EQUITY RESEARCH REPORT ON

SOFSOL INDIA LIMITED

 Particulars
Sensex 11403
Share price (as on 29th
april) 32.9
Market capitalization
(Rs.cr) 61.19
68.70-
52 weeks H/L (Rs.) 20.30
Outstanding shares (in Cr.) 186.28
P.E ratio 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 Change (in rs)
100 Change in %
50
0
Earning
Operating
Operating

before
income

profit
EPS ANALYSIS

EPS analysis

3 EPS

0
Mar '06' Mar '07' Mar '08'

EPS 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 6.03 27
Earning before 1 60.
Appropriation 3.94 79
1 60.
Retained Earnings 3.94 79
 Softsol India Ltd

250
200
150 Change (in rs)
100 Change in %
50
0

Earning
Operating

Operating

before
income

profit
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

Mar Mar Change(in Change(in
Particulars '07' '08' rs.) %)
Income
Operating Income 12.83 18.99 6.16 48.01
Expenses
Material consumed
Manufacturing expenses 0.14 0.21 0.07 50.00
Personnel expenses 3.49 9.22 5.73 164.18
Selling expenses 0.01 0.09 0.08 800.00
Adminstrative expenses 1.39 3.44 2.05 147.48
Expenses capitalised 0
Cost of sales 5.04 12.96 7.92 157.14
Operating profit 7.79 6.03 -1.76 -22.59
Other recurring income 1.02 4.63 3.61 353.92
Adjusted PBDIT 8.81 10.66 1.85 21.00
Financial expenses 0.06 0.06 0 0.00
Depreciation 0.98 3.13 2.15 219.39
Other write offs
Adjusted PBT 7.78 7.48 -0.3 -3.86
Tax charges 2.87 -2.05 -4.92 -171.43
Adjusted PAT 4.91 9.53 4.62 94.09
Non recurring items -0.11 -0.4 -0.29 263.64
Other non cash adjustments 0.03 0.03
Reported net profit 4.79 9.15 4.36 91.02
Earnigs before appropriation 27.72 36.87 9.15 33.01
Equity dividend 0
Preference dividend 0
Dividend tax 0
Retained earnings 27.72 36.87 9.15 33.01

Graphical Representation of Comparative Income Statements

COMPARATIVE INCOME STATEMENT

1000

800
COMPARATIVE INCOME
600 STATEMENT Mar '07'
COMPARATIVE INCOME
400 STATEMENT Mar '08'
200 COMPARATIVE INCOME
STATEMENT Change(in rs.)
0 COMPARATIVE INCOME
Preference
Income

Manufacturing

Adjusted PBT

Adjusted PAT
Selling

Adjusted

Other non

Retained
Operating
Expenses

Expenses

Earnigs

STATEMENT Change(in %)
Depreciation

-200

-400

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 Rs.) e
12-
Mar 26.5
13-
Mar 24.5
16-
Mar 24.9
17-
Mar 22.75
18- 24
Mar
19-
Mar 23
20-
Mar 21.85
23-
Mar 24.1
24-
Mar 24.95
25-
Mar 24.5
26-
Mar 25.95
27-
Mar 25.7
30-
Mar 25
31-
Mar 26
1-
Apr 26.7 24.69
2-
Apr 28 24.79
6-
Apr 33 25.36
8-
Apr 30.95 25.76
9-
Apr 33.5 26.48
13-
Apr 32.4 27.04
15-
Apr 33.6 27.75
16-
Apr 30.3 28.31
17-
Apr 31.5 28.80
20-
Apr 28.9 29.07
21-
Apr 29.9 29.43
22-
Apr 30.4 29.72
23-
Apr 28.7 29.92
 24-
Apr 31 30.32
27-
Apr 33.45 30.82
28-
Apr 32.9 31.23

15 Days Simple Moving Average (SMA)

40
35
30
25 Share price ( in Rs.)

20
15 day Simple
15 Moving Average
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 e Chg Adva Decl AvgGain AvgLoss RS RSI
12-Mar 26.5
13-Mar 24.5 -2.0000 2.0000
16-Mar 24.9 0.4000 0.4000
17-Mar 22.75 -2.1500 2.1500
18-Mar 24 1.2500 1.2500
19-Mar 23 -1.0000 1.0000
20-Mar 21.85 -1.1500 1.1500
23-Mar 24.1 2.2500 2.2500
24-Mar 24.95 0.8500 0.8500
25-Mar 24.5 -0.4500 0.4500
26-Mar 25.95 1.4500 1.4500
27-Mar 25.7 -0.2500 0.2500
30-Mar 25 -0.7000 0.7000
31-Mar 26 1.0000 1.0000
1-Apr 26.7 0.7000 0.7000 0.5643 0.5500 1.0260 50.6410
2-Apr 28 1.3000 1.3000 0.6168 0.5107 1.2078 54.7059
6-Apr 33 5.0000 5.0000 0.9299 0.4742 1.9609 66.2263
8-Apr 30.95 -2.0500 2.0500 0.8635 0.5868 1.4716 59.5398
9-Apr 33.5 2.5500 2.5500 0.9840 0.5449 1.8058 64.3601
13-Apr 32.4 -1.1000 1.1000 0.9137 0.5845 1.5631 60.9848
 15-Apr 33.6 1.2000 0.8484 0.5428 1.5631 60.9848
16-Apr 30.3 -3.3000 3.3000 0.7878 0.7397 1.0650 51.5743
17-Apr 31.5 1.2000 0.7315 0.6869 1.0650 51.5743
20-Apr 28.9 -2.6000 2.6000 0.6793 0.8235 0.8248 45.2009
21-Apr 29.9 1.0000 0.6308 0.7647 0.8248 45.2009
22-Apr 30.4 0.5000 0.5857 0.7101 0.8248 45.2009
23-Apr 28.7 -1.7000 1.7000 0.5439 0.7808 0.6966 41.0574
24-Apr 31 2.3000 0.5050 0.7250 0.6966 41.0574
27-Apr 33.45 2.4500 0.4690 0.6732 0.6966 41.0574
28-Apr 32.9 -0.5500 0.5500 0.4355 0.6644 0.6554 39.5910

Graphical Representation of the Relative Strength Index

Relative Strength Index (14 days)

70.00

60.00

50.00
RSI Values

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 Rs.) ROC
12-Mar 26.5
13-Mar 24.5
16-Mar 24.9
17-Mar 22.75
18-Mar 24
19-Mar 23
20-Mar 21.85
23-Mar 24.1
24-Mar 24.95
25-Mar 24.5
26-Mar 25.95
27-Mar 25.7
30-Mar 25
31-Mar 26
1-Apr 26.7
2-Apr 28 105.7
6-Apr 33 134.7
8-Apr 30.95 124.3
9-Apr 33.5 147.3
13-Apr 32.4 135.0
15-Apr 33.6 146.1
16-Apr 30.3 138.7
17-Apr 31.5 130.7
20-Apr 28.9 115.8
21-Apr 29.9 122.0
22-Apr 30.4 117.1
23-Apr 28.7 111.7
24-Apr 31 124.0
27-Apr 33.45 128.7
28-Apr 32.9 123.2

Graphical Representation of Rate of Change Index

 Rate Of Change (ROC) Index

160.0
140.0
120.0
100.0
ROC

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