NetSol in 1HFY23

Despite achieving a double-digit topline growth in the first half of this fiscal, NetSol Technologies Limited (PSX: NetSol) had its net profits almost wiped out in this period, as per the recent financial results posted to the bourse last week. The Rs3.4 billion 1HFY23 in net revenues are the highest for the prominent IT exporter in the half-yearly period in recent years. However, a much-reduced bottom line thus far also potentially sets up NetSol for a rare net loss by FY23 end, if the cost pressures did not abate.

NetSol derives bulk of its revenues from exports, selling its products such as the NetSol Financial Suite (NFS) Ascent, NFS Digital, and NFS Ascent on Cloud in the markets of Asia-Pacific, North America and Europe. Its business focus is mainly on the asset finance and leasing industries. During 1HFY23, the firm’s topline went up by 15 percent year-on-year to Rs3.4 billion, which was mainly due to some large gains made in the first quarter.

However, during the second quarter, the business performance took a rather different turn. While there was a slight decline in topline on a yearly basis during 2QFY23, it magnified into a huge net loss after core ‘cost of revenue’ and operating expenditure considerably went up in the period. Besides, the windfall from ‘other income’ (mainly on account of the PKR-depreciation related exchange gains) also came in lower, both on a quarterly and yearly basis during the second quarter.

Some Rs162 million in net loss was reported in 2QFY23 (as opposed to a net profit of Rs519mn in 2QFY22). As a result, at the half-year close, NetSol’s after-tax profits were down by 96 percent year-on-year to Rs29 million. If there is a repeat of 2QFY23 in the remaining quarters, NetSol’s full-year bottomline may plunge into deep red. (A caveat: the massive rupee depreciation in ongoing quarter may accumulate higher proceeds under non-core ‘other income,’ potentially helping profitability down the line).

Going forward, if the core revenues continued to remain under pressure, the costs will need to be brought under control. For instance, during 1HFY23, the ‘cost of revenues’ were equal to 76 percent of net revenues (going up by 15 percentage points over the same period last fiscal) and the administrative expenses were equivalent to 20 percent of net revenues (going up by 5 percentage points over the same period last fiscal). Let’s see how the remaining quarters of the fiscal turn out for NetSol’s business.