The Hindu Business Line : Megasoft: Buy

Megasoft is transforming itself from a pure IT services player into an IP driven product development company in the telecom and life- sciences vertical

Creating a niche in telecom products.

Investors with a penchant for risk can consider the Megasoft stock at current price levels. The stock is trading at a price earnings multiple of 14.5 times its trailing four-quarter per share earnings. Megasoft's steady progress towards becoming a domain-led IP (intellectual property) product development company, its robust order intake in the telecom vertical, strategic moves in the life-sciences vertical and sound financials lend confidence to the stock.

However, an unexpected slowdown in the telecom vertical, the slower-than-expected increase in penetrating mature markets, and the integration challenges stemming from a possible large IT services acquisition can expose the company to risks and challenges.

Investors can, however, consider taking exposure in small lots and temper their overall return expectations.

Focus on telecom

Since its amalgamation, in 2004, with Xius India, an unlisted company, Megasoft has restructured itself to focus primarily on two verticals: Telecom and life sciences.

In telecom, the company has focussed on helping mobile operators realise the vast potential of their networks through different products and applications. For instance, the launch of XIUS VOISE (Virtual Operator Integrated Services Engine) platform in February 2006 marked its foray into the high margin Mobile Virtual Network Operator (MVN)/Virtual carrier segment of telecom. In addition to this, the company has developed XIUS INfinet and XIUS Roaming, offering a real time billing platform and roaming services for GSM operators.

To expand its marketing and project management operations in Europe, Megasoft acquired in October 2005 a 64 per cent equity stake in German-based beam AG. This company provides consulting and project management services for automotive, telecom and product sectors. It has entered into partnerships with global players such as Teleglobe (part of VSNL), Hewlett Packard and World Cel to expand its marketing efforts in different geographies.

Over the past few months, the company has bagged a couple of multimillion-dollar deals — with Sonetel, Europe and Xero Mobile — for its XIUS range of products and services.

For the half-year ended June 30, 2006, the telecom segment contributed about 35 per cent of Megasoft's total revenue of Rs 73.6 crore. But at the profit before interest and tax (PBIT) level, its contribution at 67 per cent was quite substantial. This is evident from the PBIT margin in the latest half-year, which increased by three percentage points to 42.6 per cent over the same period in the previous year.

IT services still dominate

Despite the focus on telecom, the company still derives over 55 per cent of its total revenue from IT services. However, on the PBIT front, the contribution of IT services is coming down as margins from this segment have averaged 10-13 per cent. In the latest half-year, the PBIT margins have dipped by nearly three percentage points to 11.8 per cent.

Clearly, the company plans to enhance steadily the contribution of non-IT services to 50 per cent.

While telecom will be its key driver, life-sciences, the other priority division of Megasoft, will slowly start to contribute to this segment mix over the next year. In life-sciences, Megasoft plans to offer web-based clinical informatics software to the pharma and biotech sectors. In the latest half-year, this division clocked revenue of Rs 5.47 crore and a PBIT of Rs 60 lakh.

While the company has been considering a US-based acquisition for customer access, there are rumours that Megasoft may be one of three companies considering a buy-out or merger with VisualSoft Technologies. However, it may be too early to evaluate the overall impact of this move.

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