Date: 11th July 2000
DSQ Software Ltd - Doubling on SquareD Root
Current market price - Rs979.45
BSE Sensex - 4898

'ICE', 'TMT', 'Momentum', 'New Economy' - there are quite a few names that one can call the DSQ stock. There are quite a few uncharitable ones that one may find along the way. But we don't intend dwelling on that. Born as Square D Software, rechristened DSQ Software, and who knows a new name later on! But in all these naamkaran ceremonies, one thing has remained a constant - DSQ has been building upon its strengths and also adding more skill-sets to its repertoire.

What is the Business?
DSQ is one of the early birds in the Indian software market, and it has also managed to get the worms. While building up good skill-sets in areas like CAD/CAM, telecom-related solutions, etc, DSQ has also added newer areas like Euro-solutions and ERP to its offerings. In the recent image change, three distinct Strategic Business Units (SBUs) now undertake DSQ's business operations: engineering solutions (CAD/CAM), telecom/networking and e-commerce. Currently, DSQ has a significant portion of its business flowing in through third party contracts, entailing lower margins. However, DSQ has now planned to increase direct presence in markets mainly in the US and Europe.

DSQ ranks amongst the top ten software exporters from India. Assessed in 1998 at SEI CMM Level 4, it was the first company to be certified ISO 9000 in CAD/CAM/CAE. DSQ enjoys worldwide service delivery capability through four offshore development centers and four overseas development centers. DSQ enjoys a track record of more than 500 software projects and more than 8,000 person years of software experience. Geographically diversified with presence in USA, Europe, Asia Pacific and India, it is a dominant player in telecom and CAD/CAM, and is penetrating strongly into the CRM/I-solutions and e-commerce market. DSQ enjoys a strong order book including orders from Europe.

Who is the Management?
The company has been in the thick of action in the recent past. The stock rose significantly after strategic investors like Bank of America and CSFB took stake in the company coupled with reports of a change in management in due course. Though DSQ enjoyed a good reputation in the industry, it was seen in poor light earlier on account of corporate governance-related issues. The nemesis in corporate governance issues lay in the promoter's stake in DSQ Biotech, which was a loss making company, and had defaulted to financial institutions. Since both the companies are cash rich and repaid most of their liabilities, the nemesis to the issue has now been addressed. We believe that concerns based on the promoters will recede slowly.

Although the promoter, Dinesh Dalmia, has now taken the post of vice-chairman and is unlikely to step down from the board of directors, the main reason for worry seems to be over with professionals taking over. The new CEO, Pawan Kumar, has taken control of the entire operations of DSQ. Besides the President and CEO, DSQ would have a new COO who will head all technical functions. It plans to induct industry-specific specialists to give a strategic direction.

Whither Cash flows?
Operating and net margins have been on the rise. Over 55% of revenues are derived from the US market while 35% comes from the European market. Singapore accounts for 4% of total revenues while Australia, Japan and the Middle East each account for 2% of total revenues. This implies that over 90% of DSQ's revenues come from high-margin activities. The largest portion of revenues come from the fast growing business segment of e-commerce which accounts for about 30% of total revenues. Telecom and ECC divisions each account for 20% of total revenues. ERP, CRM and SCM together account for about 12% of revenues. Products account for a mere 4% while applications development account for 14% of profits. The company plans to have dedicated development centers for large customers and increase its offshore sales mix from 40% to 60% in the next fiscal.

E-commerce and telecom will continue to dominate its onsite sales. It plans to increase its per hour dollar revenue. Onsite US revenues have increased to over $60 per hour and offshore revenues to over $25 per hour. Similarly in Europe, the realization rate has improved by 20%. DSQ has targeted a minimum 50% revenue growth on a yoy basis and an increase in net margins to 25% in the next fiscal from 18% now. Following the inflow of huge amounts of money into the company's coffers in the light of various placements, the debt of the company has come down drastically. The effect of this is obvious on the interest burden that has come down drastically.

Although operating margins have come down from 41% to 38% during the quarter, and the other income has also dropped, the gross profit of DSQ has registered a growth. Depreciation has come down, and aided by the turnover growth, the net profit has been propelled to a triple-digit growth. During the previous year, DSQ had to provide for depreciation provision of earlier years to the tune of Rs210mn and also write-off other miscellaneous expenses of Rs35.8mn as per the strict adherence to US accounting standards. This time around, with strict accounting practices, DSQ has been able to show such growth, which is very encouraging.

Why should I Buy?
The current order book position for DSQ is about $125mn. It has made a major foray into large corporates in UK and US. Some of these include Computer Associates, QVC, Liberty Insurance, PayChex, Computer Science, Abbey National and Hyder plc, besides others. The earnings quality is improving and so is the management quality. Pawan Kumar has come in from IBM and is considered a thorough professional. The company has recently bought out San Vision Technologies (a US-based software company involved in the banking, finance and insurance sectors) for $30mn in an all-stock deal. The biggest factor is the interest from big market operators and institutions in the stock. This fuels large buying. Such a large scale buying could see the fataka stock zooooooooom to stratospheric levels.

Where can I go Wrong?
The rocket could run out of fuel and then Newton's theory holds true: "What goes up also comes down". As we are looking at the doubling of the stock, it could also seek its square root, if operator interest in the scrip wanes. The Gaul theory of "The sky will fall on our head" will hold true then.

Murali Iyer

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