MPS has been a dream stock with a 600% return over 2 years and a 241% YOY return. However, given its’ small cap status (Rs. 610 cr), marquee clients, huge growth prospects and reasonable valuations, it is still not too late to grab the stock.
Ajay Relan of CX Advisors was one of the first to put a buy on MPS. “MPS is at a tipping point” Ajay said with supreme confidence in January 2014 as he recommended the stock as his “best buy”.
What impressed Ajay Relan was the scorching growth that MPS has shown, its’ high dividend payout & yield (presently 2.75%), zero-debt & cash-rich status and future prospects. Ajay also pointed out that though the P/E is about 15, this is not at all unreasonable when you consider the cash of Rs 20 crore, excess real estate in Bengaluru that when sold can yield Rs 60 crore in cash, etc.
After that, Ruchi Burde & Pritesh Chheda of Emkay carried out a detailed analysis of MPS. In their detailed report, the duo point out that MPS has a unique “capital-light business model” with marquee clients like Oxford University Press, Macmillan, Wolters Kluwer etc. The size of the industry is a mammoth US$1.5Bn. They also point out that MPS has the “perfect recipe” of high ROE (41%), free cash flows and high dividend payout (50% of profits).
Interestingly, Ruchi & Pritesh emphasize that MPS’ valuations at PER of 19.2x FY13 and PBV of 7.4x FY13 are “completely out of sync” with future fundamentals. They also confidently assert that “MPS has the potential for multi-bagger return for investors if the growth story unfolds on expected lines”.
Ruchi & Pritesh also point that the only apprehension relating to MPS is that it has a few concentrated clients. While the top-5 clients contribute around 58% of revenues, top-10 account for roughly 75% of the total revenue. They explain that a similar apprehension was experienced about eClerk which also had ‘high client concentration’. However, eClerx has had phenomenal success with its market capitalization increasing 17x in just 6 years. A similar result can be expected from MPS, the duo says.
MPS has issued a detailed ‘investors presentation’ which makes impressive reading about its achievements in FY 2014. While the total Income is up by 14.8% YoY in FY 2014, the EBITDA has grown by 58.2% and the margin is up from 26.2% to 36.1%. The business model is also explained in detail.
Now, Dharmesh Kant of IndiaNivesh has given us clear-cut and sensible advice on what we should do about MPS. In his latest research report, Dharmesh has given ten reasons why MPS has to form a part of our portfolio. Among his reasons are MPS’ debt-free status, high dividend yield of 2.89%, ROE of 46%; EBIDTA margin of 33.50% and Net Profit Margin of 21.40%. Dharmesh Kant has foreseen a price target of Rs. 448 for MPS, which means a gain of about 25% from the CMP of Rs. 360. However, if you bear in mind the excellent analysis of Ruchi Burde & Pritesh Chheda of Emkay, Dharmesh Kant’s prediction appears to be on the conservative side. Who knows, maybe there is another 6-bagger hidden in this stock.