It's NetSol Technologies' Time to Shine

Feb. 5.07 | About: NetSol Technologies (NTWK)

After almost two years of watching NetSol Technologies (NASDAQ:NTWK), I made my first buy Friday afternoon. NetSol is an IT company based primarily in Pakistan but with operations in UK and North America as well. It specializes in systems integration and software for automobile lease management, and increasingly on e-government initiatives for the Pakistani national government and the Punjab regional government. NetSol also does some general outsourcing.

Friday, NetSol announced quarterly results for NetSol PK, the largest component of the NetSol's largest Asia Pacific division. NetSol PK reported revenues of $3.7 million and earnings that will contribute $.04/share. The improvement in year-over-year metrics is stunning: revenues are up 129%, gross profits are up 201%, and net profit margins grew from 9.6% to 41.7%.

NetSol PK Chairman and CEO Salim Ghauri said:

"We are experiencing strong growth in the Pakistan market, as evidenced by several important projects initiated with both the federal and Punjab governments. NetSol PK expects the present growth pattern to continue for the next two quarters, as the Company capitalizes on its leadership position in the Information Technology [IT] sector of Pakistan."

Keep in mind that NetSol PK is only part of NetSol Technologies, albeit the largest part. The Asia Pacific division (represented by the blue wedge in the pie chart to the left) accounted for 55% of revenues in fiscal 2006, and I estimate that NetSol PK was responsible for perhaps 75-80% of that.

The other NetSol companies are smaller, but still valuable. Last year NetSol UK rang up about $2 million in revenues and contributed around 3 cents per share in profits. TiG NetSol, a London-based outsourcing joint venture that is 51% owned by NetSol had revenues of $1.6 million and was good for maybe 2.5 cents per share after adjusting for the minority interest. NetSol Connect (pvt), a Pakistani ISP in which NetSol is the majority owner, contributed almost $900k in revenues and was negligibly profitable. NetSol CQ, another lease software company acquired by NetSol in 2006, accounted for 25% of revenues and was also profitable.

I liked NetSol enough based on current operations to buy it today, but there is a catalyst that could lead to much higher growth in the coming three years. NetSol is one of four finalists for a $300 million project to automate the land record systems for the Punjab region. The government has stated that two of the four finalists will be selected as final vendors for the project in the second half of 2007. NetSol has won projects in the past from the Punjab regional government, which could give it a leg up.

Bottom line: NetSol is compelling without the Punjab land automation contract, but could be a huge winner if it lands the bid. There is some overhang from a recent share registration, and the stock trades heavily. Improving fundamentals should trump a less-than-inspiring technical setup, and I think that happens sooner rather than later.

Disclosure: Author owns shares of NTWK.