The Anglo File: Newly Listed NetSol Set to Announce Another Acquisition

With fast growth and operations in Pakistan, the firm hopes to share the dramatic success of India's IT sector.
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LONDON --

NetSol International

(NTWK) - Get Report

will later this morning announce its third acquisition in only five months, as the IT software developer attempts to emulate the astonishing success of other software developers with facilities on the Indian subcontinent.

NetSol, which received its full

Nasdaq

listing only three weeks ago, has acquired 100% of the shares of Australia's

Abraxas Software

, an automotive finance and insurance software provider, in exchange for 150,000 shares of NetSol's restricted common stock. At NetSol's closing price on Tuesday of 18 3/4, the acquisition would cost $2.8 million.

The acquisition brings to NetSol such clients as

Toyota Finance

,

BMW Finance

,

Volvo Finance

and

General Motors Acceptance Corp.

, which will add to its existing automotive finance clients such as

Chrysler Finance Taiwan

and

Mercedes-Benz Finance Leasing Thailand

.

This acquisition -- and others that are in the pipeline, according to sources close to the company -- are part of NetSol's efforts to compete with IT companies such as India's

Infosys Technologies

(INFY) - Get Report

, which has risen more than 900% since listing in March 1999.

NetSol enjoys the same high EBITDA (earnings before interest, taxes, depreciation and amortization) margins as the Indian IT companies by farming out much of the software development to its offshore facilities where wage costs are much lower but the staff no less qualified. NetSol is currently building a new technology campus in Lahore, Pakistan, which will accommodate about 600 engineers, programmers and other staff. The first phase of the project is scheduled for completion later this year.

According to Guil Hastings, managing director of Europe and Africa for

Mastech

(MAST)

, a U.S. IT services provider with several facilities in India, monthly salaries in India are as little as a quarter of those in the U.S., yet the "development and technical talent is astonishing."

Naeem Ghauri, managing director of NetSol U.K., argues that NetSol's wage cost structure is lower still, only about 10% of that in the U.S. Furthermore, IT wages in Pakistan aren't rising nearly as rapidly as those in India, which Mastech's Hastings reckons are growing about 20% annually.

The potential of NetSol has piqued the interest of some investors. Jonathan Iseson, who runs the hedge fund

Blue Water Partners

and is long NetSol, says Infosys and

Satyam Infoway

(SIFY) - Get Report

trade at about 400 times their estimated 2000 revenues. He adds that if you apply that multiple to NetSol's forecasted $20 million revenue in 2000, the stock should be trading at more than 200.

"I'm not seriously arguing that the stock should be over $200, but in terms of its growth I see a near-term target of $35 to $40," Iseson says.

NetSol's Growth by Acquisition
Stock price of NetSol International over six months

NetSol may indeed have a lot of potential, but with a market cap of about $150 million, it still has a long way to go before it catches up with its Indian counterparts. Infosys has a market cap of approximately $22.8 billion and three other Indian IT firms --

Digital Equipment

,

Pentafour Software & Exports

and

Aptech

-- all have market caps in excess of $500 million.

There are other uncertainties. NetSol's wage cost structure may indeed be lower than even that for Indian IT companies, but according to others in the industry, the pool of talent in Pakistan is just not as deep as in India.

"The numbers are just much smaller in Pakistan than in India, where you have 50 million wanting to become engineers and there are only 30,000 places to study: Now that's some serious competition," Mastech's Hastings says.

And just as Lahore is not Bangalore, Pakistan is not India. While

George W. Bush

may not be able to name Gen.

Pervez Musharraf

, who overthrew the civilian government of Pakistan, the general is no less a menace to democracy for that. India may seem like a bewildering and volatile place at times, but it remains a vibrant democracy unlike its neighbor, where the deteriorating security situation is never far from the headlines.

The speed at which NetSol is growing is bewildering and impressive to watch. Taking the Indian summer out of firms such as Infosys, however, is likely to take just a tad longer.