NetSol: operating gains

One of Pakistan’s leading IT companies has closed FY21 on a mixed note. As per latest financials sent to the bourse for the year ended June 30, 2021, NetSol Technologies Limited (PSX: NetSol) achieved a sizable expansion in its operating profits despite a nominal topline growth of 5 percent over previous year. However, non-operating factors down the line ended up reducing the bottom-line by more than a fifth.

At the top, NetSol, which derives bulk of its revenues from exports of software licenses, IT services, and subscriptions & support services, has some catching up to do. The net revenues at Rs4.9 billion are still shy of the Rs5.4 billion topline recorded in FY19. The management is banking on its leading products – NetSol Financial Suite Ascent, NFS Digital and NFS Ascent on Cloud – to lead recovery during the pandemic.

Under the firm’s exports umbrella, it seems that while licensing revenues were healthy during FY22, IT Services revenues declined considerably in the year, which was compensated to an extent by the subscriptions and support segment. Meanwhile, local market business appears to have been lackluster during the fiscal, something which other prominent IT firms have also witnessed.

The low topline growth was well magnified by just 0.2 percent yearly growth in cost of revenues, which consumed 64 percent of net revenues in FY21, down 3 percentage points (pp) over previous fiscal. This led to a double-digit gain in gross profit and corresponding 3pp increase in gross margin to 36 percent. During the pandemic, remote work protocols are expected to have optimized both core service costs and other overheads.

The selling and distribution expenses grew by a fifth, but this spending is still low compared to the level seen in earlier years. The increase was offset by 1 percent contraction in administrative overheads, which reflects cost control measures yielding results. In the end, selling and administrative expenses together exhausted 26 percent of the topline in FY21, almost the same level as they did in the previous fiscal.

As a result, operating profit expanded by a sizable 44 percent to reach roughly half a billion rupees, with operating margin standing at 10 percent. This is the point after which margins get thrown a bit out of kilter. This is mainly due to ‘other income’ – a non-core aspect of performance – declining by 68 percent year-on-year. PKR saw appreciation in the analysis period, which affected the company’s foreign currency based business.

Pre-tax margin thus reduced from 9 percent in FY20 to 5 percent in FY21. In the end, NetSol closed the fiscal with a 22 percent year-on-year drop in net profits to Rs192 million. That is the lowest haul at the bottom since FY16. Net margin dropped from 5 percent in FY20 to 4 percent in FY21. Going forward, NetSol will do well to bring some vigor at the topline. PKR depreciation during the Jul-Sep period should provide some support to the bottomline in the ongoing quarter.