The Hindu Business Line : California Software: Invest

Shareholders of California Software Company can consider investing in the rights offer being made at an offer price of Rs 66 per share, compared to its market price of about Rs 73. Since the offer proceeds of Rs 22.7 crore are to be deployed in expanding the offshore operations of the company and that of its subsidiaries, its impact will take time to reflect in the financial performance. Hence, this investment will be suitable for those with a high-risk appetite and a medium-term outlook.

The key positive linked to this offer is the company's product-cum-service-based revenue profile accruing from three different segments — commodities solutions, enterprise solutions and technology solutions. As a relatively small player, California Software can capitalise on the robust demand from these segments. Its strong clientele, especially in the US, inorganic growth moves and good financials lend confidence to its overall expansion strategy. On the flip side, however, the long sales cycle in procuring orders, high client concentration, sharper competition in the offshoring arena and low margins in select segments may put pressure on order flows in the medium term.

Key business segments

On a consolidated basis, California Software has reported revenues of Rs 79.4 crore and post-tax earnings of Rs 3.8 crore for the nine months ended December 31, 2005. Its revenue contribution has primarily been from three business segments:

Commodity solutions: As a part of this segment, the company has developed trading, risk management and procurement solutions for commodity traders and consumers in the shipping and bunkering business. It has also developed a suite of integrated products for the oil chain supply segment.

This segment contributed 41 per cent of standalone business (and 27 per cent on consolidated basis) in 2004-05. Since the competition in this segment is not high, it can prove to be a strong growth driver of the future.

Enterprise solutions: This segment caters to packaged or customised solutions for the manufacturing, education, health care and services sector. This segment contributes about 26 per cent on a standalone basis (and 34 per cent on a consolidated basis).

Though competition is likely to be intense, some of the niche segments such as education or healthcare can open up opportunities for sustained growth. It has also made some acquisitions to penetrate these segments. The profit-before-tax margin, which has been about 10 per cent, is likely to improve only if the niche segments are exploited judiciously.

Technology solutions: This segment that contributes about 33 per cent of revenues (and 39 per cent on a consolidated basis) is likely to face severe competition from established frontline Indian players.

While the company has forged relationships with clients such as Microsoft, Nortel, HP and Sony, its relative scale and size may prove to be a disadvantage in terms of growing these relationships in the coming years.

Though the profit-before-tax margin has improved sharply to 16 per cent in the first nine months of 2005-06, its growth will hinge on the ability to retain and build on their existing client relationships.

Offer details: California Software is making a rights offer of 34.4 lakh shares in the ratio of seven shares for every 10 held to mobilise Rs 22.7 crores. Karvy Investor Services is the lead manager to the offer. The offer opened on April 26 and closes on May 25.