Equity Research Report

EQUITY RESEARCH REPORT ON SOFSOL INDIA LIMITED

Particulars

Sensex Share price (as on 29th april) Market capitalization (Rs.cr) 52 weeks H/L (Rs.) Outstanding shares (in Cr.) P.E ratio

11403 32.9 61.19 68.7020.30 186.28 6.68

RATING: SELL TARGET PRICE: INR 29.07 Recommendation Softsol India ltd has a scalable business model, good growth visibility, high Operating margin .The company has Registered a continuous robust growth rate GROWTH ANALYSIS

over past few years. The company is trading at a low P/ E Ratio of 6.68 .We expect the company to outperform in the future and we reiterate ‘SELL’ on stock with target of INR 29.07

Softsol India Ltd 250 200 150 100 50 0

Change (in rs)

Earning before

Operating profit

Operating income

Change in %

EPS ANALYSIS

EPS analysis 6 5 4 3

EPS

2 1 0 EPS

Mar '06'

Mar '07'

Mar '08'

1.67

2.58

4.91

FUNDAMENTAL ANALYSIS

ECONOMY OVERVIEW Indian Economy is among one of the fastest growing economy in the World. It has registered a robust growth rate in past few years. But weakening of U.S. Economy has an impact on Indian Economy too. Indian economy has registered a GDP growth rate of 9.213% in 2007-08 but it slipped down to 7.9 % in the year 2008-09 which points out the negative growth prospects for the industrial sector and the return expected from investment in shares . Action taken to fight against the slowdown of the Economy, Government of India & Reserve Bank of India took many fiscal as well as monetary actions. Clubbed with fiscal & monetary actions, decreasing commodity prices, decreasing crude prices and lowering interest rate, we expect that Indian Economy could again register a decent growth rate in the year 2009-10. Inflation stands at 0.18 per cent on 16 th April 2009 against a high of 12.63 per cent on 9th August 2008.

INDUSTRY SNAPSHOT The robust growth of India Inc. can be attributed to the meteoritic success of ' India IT Industry '. In fact no other Indian industry has performed so well against the global market. Industry is highly fragmented where it is characterized by very few small and large players who normally provide highly customized services to the customers. The major contributor of revenue to this industry is cheap labour cost. Political instability is considered to the major threat for the prospects of the industry IT services will contribute over 5.4 % of the overall GDP. IIT industry will attract Foreign Direct Investment (FDI) of U.S. $ 4-5 billion. Market capitalization of IT shares will be around U.S. $ 225 billion. COMPANY ANALYSIS It is at the forefront of Design, Development and Implementation of Software tools and Products that offer E-Solutions to clients Worldwide. It has a sharp business focus and have evolved a Product Model that is consistently capable of rapid and cost effective solutions. Services Internet based Solutions, Telecom Services, e-Commerce Solutions, Networking Solutions, Legacy Software Solutions, Software Design / Development, Web Designing / Development.

Softsol India Ltd Change Change Particulars

(in rs)

in %

Operating income

12.54

194.42 233.

Cost of sales

9.07

16 135.

Operating profit

3.47

55 193.

Net profit Earning

6.03 before

Appropriation

27 1

3.94

60. 79

1 Retained Earnings

3.94

60. 79

Softsol India Ltd 250 200 150 100 50 0

Change (in rs)

Earning before

Operating profit

Operating income

Change in %

From above we can observe that the company’s performance for the past three years has been extraordinary. There has been a considerable increase in the operating income and net profit of the company which shows good prospects of the company. From the income statement we can observe that the company has not declared any dividend, which is good sign on the part of management because the rate of return is more than cost of capital. The company faces intense competition from the medium and small scales companys’s like Four Soft India Ltd, Ram Informatics etc. The capital structure of the company suggest that the company has no long term debt which implies that company is forgoing the benefits of optimum capital mix Financials The company Operating income and Net profit has registered a growth rate of 48.01 and 91.02 over last year. For the purpose of the study a comparative income statement is constructed as follows COMPARATIVE INCOME STATEMENT Particulars Income Operating Income Expenses Material consumed Manufacturing expenses Personnel expenses Selling expenses Adminstrative expenses

Mar

Mar

Change(in

Change(in

'07'

'08'

rs.)

%)

12.83

18.99

6.16

48.01

0.14 3.49 0.01 1.39

0.21 9.22 0.09 3.44

0.07 5.73 0.08 2.05

50.00 164.18 800.00 147.48

Expenses capitalised Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Other write offs Adjusted PBT Tax charges Adjusted PAT Non recurring items Other non cash adjustments Reported net profit Earnigs before appropriation Equity dividend Preference dividend Dividend tax Retained earnings

5.04 7.79 1.02 8.81 0.06 0.98

12.96 6.03 4.63 10.66 0.06 3.13

7.78 2.87 4.91 -0.11 4.79 27.72

7.48 -2.05 9.53 -0.4 0.03 9.15 36.87

27.72

36.87

0 7.92 -1.76 3.61 1.85 0 2.15 -0.3 -4.92 4.62 -0.29 0.03 4.36 9.15 0 0 0 9.15

157.14 -22.59 353.92 21.00 0.00 219.39 -3.86 -171.43 94.09 263.64 91.02 33.01

33.01

Graphical Representation of Comparative Income Statements COMPARATIVE INCOME STATEMENT 1000 800

Retained

Earnigs

Preference

Other non

Adjusted PAT

-400

Depreciation

-200

Adjusted PBT

COMPARATIVE INCOME STATEMENT Change(in %)

Adjusted

0 Operating

COMPARATIVE INCOME STATEMENT Change(in rs.) Selling

200

Expenses

COMPARATIVE INCOME STATEMENT Mar '08'

Manufacturing

400

Expenses

COMPARATIVE INCOME STATEMENT Mar '07'

Income

600

Analysis and Interpretation From above we can observe that there is a considerable difference in the operating income and net profit. Which implies that the company’s earning from non operating sources has been increased more proportionately than the operating income . It is revealed that the cost of sales has been increased in more proportion comparative the operating income portrays the picture of excessive spending on unnecessary expenditure which is not a good sign to the company. Other factors which contributed to the increase in Net profit are the reduction in Tax charges and and other non operating expenses.

The company from the past two years has not paid any dividend to the shareholders despite of registering good profits. Thinking positively we can conclude that the company has done a good thuing by not paying dividend to the share holders because the company Rate of return is more than the cost of capital. However on the negative side it may demotivate the new investors from investing for regular returns Overall the companys performance for the past two years is satisfactory TECHNICAL ANALYSIS Technical Analysis is a process of identifying trend reversals at an earlier stage to formulate the buying and selling strategy. With the help of several indicators they analyze the relationship between price volume and supply demand for the overall market and the individual stock. Volume is favourable on upswing i.e. the number of shares traded dwindles. If it is the other way round ,trend reversals can be expected Moving Averages Moving Averages are one of the technical tool which helps in identifying the trends and reversals, measure the strength of an assets momentum and determine potential areas where asset an asset will find support or resistance. For the purpose of the analysis, 15 day Simple moving Average of the stock as been constructed as follows Simple Moving Average (SMA) 15

day

Simple Moving Share price ( in

Averag

Date 12-

Rs.)

e

Mar 13-

26.5

Mar 16-

24.5

Mar 17-

24.9

Mar 18-

22.75 24

Mar 19Mar 20-

23

Mar 23-

21.85

Mar 24-

24.1

Mar 25-

24.95

Mar 26-

24.5

Mar 27-

25.95

Mar 30-

25.7

Mar 31-

25

Mar 1-

26

Apr 2-

26.7

24.69

Apr 6-

28

24.79

Apr 8-

33

25.36

Apr 9-

30.95

25.76

Apr 13-

33.5

26.48

Apr 15-

32.4

27.04

Apr 16-

33.6

27.75

Apr 17-

30.3

28.31

Apr 20-

31.5

28.80

Apr 21-

28.9

29.07

Apr 22-

29.9

29.43

Apr 23-

30.4

29.72

Apr

28.7

29.92

24Apr 27-

31

30.32

Apr 28-

33.45

30.82

Apr

32.9

31.23

15 Days Simple Moving Average (SMA) 40 35 30 Share price ( in Rs.)

25 20

15 day Simple Moving Average

15 10 5 0 1

3

5

7

9

11 13 15 17 19 21

23 25 27 29

Trend From the above, we can observe that the stock is trading above the moving average and also that the average is sloping upwards. Hence it can be deemed that the stock is going through uptrend. Well, in this uptrend it is better for the traders holding a long position in an asset of the company. Support From above graph we can can observe that the stock has prop up the price after it has fell (i.e. from 33.5 to 28.9) which implies that the stock enjoys a support at the price (i.e. 28.9) where considerable demand for the stock is expected to prevent further fall in price. Resistance From above, we can observe that the stock has got raised to a certain level and then drops (i.e. 33.5 from 25) which implies that the stock goes through resistance level at 33.5

price .It also implies that the supply of the scrip is more than the demand and further rise in price prevented. Stop Losses The Support and Resistance characteristics of moving averages help in managing risk considerably. From above we can observe that the stock is currently trading at 32.9, whereas its moving average is 31.23. So the Stop loss for this stock should be less than the moving average price in order to the stock room to breathe. Hence it is set at stock price les than moving average ( i.e. 31) Relative Strength Index (RSI) Relative Strength Index is a technical tool which helps to identify the inherent technical strength and weakness of a particular scrip or market and attempts to determine the overbought and oversold positions of an asset. For the purpose of the study a 14 day relative strength index of the stock is constructed as follows

Relative Strength Index ( 14 days) Clos

Date 12-Mar 13-Mar 16-Mar 17-Mar 18-Mar 19-Mar 20-Mar 23-Mar 24-Mar 25-Mar 26-Mar 27-Mar 30-Mar 31-Mar 1-Apr 2-Apr 6-Apr 8-Apr 9-Apr 13-Apr

e 26.5 24.5 24.9 22.75 24 23 21.85 24.1 24.95 24.5 25.95 25.7 25 26 26.7 28 33 30.95 33.5 32.4

Chg -2.0000 0.4000 -2.1500 1.2500 -1.0000 -1.1500 2.2500 0.8500 -0.4500 1.4500 -0.2500 -0.7000 1.0000 0.7000 1.3000 5.0000 -2.0500 2.5500 -1.1000

Adva

Decl

AvgGain

AvgLoss

RS

RSI

0.5643 0.6168 0.9299 0.8635 0.9840 0.9137

0.5500 0.5107 0.4742 0.5868 0.5449 0.5845

1.0260 1.2078 1.9609 1.4716 1.8058 1.5631

50.6410 54.7059 66.2263 59.5398 64.3601 60.9848

2.0000 0.4000 2.1500 1.2500 1.0000 1.1500 2.2500 0.8500 0.4500 1.4500 0.2500 0.7000 1.0000 0.7000 1.3000 5.0000 2.0500 2.5500 1.1000

15-Apr 16-Apr 17-Apr 20-Apr 21-Apr 22-Apr 23-Apr 24-Apr 27-Apr 28-Apr

33.6 30.3 31.5 28.9 29.9 30.4 28.7 31 33.45 32.9

1.2000 -3.3000 1.2000 -2.6000 1.0000 0.5000 -1.7000 2.3000 2.4500 -0.5500

3.3000 2.6000

1.7000

0.5500

0.8484 0.7878 0.7315 0.6793 0.6308 0.5857 0.5439 0.5050 0.4690 0.4355

0.5428 0.7397 0.6869 0.8235 0.7647 0.7101 0.7808 0.7250 0.6732 0.6644

1.5631 1.0650 1.0650 0.8248 0.8248 0.8248 0.6966 0.6966 0.6966 0.6554

60.9848 51.5743 51.5743 45.2009 45.2009 45.2009 41.0574 41.0574 41.0574 39.5910

Graphical Representation of the Relative Strength Index Relative Strength Index (14 days) 70.00 60.00 RSI Values

50.00 40.00 Series1

30.00 20.00 10.00 0.00 1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

. Overbought level is set at 70 and Oversold level at 30 From above graph, we can observe that the RSI rises above 60 and falls back below it. In this market condition it is better to go short in the downtrend. On observing the RSI trends we can make out the scrip is going through bullish divergence.

Rate Of Change Index (ROC) Rate of Change is a technical tool which is widely used method to measure the momentum and to compute the rate at which the price of a stock, or market index, changes over a certain period of a stock. For the purpose of the study, a 14 day Rate of Change Index is constructed as follows

Rate

Of

Change

Index Share price ( in Date 12-Mar 13-Mar 16-Mar 17-Mar 18-Mar 19-Mar 20-Mar 23-Mar 24-Mar 25-Mar 26-Mar 27-Mar 30-Mar 31-Mar 1-Apr 2-Apr 6-Apr 8-Apr 9-Apr 13-Apr 15-Apr 16-Apr 17-Apr 20-Apr 21-Apr 22-Apr 23-Apr 24-Apr 27-Apr 28-Apr

Rs.) 26.5 24.5 24.9 22.75 24 23 21.85 24.1 24.95 24.5 25.95 25.7 25 26 26.7 28 33 30.95 33.5 32.4 33.6 30.3 31.5 28.9 29.9 30.4 28.7 31 33.45 32.9

Graphical Representation of Rate of Change Index

ROC

105.7 134.7 124.3 147.3 135.0 146.1 138.7 130.7 115.8 122.0 117.1 111.7 124.0 128.7 123.2

Rate Of Change (ROC) Index 160.0 140.0 120.0 ROC

100.0 80.0

Series1

60.0 40.0 20.0 0.0 1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

From above graph, we can observe that the Rate of Change Index is prevailing above the reference level. Which implies that there is considerable growth in the momentum (a bullish factor). We can also observe that there is a fall in the Index level during the third week of april, since still the index is above the reference level it indicates a slow down in the rate of increase in price From the ROC Index we can conclude that the stock market price is at higher level than the past 14 days earlier. Note: 100 level is assumed to be the reference level