SQS India's stock is worth a look with its consistent growth profile

SQS India BFSI is among the few small-sized IT companies under Rs 1,000-crore market cap to earn double digit stock returns over the past 12 months. The software testing firm has reported a sustained growth in sales and profits without sacrificing operating margin. The stock has fallen in the past few weeks following weakness in the broader markets. Investors with a horizon of two-three years may consider the stock for further assessment considering the company’s growth prospects.

Germany-based SQS Software Quality Systems owns 54.2% in the company, which was formerly known as Thinksoft Technologies. SQS India focuses on the clients in the banking, insurance, capital markets, and electronic card payment segments. It earns half of its revenue from Europe and 16% from the US. The rest is from Asia.

Over the past two years, it has started providing services through its German parent. The proportion of revenue from this channel has increased to 10% from nil two years ago. The company is likely to report more engagements through its parent, which is one of the growth drivers.

Another potential driver is the recent acquisition of two companies by the parent in the US. These companies provide IT project management and onsite testing to around 70 clients together.

This has expanded the parent’s US market revenue to $70-75 million. For SQS India BFSI, it offers an opportunity to expand foothold in the US, which accounts for over half of the total software testing revenue globally.

The company has retained the operating margins in the range of 18-20%. It currently earns 60% revenue from onsite services. A shift to offshore centres in India will enhance margins due to the country’s cost efficiency. The company is keen on adopting automation and cloud technologies, which will not only improve the proportion of offshore revenue but also reduce the dependence on the headcount.

It had 1,004 employees at the end of December 2015 compared with 829 a year ago. It will add 250 seats in its Chennai campus by May 2016 reflecting revenue growth potential.