NetSol: profit surge

At the close of the half-year ended December 31, 2021, Pakistan’s prominent IT exporter posted significant gains in its topline and even more solid expansion in its bottomline. As per the latest results posted to the bourse, NetSol Technologies Limited (PSX: NetSol) grew its net sales during 1HFY22 by 25 percent year-on-year to Rs3 billion and its net profits by 178 percent year-on-year to Rs0.7 billion.

The firm’s topline is heavily sourced from exports of software licenses, IT services, and subscriptions & support services that are provided from Pakistan. Currently, the main products include the flagship NetSol Financial Suite (NFS) Ascent, NFS Digital, and NFS Ascent on Cloud. Higher revenues from licensing segment and subscription & support services appear to be the drivers of growth in this half-yearly period.

While ‘cost of revenues’ grew slightly higher in proportion to net sales, NetSol still looks good with a gross margin of 39 percent in 1HFY22 (down by 69 basis points). This was buttressed by controlled growth in operating expenditures (selling expenses and administrative expenses), as a result of which operating profit rose by 36 percent year-on-year and operating margin reached 14.9 percent (up by 119 bps).

It was the ‘other income’ down the line that scored enormous gains in this period and eventually sent the bottomline soaring. The other income – which is composed mainly of profits from bank deposits and investments and foreign currency gains – crossed the half-billion-mark during 1HFY22, almost six times what NetSol scored during the same period in the previous fiscal.

As PKR depreciated substantially against the US Dollar and Euro in the Jul-Dec 2021 period, IT exporters have benefitted from the windfall. The outlook for PKR is not too bright in 2HFY22 either, considering existing macroeconomic imbalances and northbound crude oil prices. NetSol’s massive ‘other income’ in this period – led by currency gains – was equivalent to 18 percent of its topline (4% in 1HFY21).

A fifth of the ‘other income’ gains which NetSol made in 1HFY22 were wiped by more than doubling of ‘other operating expenses’. Still, the impact of growing topline and non-core income was substantial, resulting in profit-after-tax that was roughly three times what NetSol achieved in 1HFY21. At this pace, NetSol may close FY22 with all-time high topline and bottomline. Meanwhile, over at the PSX, the NetSol stock closed at Rs104.64 on February 15, significantly lower by 58 percent compared to a year ago.