What would a large player in the Indian software industry look out for in a smaller company, before mounting a takeover bid for a company in the same industry? Logically he would try to acquire stake in a smaller company, at a cost much less than the cost of setting up an equivalent project. For other industries one could scout for a company whose market capitalisation and debt is substantially less than its turnover. But this criteria might not hold much water for the software industry. This is because riding piggy back on a bull run most of the software scrips are over priced and have been setting the bourses on fire. Here stronger companies would be better off acquiring turnaround companies at an opportune moment. Interestingly enough PSI Data Systems is one such company that might fit the bill.A subsidiary of Group Bull -- France, it is well on its way to a turnaround, recording decent results for the year ended December 31,1997. PSI Data Systems undertakes offshore and onsite software development andhas executed a number of projects in Europe, US and Asia. Also the company offers its clients in the banking and financial industry a range of software and hardware products. The company also has a software park at Bangalore and also markets and supports the French parents entire range of personal transaction systems including automated teller machines (ATMs), cash dispensers, point of sale terminals, card readers and smart card based solutions for electronic commerce.
An abysmal performance in the financial year ended December, 1996, had put PSI on the back foot. Incidentally the company has changed its accounting year from April-March to calendar year January-December. Therefore figures for the said period are not comparable with the previous accounting year ended on December 31, 1996 (nine-month period). Net sales have increased considerably to Rs 31.15 crore (Rs 15.70 crore). Incidentally PSI had posted an operating profit of Rs 1 crore, on sales of Rs 5 crore for the half year ended June, 1997. Theother income has reduced to Rs 1.2 crore from Rs 1.79 crore.
Having posted an operating loss of Rs 23 lakhs for the previous financial year, an operating profit of Rs 2.19 crore is a commendable achievement. The company has profited from increased exports of software services coupled with an increased sale of its ATMs to the Indian banks. But in the high margin software industry, PSI's operating margin of 7.52 per cent is nothing to boast about. In 1997, PSI undertook a balance sheet cleansing exercise to to write off a huge portion of its accumulated losses amounting to Rs 31.77 crore. Commensurately accumulated losses have reduced to Rs 2.67 crore. It has capitalised these losses by reducing its share capital by 80 per cent to Rs 7.17 crore with effect from December, 1997. The restructured equity ended up reflecting a healthier balance sheet.
This in effect resurrected its image with potential customers and banks. Moreover, the pared down capital looks realistic in relation to its business volumes.Furthermore, PSI has sold some assets and used these proceeds to lower borrowings to Rs 3.7 crore from Rs 5.91 crore in December, 1996. The company entered into an agreement for the sale of factory land and building at Peenya, Bangalore together with some specified assets like electrical fittings, furnitures and other equipment for a consideration of Rs 4.10 crore. The sale proceeds were supposedly utilised towards retiring long term loans, debentures and reduce working capital borrowings. The substantial reduction in interest costs has enabled PSI to post a net profit of Rs 1.72 crore compared to a loss of Rs 1.44 crore.
However, since its compensation packages have not been able to keep pace with its competitors, PSI has had a problem of high employee turnover. To counter this problem the company has embarked on an employee stock option plan. The success of this scheme is crucial to its future profitability as operational costs would be reduced with lesser manpower costs. Moreover, an increased acceptanceof its software services in the overseas market would be crucial for the future. Thus given the success of its carefully orchestrated turnaround and the company's future positives, companies like Infosys and Satyam Computers would be well advised to take PSI under their wings to enhance future earnings streams.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
