetSol can expect high revenues in the future and a commanding position in the software market.
The company's IPO was oversubscribed by 1.1 times and was the most successful IPO of the year. It offers a wide range of Information Technology solutions, consulting services and customized application softwares. Some of its products include Technology Outsourcing, Systems Integration, Application Development, Processes Consulting, Business Intelligence Consulting and Information Security Consulting. NetSol's most popular product, LeaseSoft, has boosted its position in the leasing and assets hire purchase management vertical.
NetSol caters to different sectors such as leasing and finance, insurance, banking, government, defence, manufacturing, health, education and IT. The company has a stronghold in the Pakistani market and a growing presence in other parts of the world. It has off-shore IT operation facilities and exports to Asia Pacific region, Australia, Europe, USA and Middle East.
NetSol became ISO 9001:2000 certified in 1998. In August 2006, NetSol was awarded the highest quality standard for software development, Capability Maturity Model Integration (CMMI) Level 5. The company then aimed to achieve the ISO 27001 certification, an internationally recognized standard for Information Security Management and recently NetSol's Asia-Pacific division's Lahore based IT campus "NetSol Village," has achieved ISO 27001 certification. NetSol has been successful in generating higher revenues every year. The company's main sources of income are software licencing, software development and maintenance services. The company's operations in Pakistan contribute 20% while exports constitute a major 80% of the its total revenue earned every year.
NetSol has witnessed a rising trend in its revenue due to high generation of income from local operations and exports. NetSol's local revenue increased (by 288%) from Rs 46 million in FY05 to Rs 179 million in FY07. The company's export revenues stood at around Rs 390 million in FY05 and increased to Rs 748.5 million in FY07, with a major boost of an 89% during the FY07. Due to this substantial growth in NetSol's exports it received the 'FPCCI Best Export Performance Award' in 2005-06. NetSol is expected to maintain its rising trend of revenue in the future as well because the revenue earned during the period July-07-March-08 (first 3Q of FY08) is Rs 893 million vis-a-vis Rs 637 million earned during the same period in the last fiscal year.
PROFITABILITY
The overall profitability picture of NetSol has been promising, showing that the company's operations have been effective over the years. The gross profit and net profit margins of the company fell slightly in FY05 and then dipped further to a great extent in FY06. NetSol's cost of sales increased by 65% in FY06 whereas the revenue earned was only 16% higher as compared to FY05. Lower growth in revenue in FY06 can be attributed to the fact that NetSol's exports which constitute around 80% of the total revenue grew by only 1.2% and although local revenue increased by 138%, it formed only 20% of the revenue. Because of the lower margins on local revenue, the gross profit was 11% lower and this translated into a 42% lower net profit for FY06. Thus the return on assets (ROA) and return on equity (ROE) ratios were also impacted and decreased in FY06.
The profitability ratios recovered in FY07. Higher revenue due to an 89% increase in exports and a 63% in local revenue along with controlled increase in cost of sales resulted in higher gross profit margin in FY07. The net profit increased mainly due to higher value licence sales and effective control over costs. It was further boosted by increase in other income such as rental income and gain on foreign currency translations. ROA increased which showing that the company was able to earn a higher return with the assets under its control in FY07.
The profitability situation is expected to improve in FY08 as NetSol has already posted a higher gross profit and net profit during the first 3QFY08 compared to the GP and NP in FY07. The gross profit for 3QFY08 is around Rs 26 million higher than the gross profit of FY07. Net profit during July-March-08 was around Rs 452 million, already 28% higher than the total net profit of FY07 (Rs 352 million). ROA and ROE have both fallen slightly during July-07- March-08 due to higher increase in assets (32%) and equity (35%) with respect to the growth in net profit (28%).
LIQUIDITY
NetSol's liquidity position improved from FY04 to FY06 because the current assets increased more in proportion to current liabilities. In FY07 the current ratio decreased because the current assets grew by 56% while the current liabilities increased by 138%. Short term financing of the company increased in FY07, due to high export refinance and addition of running finance, resulting in the substantial increase in current liabilities for the period. Some of the current liabilities (amounting to around Rs 137 million are interest/markup bearing liabilities) such as short term financing and lease liabilities maturing within one year.
The working capital of NetSol has been continuously increasing, showing the company's ability to meet its short-term debt and operational expenses quite comfortably. Cash and bank balances constitute 7% of the total current assets in FY07. Accounts receivables form a major part of the current assets and as NetSol's volume of business is increasing the amount of accounts receivable is also increasing such as accounts receivable in FY07 grew to Rs 319 million as against Rs 151 million in FY06. These receivables are unsecured; however, the management expects to recover them. Moreover, the company follows an effective cash management and planning policy to ensure timely availability of funds and takes appropriate actions when new requirements occur.
ASSET MANAGEMENT RATIOS
The total asset turnover ratio of the company was the highest in FY05 when the revenue had increased substantially. It came down from its level of 0.65 in FY05 to 0.48 in FY06 because the revenue in FY06 grew by only 16% while the asset base increased at a higher pace (53%). However, in FY07 the revenue growth rate improved and thus total assets turnover ratio of the company improved. The revenue/equity ratio has experienced a similar pattern as the total assets turnover ratio. We can deduce that overall NetSol has been able to generate a sufficient volume of business on its total asset investment.
The debtors' turnover ratio of the company has been declining except for a rise in FY06 when there was only a slight increase in the accounts receivable of the company. The overall declining trend of debtors' turnover ratio shows that it is taking longer for the company to recover its receivables and convert them into cash. Likewise, the average collection period is also increasing. In FY06, the average collection period was 109 days, which increased to 126 days in FY07 and during the 3QFY08, it took 171 days to recover the receivables.
The accounts receivable are increasing as the total revenue of the company is increasing. However, the management appears to be confident about recovering its unsecured receivables from its customers. NetSol applies credit risks to its customers, monitors credit exposure towards the customers and makes adequate provisions against doubtful debts. The total debt to asset ratio describes how NetSol has been financed over the years. The companies' reliance on debt or credit was higher during FY04 and FY07.
However, overall, NetSol is not a highly leveraged company. Lease payments (for assets such as vehicles and computers) and short term financing form a major portion of the liabilities of the company. Although the growth of assets has been slowing down over the years, they have been increasing more in proportion to the liabilities, except in FY07 when the liabilities grew by 164% while assets grew by 51%. The liabilities grew to such an extent because of more short term financing, higher credit transactions and credit taken from related parties such as the parent company NetSol Technologies Inc and the subsidiary TiG NetSol (Pvt) Limited.
The companies operating fixed assets and intangible assets (which include in house developed and underdeveloped software) increased considerably. NetSol has made long term investments in a subsidiary company. The debt to equity ratio has followed the pattern of debt to equity because the growth in equity has outpaced the increase in liabilities. Till March-08 the company's share capital stood at Rs 497.8 million as 172,648 ordinary shares of Rs 10 each were issued as fully paid bonus shares.
The earning per share ratio of the company fell drastically in FY06 due to a decline in profitability. As the profits picked up in FY07 and July-March-08 the EPS also rose. However, the effect of this fall in EPS in FY06 seemed to have reflected in the price of NetSol's shares in FY07 when the average stock price fell. The average price of NetSol's stock in FY06 was Rs 40.4/share, which dropped to Rs 36.6 in FY07. During July-March-08 the stock price increased impressively to Rs 110.7 as investors' expectations increased with the rising profitability of the company.
The P/E ratio was relatively higher in FY06 showing that the investors expected the company's earnings to rise in FY05 but since the earnings fell the investors' expectations dampened and reflected in a falling P/E ratio in FY07. As the earnings stabilized stock price rose during the second half of FY07 and has continued to improve till 3rd Quarter FY08. The book value per share has been increasing consistently. Despite the price fluctuations the share price has been higher than the book value, showing that investors have had confidence in the company's management and believe that the management has created a business worth more than the resources it has.
FUTURE OUTLOOK
NetSol's performance is expected to improve in terms of the revenue growth and profitability. In the local market, NetSol has built goodwill in the government as well as the private sector. NetSol's local revenue has been increasing and is expected to improve in the future. NetSol's performance during the initial quarters of FY08 has been very impressive. It experienced growth in its services, licence sales and maintenance fees. Its IT consulting services business also grew as the company expanded its range of vertical market expertise and entered the fast growing market for hospital management systems (HMS). It has a new contract with a major public sector hospital. The company's operating efficiency has also being improved.
It has recently signed a contract with a leading bank to assess and assist it in the process of conforming to the framework of the Basel II capital accord as per SBP regulations. It will help the bank in adopting the Internal Ratings Based (IRB) approach of the Basel accord for credit risk. The company has been quick to realize that after SBP's directions for banks to implement Basel II, Pakistan has become a growing niche market for Basel II advisory services and this offers great opportunities for NetSol in the future.
Export revenue forms a major part of NetSol's total earnings and thus it is making the efforts to increase its exports. NetSol's main product, LeaseSoft has been very popular in China and other countries of the Asia Pacific region. Now, NetSol is all set to take it to North America and European markets. These new markets offer higher value for IT products and services and NetSol expects to generate more business by entering these lucrative markets. At the same time NetSol is making efforts to further penetrate the Asian Pacific market and for this purpose it aimed to open an office in Thailand. Outsourcing is an area of focus now for NetSol.
It is focusing on outsourcing activities using its current facilities in San Francisco and London. Recently, NetSol has achieved a huge contract with the North American captive finance division of a major Asian-based automobile manufacturer. According to the agreement NetSol will be providing product licencing, software customization, system implementation, ongoing maintenance and support services from NetSol's financial solutions. With this contract, NetSol can expect high revenues in the future and a commanding position in the software market.
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