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Sunday, June 28, 2009

Small Cap Stock Investigation - Vakrangee Softwares Limited - MoneyLife Investigates Stock Crash..

What is behind the recent price and profit crash of Vakrangee and now the huge trading volumes in the counter? Checkout this MoneyLIFE Investigation report. Try making a guess if there could be a good opportunity to buy stocks and make money in this counter.

Domestic software development is turning out to be a lucrative area, especially the computerisation of government processes and records, even though the margins are much lower than those in offshore software development. These projects are attracting large software companies, such as Tata Consultancy Services (TCS), HCL and Wipro, among others. But it is a rather murky business, especially getting state government contracts. One needs to be able to cut through bureaucratic red tape and ‘take care’ of government officials and their political masters. Since large software companies don’t want to soil their hands, a set of smaller, third-tier companies seem willing to step forward as their fronts. They then walk away with e-governance contracts for a variety of smart cards, e-licences, registration cards, etc.

According to some market-watchers, Mumbai-based Vakrangee Softwares Limited (VSL) is skilled at handling things at the local level, making it an invaluable partner for large software companies. Set up in 1990, VSL has quickly become a force to reckon with in the e-governance sector. It provides specific BPO operations for government departments and private clients and is already working with major industry players like TCS/CMS, C-DAC, Godrej & Boyce and many more. Its experience in executing government contracts can be judged from the fact that it has handled manuscripts of around 75,000 polling booths of Maharashtra and the voters’ database of the village panchayats in Uttar Pradesh, India’s most populous state. Though primarily focused on e-governance projects, VSL is gradually moving towards the private sector and has bagged contracts from companies like ICICI Pru and Airtel. What has been its performance in recent times?

VSL had been reporting phenomenal numbers until the December 2008 quarter. Its operational income has been rising by an average 69% over the past five quarters while its operating profit was up 65% over the same period. Even its margins have been stupendous, averaging a healthy 43% over the past five quarters. The company ended FY08 with a 92% rise in operational income while operating profit nearly doubled to Rs101.66 crore from Rs51.69 crore in FY07. Its net profit had zoomed from Rs24.39 crore in FY07 to Rs49.96 crore in FY08. These phenomenal numbers probably helped it maintain a decent stock price, despite a bearish market sentiment until August 2008. Thereafter, the price went into a long decline, dropping all the way from Rs216 to Rs21. What happened to the company which was performing so well until then? The problem began in the December quarter. Its operational income for the quarter-ended December 2008 was up a mere 9% over the corresponding year-ago quarter, while operating profit actually declined 18% over the same previous period. Worse, its net profit was down as much as 70% to Rs4.03 crore from Rs13.53 crore during the corresponding previous period. Can the profits of a software company nosedive so dramatically?

A market insider tells us that the pathetic performance of its stock price between August 2008 and February 2009 was due to the souring of its relationship with one of its largest partners, a blue-chip IT company that had bagged a big passport computerisation contract from the Government of India (GoI). The order was worth Rs1,500 crore and it was supposed to sub-contract a part of it to Vakrangee because of its skill in ‘bagging’ government contracts. A financial website had even reported that the two companies had won the bid together. Vakrangee was probably in on the deal because of the IT company’s unwillingness to handle the “sundry expenses” involved in bagging government projects. The understanding, says our source, was that Vakrangee would recover what it spent by charging appropriate margins on the sub-contracted order.

Vakrangee reportedly spent almost Rs12 crore to Rs14 crore to bag the order, but it needed to invest another Rs150 crore for the necessary infrastructure to execute the contract. It was to raise this money through the market by placing its shares at around Rs250 each. But the market tanked and it was unable to do so. It was also reluctant to raise the funds through debt. Vakrangee’s failure to create infrastructure apparently led to the IT major cancelling the contract to Vakrangee.

MoneyLIFE wrote to the IT company through its PR firm, and specifically asked about Vakrangee’s role in ‘facilitating’ the bid. It flatly denied having “selected Vakrangee as a subcontractor for the Passport project” and claimed that our “subsequent questions” were not relevant. Since this article is not about the IT major, but about Vakrangee, we have kept its name out of the report. The story does not end there. According to our source, Vakrangee’s promoters had allegedly tried to ramp up the stock by acquiring eight lakh shares in the price range of Rs150–Rs180 in benami transactions. The shares were acquired through margin funding. Far from lifting the stock price, the shares declined further leading to margin calls from the broker, who finally sold the shares. This led to a loss of Rs8 crore–Rs10 crore. The stock market losses as well as the “expenses” incurred on the failed passport contract caused the promoters to suffer a loss of Rs22 crore–Rs25 crore in a very short period.

This did not worry the promoters. Instead, they saw the depressed stock price as an opportunity to shore up their holding from the current 18% to around 40%–50%. In line with this plan, the financial performance of the company nosedived in the third quarter of 2008. It also helped the company reduce its tax liability. Interestingly, while the stock prices tumbled, trading volumes in the counter have surged. Our sources attribute this to the promoters mopping up shares, not necessarily in their own name. Sources expect that the financial performance will improve dramatically once the “interested parties” have mopped up substantial shares. This is expected to help the promoters recover losses on their stock gamble and the failed contract.

"We cannot divulge any information"
When contacted by us, VSL denied many of our queries. VSL’s president, corporate affairs, Prem Meiwal, responded as follows to the various issues:

ML: Was the passport computerisation project to be sub-contracted to Vakrangee Softwares? If so, did the contract go through or not? If not, why wasn’t it offered to Vakrangee?
Meiwal: We have a strict Non-Disclosure Agreement (NDA); hence, we cannot divulge any information.

ML: What were the margins at which Vakrangee expected to work for this contract? Were they within the normal limits?
Meiwal: Our policy about press communication does not allow us to make public our internal decision and working.

ML: Was Vakrangee to pay amounts to government officials and politicians to secure the contract and later on recoup the money through fatter margins?
Meiwal: We are strictly following the code of conduct laid down by the company which does not allow us to adopt such kind of practices.

ML: Market rumours have it that Rs12 crore-Rs14 crore was paid in cash to facilitate the contract. Is this true?
Meiwal: These are baseless; we follow the code of conduct strictly.

ML: How much money did Vakrangee need for creating infrastructure to implement the passport project?
Meiwal: Our NDA with vendors does not allow us to disclose this type of information.

ML: Did the promoters of Vakrangee buy shares under margin funding and, if so, at what price?
Meiwal: Promoters of Vakrangee have not bought any shares under margin funding from any of the brokers.

ML: Were these shares sold off on margin calls at a loss? How much of loss was incurred by promoters on the same?
Meiwal: The question does not arise in view of the above.

ML: Why is Vakrangee’s Q3 PAT at such a low level of Rs4 crore from Rs19 crore in the preceding quarter?
Meiwal: The nature of our business is such that quarter-to-quarter results are not comparable.
ML: Despite a fall in the PAT, why are volumes at the counter so huge?
Meiwal: These are all market dynamics; we are in no way concerned with the volume of our scrip on bourses.
Source: MoneyLife

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