Megasoft Ltd: Mega Telecom Foray to Propel Growth

Face Value: Rs.10

BSE Code: 532408

CMP: Rs.20.7

Book Value: Rs.68.14

Market Cap: Rs.91.63 Cr

52-Week High /Low: Rs.134 /Rs.17.10

P/E : 4 (Good software /IT companies generally command a P/E > 10)

Introduction: Megasoft is a trans-national Intellectual Property driven, product-based technology company. Established in 1994 in Virginia USA & Listed in Mumbai Stock Exchange. Megasoft, a public listed company operates out of offices spanning Europe, Asia and America.

The company has operations in more than nine countries worldwide including its development centers in India and China. Megasoft is currently focusing on Telecom as thrust area given its strong management and delivery capabilities in these industry domains. Telecom sector at present is witnessing tremendous growth throughout the world including India and China. Strong partnerships with global leaders like HP, Teleglobe and TNZI have given XIUS-bcgi the reach and credibility to build a customer base spanning across Asia, Americas, Europe and the Middle East with over 65 commercial installations to its credit till date.

Description of the Group: Megasoft Limited ("the Company") together with its subsidiary companies (collectively "the Group") are engaged in the business of providing Information Technology services to customers.

Name of the subsidiary companies:

Direct subsidiaries:

(i) Megasoft Consultants Sdn Bhd (Malaysia)

(ii) Megasoft Consultants Pte Ltd (Singapore)

(iii) Megasoft Consultants, Inc. (USA)

(iv) Boston Communications Group, Inc. (USA)

(v) Beam AG (Germany)

Indirect subsidiaries:

(i) Megasoft Consultants Limited (UK)

(ii) Megasoft Consultants GmBH (Germany)

(iii) Megasoft Consultants BV (The Netherlands)

(iv) Cellular Express, Inc. (USA)

(v) Puresight Technologies Ltd (Israel)

(vi) Boston Communications Group de Mexico, S.R.L. (Mexico)

(vii) BCGI Wireless Pvt Lt (India)

Shareholding Pattern: The promoters hold 15.84 % of the shares of the company while the General public holds 84.16 % of the shares of the company. It is interesting to note that Mutual Funds hold 14.93%, Venture Capital Funds hold 8.50% and FIIs hold 13.32 % of the shares of companies, indicating the quality of the company. All these three entities constitute around 36% of the shares of the company. Among the general public there are some interesting data:

(a) Individual shareholders holding nominal share capital up to Rs. 1 lakh is 12.78%

(b) Bodies Corporate hold 9.28

(c) Directors & their Relatives & Friends hold 5.02%

(d) Non Resident Indians hold 2.34 and

(e) Foreign Corporate Bodies hold 4.34% of the shares of the company, leaving very little shares in the hands of common investors. THIS GIVES PREMIUM TO THE SHARES OF THE COMPANY.

Some Very Great Names or who's who of Industry, emerge if we study the share holding pattern, in details:

(a) ICICI Prudential Tax Plan holds 3%

(b) ICICI Prudential Fusion Fund holds 2.01 %

(c) Birla Sun Life Trustee Company Pvt Ltd A/c Birla Sun Life Equity Fund holds 3.92 %

(d) BNP Paribas Arbitrage holds 2.21 %

(e) Morgan Stanley Mauritius Company Ltd holds 1.75 %

(f) Deutsche Securities Mauritius holds 3.96 %

(g) Copthall Mauritius Investment Ltd holds 4.80%

(h) SAIF II Mauritius Company Ltd holds 3.95% and

(i) ICICI Prudential Emerging Star (Stock Targeted at returns) Fund holds 3.54%

Financials: On a standalone basis the total income of the company for Q2FY09, came out to be Rs.32.4 Cr as against Rs.17.23 Cr in the same period previous year. PBDT (Profit Before Tax and Depreciation) of the company came out to be Rs.10.3 Cr as against Rs.5.52 Cr in the same period previous year. Profit before tax is a whopping (ten times) Rs.6.09 Cr as against a mere Rs.66 lakhs in Q2FY08 (same period the previous year). The net profit of the company for Q2FY09, came out to be mind boggling Rs.5.6 Cr as against Rs.1.43 Cr in the same period previous year. Another point which is worth noting is that both the operating and net profit margins in Q2FY09, increased considerably, over the previous year. The cash EPS of the company for Q2FY09, came out to be Rs.2.21 as against Rs.1.42 in the same period previous year.

Investment Rationale:

1. The fact that Megasoft Ltd is currently focusing on Telecom as thrust area given its strong management and delivery capabilities in these industry domains, is a song to the shareholders as telecom sector at present is witnessing tremendous growth throughout the world including India and China.

2. Strong partnerships with global leaders like HP, Teleglobe and TNZI have given XIUS-bcgi the reach and credibility to build a customer base spanning across Asia, Americas, Europe and the Middle East with over 65 commercial installations to its credit till date.

3. The company plans to aggressively market its VOISE solution across the EU, especially to the telecom service providers in Germany, the UK, France, Italy, etc. Megasoft Ltd, also plans to tap the potential being generated in the industry because of the outsourcing requirements.

4. The company is also planning to increase its focus on the life sciences domain, primarily on Electronic Data Capture (EDC) applications (required in clinical research).With an enhanced understanding of customer needs, Megasoft is focusing on tapping the increasing market requirement for EDC applications in the pharmaceutical industry, especially in the EU and the US. Megasoft Ltd. generates approximately 60 per cent of its revenues from its consulting division.The company has plans to increase its geographic presence and provide quality consulting services to its clients.

5. It has earlier amalgamated erstwhile, VisualSoft Technologies Ltd with effect from 1st October, 2006, which is giving great thrust in its revenues.

6. On August 30, 2007 the company completed acquisition of US based "Boston Communications Group, Inc." ("bcgi") by acquiring 100% of the bcgi’s shares through a open tender offer. bcgi has become a wholly owned subsidiary from that date.

7. It is a dividend paying excellent company in the software sector. The company has now moved to a managed services model from the License sale of revenues. By this change in the Revenue model, the company has a substantial visibility of its revenues for the near future.

The fact that the scrip is trading near its 52-week low price of Rs.17.10, gives it limited downside from the CMP of Rs.20.7.

8. Megasoft Ltd. made a strategic investment of US$ 3,000,000 in Keystone Wireless, LLC, USA during June 2007 as 5% stakeholder. Keystone is a mobile telecom service provider based out of the United States. The result of this investment has started to show in the quarterly results.

9. With the quarterly results of some of the well known or who' s who, in the information technology (IT) space, coming in this month, we could see some buoyancy in the shares of IT companies in the days to come. Hence, we could see some great movement in the shares of the company as it is a very well managed company, working across various verticals.

10. The company has a strong intellectual property portfolio and is a forerunner in adopting new technologies for its innovation and co-creation strategies.

It is a multi-national and multi-continent company and hence should trade at high valuations.

11. Megasoft has substantial exposure to foreign exchange related risks because of earnings denominated in foreign currency arising from export of software. Majority of the company's revenues are US dollar (USD) denominated and the continued Depreciation of Rupee (INR) vis-à-vis the USD can further pump up the revenues and margins going forward, through indirect gains. The company hedged its forex exposure through forward contracts. The company also has a natural hedge as most of its expenditure is in the US Dollar. The company has not entered into any derivative transactions during the year.

Concerns: Growth of Megasoft Ltd is dependant on the telecoms industry. Any vagaries in the telecom business environment will influence the performance of the company. The Telecom Industry has a historical practice of extended sales cycle and high debtors' position. This may be detrimental to cash flows of the company.

Conclusion: Megasoft Ltd perceives the market opportunities to be favourably inclined to its current offerings and strategies. With the US markets showing weaker growth and the emphasis on cost reduction globally, Megasoft is rightly positioned as a niche player with a strong brand value in the telecom products segment and a number one player in the ADMS and PLM space. Moreover, the US economy is set to improve going further, triggering a rally in the IT stocks. With the increasing focus on innovative technology solutions and a strong R&D back ground along with product development expertise, Megasoft Ltd is ready for exploiting this unparalleled opportunity to expand and grow in these areas as a strong entity.

If we look at the charts we will find that Bollinger Bands, Stochastic, MACD, and Candle Stick Chart Pattern indicates an immediate rise in the price of the scrip. Also, on last Friday, the scrip rose with high volumes indicating that bulls have started to enter the scrip.

Moreover, from the daily charts it is found that the scrip has broken out of the envelop pattern on the positive side, indicating further upmove in the price of the scrip.

Hence, one can buy the scrip at the CMP of Rs.20.7, for a target of Rs.35--Rs.55 in the short to medium term.

Note: The Stock was recommended on last Friday (2nd January, 2009), to the Paid Group Members.