Stock Review: Megasoft

 

 

Co To Benefit From Higher Prepaid Mobile Subscription In US

 

THE stock of IT company Megasoft has jumped 24% in the past six trading sessions. The sudden run-up follows the company's decision to sell its real estate assets to pay off a large chunk of its debt. This will help in reducing the interest cost. The company also expects to benefit from the upward trend in prepaid mobile subscription in the US, its biggest market.

   Megasoft offers solutions to telecom operators in the US, Latin America and Asia. Prepaid real time charge management, mobile payment recharging, and mobile advertising are its key areas of operations.

   Barring the latest run-up, the company's stock had a lacklustre time on bourses. During the last one year, it has more or less underperformed the ET Infotech index. The lack of investor interest is on account of the dull performance by the company over the past few quarters.

   As a niche player in the telecom market, its fortunes suffered due to poor show by telecom operators in the US in the last year. It had reported a net loss in each of the three quarters ended December 2009 on the back of sluggish sequential revenue growth.

   The bad phase now seems to be over for Megasoft. The telecom players are showing signs of recovery globally. Further, in the US market, telecom subscribers are fast adopting prepaid option in order to control their telecom spends. Various surveys indicate that the proportion of prepaid users is expected to more than double from the current 10% in next two years. This augurs well for Megasoft who provides prepaid solutions.

   More than 95% of Megasoft's revenue is transaction based in nature. This means, higher the number of transactions, higher would be the quantum of business. Thus the rising prepaid trend in the US telecom market is likely to boost Megasoft's future revenue.

   The company is planning to sell its property in Hyderabad, and Vizag. Considering the property prices in these regions of Andhra Pradesh, Megasoft hopes to mop around Rs 70 crore from this transaction. It plans to deploy the cash to pay its long-term debt. Over the last few years, the company has used operating cash to reduce its debt. The property sale should help it pay a major chunk of the outstanding debt of Rs 90 crore. This will also result into substantial reduction of its borrowing cost, which stands at 10% currently.

   The company posted net loss in the last twelve months. This renders an equity valuation based on price-earnings ratio useless. Going ahead, it expects to maintain the revenue growth rate of 30% year-on-year at an operating margin of around 30%. This looks possible given the higher potential from the US market and reduction in debt burden once it sells proeprties.