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Krishnan Thiagarajan

INVESTORS with a medium-term perspective can retain their exposure in the Subex Systems (Subex) stock.

From the current price levels, the stock may yield fair capital appreciation to investors willing to hold on more than a year.

The stock is trading at a price earnings multiple of 15 times the projected 2004-05 per share earnings.

As a products company focussed on the telecom domain, two factors are likely to fuel revenue and earnings growth in 2005-06 and beyond. One, the higher contribution of its key integrated product — RevMax, a Revenue Maximisation suite, launched in February — can drive up its revenue stream.

Two, the customers acquired by Subex through its two recent acquisitionscan open up revenue opportunities from product customisation, additional licence fees and cross-selling of services business.

In the near term, however, the challenge of integrating these two acquisitions, widening the market for RevMax, and longer sales cycle for bagging large contracts may temper the financial growth and lead to unevenquarterly performance.

Subex operates across two major business segments: Telecom software products and telecom software services.

But its focus has been steadily shifting towards software products, with its revenue contribution rising from 7 per cent in 2000-01 to 45 per cent in 2003-04. This contribution is likely to rise steadily as the growth in product revenues may significantly outpace services in the coming years.

According to the segmental performance, in the half-year ended September 30, products contributed 40 per cent of revenues at Rs 19.05 crore. But this segment accounted for nearly 85 per cent of the profit before interest, depreciation and tax (PBIDT) at Rs 10.5 crore.

Identifying revenue maximisation as a key product offering, Subex launched RevMax to cater to telcom companies worldwide.

This integrated platform includes two key products developed earlier by the company. In 2000, Subex started off with Ranger, a Fraud Management System for telecom operators. Subex has emerged as the player with the largest installed base for this product globally.

In February 2003, it added INcharge, a Revenue Assurance product targeted at preventing revenue leakages. To strengthen its customer base, Subex acquired in the July-September quarter the Fraud Management Software divisions of Alcatel Telecom, UK, and Lightbridge Inc. for a total consideration of $ 6.5 million.

For Subex, these acquisitions added about 40 customers which are likely to migrate to the Ranger fraud management system in a phased manner.

The services segment of Subex caters largely to application development work for telecom clients in the areas of billing, customer care and inventory management.

While the services contribution to revenues at 60 per cent has been fairly high, given the onsite-centric nature of work, its contribution to the PBIDT at 15 per cent is quite insignificant.

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