NetSol Technologies Limited (PSX: NETSOL) was incorporated in Pakistan as a private limited company in 1996 and was later converted into a public limited company. The company is engaged in the development and sale of computer software and allied services locally as well as internationally.

Pattern of Shareholding As of June 30, 2022, the company has a total of 87.836 million shares outstanding which are held by 7245 shareholders. NetSol Technologies Inc. which is the holding company of NETSOL has a major shareholding of 67.62 percent in the company. This is followed by local general public holding 25.14 percent shares. Public sector companies account for 4.11 percent of the outstanding shares of the company. Directors, CEO, their spouse and minor children hold 1.22 percent shares of NETSOL while Banks, DFIs and NBFIs have a stake of 1.18 percent in the company. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

NETSOL’s topline posted a year-on-year decline in 2020. In the remaining years under consideration, the topline rode an upward trajectory. The bottomline remained tamed in 2020 and 2021 where it posted a plunge but rebounded staggeringly in 2022. The gross profit margin which had been dropping until 2020 showed signs of improvement in 2021, however, tumbled again in 2022. Conversely, operating profit and net profit margin kept dropping until 2021 and recovered in 2022. The detailed performance of each of the years under consideration is given below.

In 2019, NETSOL’s topline grew by 26 percent year-on-year which came on the back of global implementation of its flagship product NFS Ascent. The company also finalized contracts with leading blue-chip organizations locally and globally in 2019. The implementation of NFS Ascent in China was the largest implementation of NETSOL to date. As of 2019, 99.8 percent of NETSOL’s total revenue is from the international market. The cost of revenue jacked up by 40 percent year-on-year in 2019 which largely includes payroll expense followed by travelling and conveyance charges. While gross profit grew by 8 percent year-on-year in 2019 but GP margin plummeted from 45 percent in 2018 to 39 percent in 2019. NETSOL’s distribution expense grew by 17 percent year-on-year in 2019 while its administrative expense inched up by 1 percent. The main growth propellers in the operating expense category were salaries and benefits as well as R&D expense. The company made a tremendous 76 percent year-on-year growth in its other income on account of exchange gain as its drives its major revenue from outside Pakistan. Other expense drastically grew from Rs.4.30 million in 2018 to Rs.261.83 million in 2019, signifying a jump of around 60 times due to R&D cost. While operating profit grew by 17 percent year-on-year in 2019, OP margin dropped from 27 percent in 2018 to 25 percent in 2019. The company generally finances its operations through equity finances which are evident by the fact that its finance cost as a percentage of its topline stays under 1 percent in all the years under consideration. NETSOL’s debt-to-equity ratio stood at 16.8 percent in 2019. Finance cost shrank by 10 percent in 2019. Its bottomline grew by 17 percent year-on-year in 2019 to clock in at Rs.1243.48 million with an NP margin of 23 percent versus 25 percent in 2018. EPS also grew Rs.11.87 in 2018 to Rs.13.84 in 2019.

In 2020, NETSOL’s topline shrank by 13 percent year-on-year. The company achieved major milestones in 2020 which includes a major American multinational automaker which went live in China with NFS Ascent’s Retail Platform. Besides, the company also deployed its NFS Ascent in Hong Kong and Malaysia for a leading German auto captive. However, the drop in sales came on account of on-site services which came to a standstill on the back of COVID-19 related lockdowns and travel restrictions. Cost of sales also shrank by 5 percent year-on-year mainly on account of a drop in travel and conveyance charges. Gross profit for 2020 plunged by 25 percent year-on-year with GP margin sliding down to 33.3 percent. Distribution expense dropped by 32 percent year-on-year in 2020 on the back of a considerable drop in commission on sales as there was a drop in signing on new deals with the customers in 2020 as majority of customers were in their maintenance phase after successful implementation in the previous years. This is also evident drop in license fee in 2020 while maintenance fee grew by a good momentum. Administrative expense ticked up by 3 percent in 2020 due to high payroll expense. Other income dropped by 49 percent year-on-year in 2020 due to 90 percent drop in exchange gain on the back of a huge decline in export revenue. This was partially offset by handsome dividend income M/S Netsol Innovation (Private) Limited. Other expense grew by 16 percent year-on-year in 2020. While R&D expense dropped, the company booked huge provision against doubtful debts in 2020. Operating profit shriveled by 62 percent year-on-year in 2020 with OP margin falling down to 11 percent. Finance cost grew by 22 percent year-on-year in 2020 due to increase on short-term and long-term financing in 2020 which increased its debt-to-equity ratio to 24 percent. During 2020, the company availed the SBP Refinance Scheme for the payment of salaries and wages. In 2020, the company also recorded a share of loss of an associate company worth Rs. 67 million. Consequently, bottomline crashed by 80 percent year-on-year in 2020 to clock in at Rs.244.84 million with an NP margin of 5.2 percent. EPS also posted a steep fall to stand at Rs.2.73 in 2020.

In 2021, NETSOL’s topline posted a marginal 5 percent year-on-year growth. The license revenue mainly came on the back of provision of license to the sister concern’s client for the deployment of NFS Ascent in China and Thailand. Besides, there was a regular stream of customization and enhancement requests from the existing clientele which boosted the maintenance fee in 2021. During 2021, the company didn’t make any local revenue. The cost of sales remained almost the same as it was in the previous year. This drove the gross profit up by 15 percent year-on-year in 2021 with a slight improvement in GP margin which clocked in at 36.4 percent. Distribution expense grew by 20 percent year-on-year in 2021 primarily due to a rise in commission on sales. Administrative expense shrank by 1 percent year-on-year in 2021. While payroll expense significantly rose in 2021, the drop in administrative expense came on the back of a plunge in travelling and conveyance and entertainment expense. Rent, rates and taxes also contributed to a drop in administrative expense as short-term leases dropped during the year. Other income dropped by a massive 68 percent year-on-year in 2021 as the company didn’t receive any dividend income. Furthermore, there was no exchange gain as the year ended with a stronger Pak Rupee. Other expense also contracted by 2 percent year-on-year. While the company incurred a massive exchange loss of Rs. 119.655 million in 2021 as against the exchange gain of Rs.83.461 million in the previous year, the drop in other expense in 2021 was on account of a drop in R&D cost as well as lesser provision booked for expected credit losses. Higher distribution expense coupled with thin other income culminated into a 33 percent year-on-year drop in operating profit with OP margin tapering off to 7 percent in 2021. Finance cost grew by 21 percent year-on-year in 2021 despite lower discount rate during the year. This was due to increase in short-term borrowings under export refinance scheme. The debt-to-equity ratio grew to 26 percent in 2021. The share of loss of an associate company reduced by 59 percent year-on-year in 2021 yet net profit trimmed down by 22 percent year-on-year to clock in at Rs.191.59 million. NP margin clocked in at 3.9 percent in 2021 – the lowest among all the years under consideration. EPS also inched down to Rs.2.13 in 2021.

2022 proved to be the most fortunate year for NETSOL as not only did its topline grew by 24 percent year-on-year but its bottomline expanded exponentially during the year. The sales growth was on account of the implementation of NFS Ascent at various destinations in Japan, Australia, South Africa and Taiwan which increased its license revenue. Maintenance revenue also grew remarkably during the year while there was a drop in services revenue. The company also made revenue from local market in 2022. The cost of sales inched up 27 percent year-on-year in 2022 due to higher payroll expense, software license charges, travel and conveyance charges as well as depreciation. This culminated into a drop in GP margin to 34.4 percent in 2022 although gross profit grew by 17 percent year-on-year during the year. Distribution expense grew by a marginal 1 percent in 2022. While salaries expense grew considerably in 2022, the drop in commission on sales diluted the growth in distribution expense. Administrative expense grew by 30 percent year-on-year in 2022. What made an astounding contribution in the bottomline growth in 2022 was a marvelous 606 percent growth in other income on account of a fat exchange gain worth Rs.790.317 million. Other expense grew by 16 percent year-on-year due to higher R&D cost and higher provision for expected credit losses. The operating profit magnified by 268 percent year-on-year in 2022 with OP margin climbing up to 21 percent. Finance cost grew by a mere 1 percent in 2022 despite multiple rounds of monetary tightening. This was due to lesser borrowings in 2022 which pushed down NETSOL’s debt-to-equity to 23 percent in 2022. Although share of loss of an associate company grew by 509 percent in 2022 yet the company was able to report a 377 percent year-on-year rise in its bottomline which clocked in at Rs.913.21 million in 2022 with an NP margin of 15 percent. EPS ticked up to Rs.10.18 in 2022.

Recent Performance (9MFY23)

The lucky streak continued in 2023 whereby NETSOL posted a year-on-year growth of 20 percent in its topline in 9MFY23 which came from all three sources of revenue – license, services as well as maintenance. The company made revenue from local market only during the third quarter of 2023. During 9MFY23, the company also extended its partnership with Amazon Web Services, signed an agreement with Digital Intelligence Systems (DISYS) and a leading Japanese equipment finance company of Australia which hold landmark importance for the company. Cost of sales grew by 37 percent year-on-year during 9MFY23 on account of high payroll expense, travelling and conveyance charges, depreciation as well as utility charges. This drove the gross profit down by 9 percent year-on-year in 9MFY23 with GP margin sliding down to 28 percent in 9MFY23 from 37 percent in 9MFY22. Distribution expense and administrative expense rose by 12 percent and 45 percent respectively in 9MFY23 due to high commission on sales, high payroll expense as well as traveling and conveyance charges. Other income grew by 198 percent year-on-year in 9MFY23 on account of handsome exchange gain. Other expense also grew by 84 percent year-on-year in 9MFY23. High other income culminated into operating profit magnifying by 64 percent year-on-year in 9MFY23 with OP margin climbing up to 31 percent from 22.6 percent during the same period last year. Finance cost grew by 181 percent year-on-year in 9MFY23 due to high discount rate. Net profit grew by 63 percent year-on-year in 9MFY23 to clock in at Rs.1432.55 million with an NP margin of 26 percent versus 19.2 percent during the same period last year. EPS also grew from Rs.9.73 in 9MFY22 to Rs. 16.25 in 9MFY23.

Future Outlook

NETSOL is expected to post robust sales and greater returns in the coming times as it will stretch its wings in new geographical markets as well as new product offerings including cloud services in partnership with Amazon Web Services. While Pak Rupee is expected to gain strength in the near term due to bilateral and multilateral inflows, it may drop down again owing to increased demand of USD as import restrictions have been removed. Weaker Pak Rupee will translate into greater exchange gain for NETSOL which will further buttress its bottomline and margins.