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SeraNova not to enhance Silverline EPS for now

NetScribes/Ganesh Ramamoorthy

It's confirmed. Silverline Technologies' latest acquisition, SeraNova Inc, will not immediately add to the former's earnings per share, after all. With SeraNova recording a net loss of $240,000 for the quarter ended September 2000, Silverline has landed itself in a pretty unenviable position.

Last month, Silverline had bought out the Nasdaq-listed e-business consulting services firm in a $99-million all-stock deal

With SeraNova reporting a net loss of $0.01 per share for the September quarter against a net income of $0.01 per share in the year-ago quarter, analysts see very little addition to Silverline's earnings in the next two quarters. Earlier, analysts had predicted a higher net loss per share of $0.045 for SeraNova.

On Thursday, the Silverline counter remained weak throughout the day following a weak opening due to Wednesday's Nasdaq fall. Opening from the previous close of Rs 324.90 on the Bombay Stock Exchange (BSE), the scrip hit a low of Rs 314.05 before recovering to close at Rs 321.30. The counter witnessed huge volumes of 4.07 million shares.

On acquiring the US-based firm, Silverline had said that Seranova would accrue to its earnings immediately. The acquisition, valued at $99 million, warrants a cash outlay of $20 million. In addition, the issue of 6.11 million Silverline ADRs to SeraNova shareholders will dilute the Indian company's equity by 14 per cent.

On the other hand, Silverline now has a revenue base of about $120 million from SeraNova alone. Also, given that SeraNova's revenues come from e-business, Silverline is hoping that its own revenues will see a higher contribution from that business.

Analysts, however, point out that while the acquisition represents a huge opportunity for Silverline, it also enhances the company's risk profile. "The acquisition seems unlikely to add to the EPS, at least in the next few quarters," said an analyst with a Mumbai-based securities firm.

Even if SeraNova does start earning profits, it could drag down overall profitability in the near-term, he added. Also, it is not certain if the addition to earnings will be in line with the equity expansion and investments that Silverline is making.

SeraNova reported a net loss of $240,000 for the quarter, compared to a net profit of $122,000 in the year-ago quarter. But a 122 per cent jump in revenues to $32.3 million from $10.5 million helped the company cut its losses by 91 per cent from a net loss of $1.8 million in the quarter ended June 2000. In the quarter just ended, revenues rose 18 per cent from $19.8 million in the June quarter.

Taking into account an impending 14 per cent equity expansion and excluding the ADS proceeds, Silverline's EPS on an annualised basis works out to Rs 26, with a price-earnings multiple of around 13 times. "The valuations for Silverline look attractive. But the improvement in valuation hinges on how the acquisition shapes up," the analyst said.

To improve SeraNova's profitability, Silverline is already planning to transfer the bulk of its work done onsite to offshore development centres in India by the quarter-end.

Analysts feel that fresh buyings in the Silverline stock could be delayed as the impact of its acquisitions will be felt only after March 2001. They say that the crucial factor now for the scrip is SeraNova's revenue growth. "It has shown good revenue growth this quarter. If it sustains this, it would encourage shareholders to hold onto their holdings," the analyst said.

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