The VSIL scrip opened for trading on November 2 on the BSE at Rs 377.75, before losing ground to close at Rs 369.50. The VSIL counter clocked a volume of 3,200 shares in 21 trades on the opening day. On the next day, the volume shot up to 26,200 shares in 24 trades and the traded value to Rs 96.32 lakh to top the volume amongst the B2 group scrips. The closing price on November 3 was Rs 363.

The company could obtain listing on BSE as it satisfied all the three criteria of Rs 5-crore equity, Rs 10-crore net worth and Rs 15-crore market capitalisation. Though VSIL has already obtained shareholders' approval for NSE listing, the latter will have to wait as NSE's listing norms for existing companies are stricter. It appears that the company will have to wait at leastanother year in order to complete three years of listing at the Hyderabad Stock Exchange (HSE) before seeking listing on the NSE.

In October 1996, VSIL made its Rs 3.10-crore maiden public issue of equity shares. It was lead managed by 21st Century Management Services Ltd belonging to Sunder Iyer, the now grounded high flier of yesteryears. The objective was to part-finance the Rs 6.75-crore project for setting up a 100 per cent export-oriented unit (EOU) under the government of India Software Technology Park (STP) scheme for export of software.

At the time of its public offer, the company had proposed listing of its equity shares on the Hyderabad, Bangalore and Ahmedabad stock exchanges.

While the scrip has been regularly traded on HSE, one is not able to trace it on the Bangalore and Ahmedabad stock exchanges. On the HSE, where the VSIL scrip first opened for trading at Rs 12.75 apiece on December 9, 1996, the scrip had been an average performer till about February, 1998. The closing price of VSILfor February, 1998, was Rs 33.65. The northward climb began in March 1998 and the scrip has not looked back thereafter.

Except for brief corrections in June and October 1998, the closing price of VSIL at the end of every month since March 1998 has always been higher than the previous month's.

In fact, in the eight-month period between March and October 1998, the VSIL scrip has gone through the roof, registering a gain in excess of 900 per cent on increased trading volumes. Though this period coincided with the new-found craze for scrips even remotely connected with the software industry, the phenomenal change of fortunes for VSIL, within so short a time, throws up the question whether its current price is indeed sustainable. One of the top merchant banking-cum-brokerage outfits of Mumbai, that barely escaped the scam net, is concocting predictions that VSIL would overtake Infosys in time.

But history has shown that merchant bankers are an over-optimistic lot, as the 1995 bought-out deal boom, and thesubsequent bust, demonstrated.

Alternatively, the recommending market manipulators, as in the past, could be carrying a substantial long position in the VSIL counter. In any case, the interested researchers have played it safe, having not spelt out whether VSIL would move up or Infosys would come down. Independent analysis, however, shows that all the hype surrounding the VSIL scrip is substantially unwarranted. The company is just into its second full year of operations.

For fiscal 1998, its first full year of operations, the company posted a modest turnover of Rs 9.65 crore and a net profit of Rs 2.83 crore. While the turnover exceeded the projections given at the time of its public issue by 72 per cent, the profitability did so only by 5 per cent.

What's more, as against the promised 20 per cent dividend, VSIL preferred to remain out of the dividend list in 1998. In comparison, though, the current fiscal has been definitely better. While the first quarter witnessed a turnover and net profit of Rs4.01 crore and Rs 1.28 crore, respectively, the second quarter has been more impressive, with a turnover and net profit of Rs 7.12 crore and Rs 2.63 crore, respectively. Indeed, the half-yearly turnover of Rs 11.14 crore has exceeded that of the whole of fiscal 1998.

If the company carries the first-half momentum into the second half, it could end up with a turnover of about Rs 23 crore to Rs 25 crore and a net profit of between Rs 8 crore and Rs 9 crore. The projected net profit for fiscal 1999 translates into an earnings per share (EPS) of Rs 14. The current price of Rs 363 discounts the projected EPS 25 times, while the industry average for medium and small software companies is around 16 times the earnings.

Meanwhile, in September 1998, VSIL obtained shareholders' approval for making a preferential issue of 15 lakh shares in favour of certain broad categories of investors, at a premium to be decided by the board.

Interestingly, the purpose for making such an offer went unstated in the publisheddocuments so far. To our faxed query, the company has indicated the likelihood of establishing "R&D centres". Also, the reply adds vaguely, "The company may place maximum of 5 lakh equity shares to the business partners or institutions at a premium which is advantages (sic) to the company as well as the shareholders."

Now, a look at the quality of earnings. Apart from its Y2K remediation tool, "VisualSHIFT", the company does not appear to possess any major software product. For all its lofty sales pitch, the company's R&D spend has probably been so low that for fiscal 1998 no separate record of the R&D expenditure was maintained.

What's more, though the company is stated to employ over 100 engineers and software professionals, in fiscal 1998 only 3 of them drew a remuneration package in excess of Rs 2 lakh per annum. Further, the company has sent in a wishy-washy reply regarding the contribution of Y2K consulting to the current fiscal's turnover so far. Says its reply: "Around 20 per cent of theturnover if product sales not taken into account".

VisualSoft's main promoter, Raju, is `promoted' as the brain behind the success of Satyam Computer. However, as far as the investing public would recall, much of Satyam's growth has come about subsequent to 1992, that is after Raju's departure from Satyam as joint managing director and chief operating officer. Besides, Raju's tottering consultancy business, between 1992 and 1995 after leaving Satyam, under the banner Dandu Computer Services, does not catapult him as any great software guru, as some of his market-makers would like us to believe.

(Arranged by Investar -- The Aarthik News & Research Syndicate)