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Krishnan Thiagarajan

SQL Star International is making a rights offer to part-finance the working capital requirements for its Indian operations and repayment of unsecured loans. This rights offer follows its initial public offering in June 1999 to part-finance its expansion foray into software and education business. The total project cost is estimated to be Rs 3.12 crore, which is to be financed through this rights offer.

In the first nine months ending September 30, 2001, the company's post-tax earnings plunged dramatically, though revenues reflect only a marginal sluggishness over the year ended December 31, 2001. During this period, the post-tax earnings dipped to Rs 0.11 crore from Rs 4.13 crore, while the revenues (from both software and education business) remained fairly steady at Rs 36.59 crore vis-a-vis Rs 45.98 crore. The financial performance reflects the current state of the offshore outsourcing market in which `scale' and `size' are expected to play a dominant role in the application development business. While volume growth will continue to remain sluggish, there may be further pressure on billing rates.In such a backdrop, relatively small players such as SQL Star International with hardly any competitive niche to address in application development/ education space may find the going extremely tough. Considering the aggressive attempts by the frontline and medium sized companies to garner outsourcing business, the attempts by SQL Star International to enhance the contribution of direct business will be a difficult proposition.

Even if SQL Star International were to bag material software development contracts in the near future, its operating margins are likely to be dramatically squeezed. In such a competitive environment, remedial measures through employee rationalisation put through by the company in terms of reducing the employees are likely to be of limited value.

Since the education business is also passing through considerable churn, there is hardly any scope for revenue support or cushion from this activity. The leverage and synergies to be established between the software and education business have broken down to a large extent, even for software majors such as NIIT. It is likely that both instructor-led training and technology-led training business will continue to fare poorly in the foreseeable future for small-sized players such as SQL Star International.

Considering the slew of factors working to the detriment of the company, this rights offer at par (when the stock is also trading just above par) may be given a go-by. The offer opened on February 9 and closes on March 11. The lead manager is Aryaman Financial Services.

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