NetSol in a sweet spot

For a company that had made headlines for posting blistering revenue and profitability growth in FY10, lower revenue growth during 1QFY11 has made NetSols income statement look stranger to the company.
Economic turnaround in Asia, along with a low base effect - as recessionary fears resulted in lower demand for IT products and services in FY09 - helped it record an outstanding revenue growth in FY10.
In a nutshell, it seems that the company has trekked its routine this year. Overseas sales, which make up more than 90 percent of NetSols revenue pie, grew by nearly 8 percent - stemming from higher service and maintenance proceeds. The local revenue basket, however, squeezed to around Rs8 million from Rs18.9 million in the same period a year earlier.
Though the software solution provider registered a meager revenue growth in 1QFY11, given the minimal incremental cost on additional licenses sales, together with restructuring of non-productive divisions, gross profit margin improved by 7 percentage points to 69 percent.
Selling and promotion expenses, though very small, increased on account of growing presence in the far-eastern market. These expenses might increase further in the quarters ahead as the company is aiming to expand its operation in China. Tall exchange gains, on account of rupee depreciation resulted in higher other income.
Moreover, one-off expenses, such as relief assistance for the flood-affected populace, and the write-off of receivables (not received from Raseen Technologies LLC) pushed administrative expenses higher, nullifying the positive impact of higher gross profit on the bottom line.
With a growing presence in the Far East along with Australia, the companys outlook seems bright. The parent companys joint venture with Atheeb Group would help it penetrate into the Middle Eastern markets.
As the company has sent an acquisition proposal to the SECP to purchase two sister companies, its minority shareholders have showed resistance, claiming that the acquisition price is high and would only benefit the majority shareholder of NetSol, i.e. NetSol Technologies Inc.
Whether or not the SECP gives its approval is yet to be seen, but investors at the market don seem to have liked it much. This can be gauged from the fact that the companys share is trading at a 36 percent discount to its price before the NetSols directors announced their acquisition decision.

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NetSol Technologies Ltd

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Rs (mn)                      1QFY11   1QFY10     Chg

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Revenue                         366     352       4%

Cost of revenue                 115     133     -14%

Gross profit                    251     219      15%

Gross margin                     69%     62%     10%

Selling & promotion expenses     32      13     146%

Admin expenses                  103      36     186%

Other income                     93      44     111%

Net profit                      195     200      -2%

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Source: KSE notice