yes that is the reason why the market is giving them low valuation .Let see hopefully things will change from here onwards

Spoiler’s Alert: I’m not getting into cloud wars or diving deep into tech capabilities of various cloud players across globe if you are a techie pls ignore my post and just run! It’s just doesn’t make sense comparing pygmy marmoset (smallest monkey) with a gorilla like AWS in terms of capabilities or services imo. Actually, I’m quite surprised to see many techies out there taking a direct comparison with established biggies like AWS or Azure etc. Everybody knows what AWS or Azure capabilities are. It’s a dead end discussion.

Then why I’m writing this without diving deep into tech aspect of the company?

Ans: There are so many folks out there they want to know about the company at high level without going into nitty-gritty of “Tech” side much so that they can take a portfolio level call. As cloud is also a mega trend also so much has been discussed already regarding “tech” capabilities there nothing special that could add here.

Let me present a slightly different view! I reserve the right to be wrong!

What they do :

It offers public cloud and private cloud services. Infrastructure as service model (iaas). So, you can build and launch your machine learning/AI/ all types of complex algo’s applications on the most high-value (subjective!) infrastructure cloud on hourly basis, committed time basis, or spot basis. Which includes all types of services like web, mobile or an enterprise. They are currently offering Compute, Load Balancers, Object Storage, Block Storage, Kubernetes and trying to provide holistic cloud services to any company. Don’t read too much into their current offerings and start comparing them with biggies like AWS or Azure straight away, you will be disappointed in no time.

//Small tip from my side: when you are analyzing or studying a small company don’t start with a direct product to product comparison. Always look for the differentiation in strategy and look whether it has identified the customer pain points or not? how effectively it is addressing those pain points. Not everyone is as blessed as Mukesh Ambani to make your services free to eliminate the competition overnight.//

To those who don’t know what is self-service public cloud? In simple terms, a customer can launch applications and provision storage without the involvement of the service provider. The request process and fulfillment are all automated.

What is asset of E2E : Just chips and it’s uninterrupted service/security capability.

How ?

The cloud provider manages a portion of your business which is going to be the hardware portion. The cloud provider will manage the servers, storage, virtualization, and the networking portion. E2E offers the services to their customers which requires to run ML/AI algo’s (To put into simple terms Zomoto offers your next recommended food item or Nyka offers next recommended lipstick etc right! that’s nothing but a work of a ML/AI algo’s that runs on cloud infra offered by co’s like E2E) Mind that E2E is not serving big clients like Zomato or Nyka or any other big consumer centric platform companies. I just used their names for illustration purpose.

Here is the general split between cloud provider (ex: AWS or E2E) and client (ex: Netflix or Zomato etc)

E2E part : The hardware services which includes.

Storage, servers, networking, virtualization etc

The client part: (Netflix or Zomato): web or mobile any enterprise not limited to these.

Application, data, OS, middleware, runtime etc.

Why this company has the right to win :

It’s differentiated clientele strategy : if you look at their ticket size (the avg billing rate they charge to their client is very low compared to AWS or Azure) why? E2E targets SME’s or MSEM’s or startups and also their product strategy addressing needs of “AI, ML and Deep Leaning workloads.” for small players. It’s more of how you are packaging your services and make it as a “complete product” and sell it. Not going into head on with biggies. No point in doing that either, you lose!

“E2E’s vision is simple. There is space for an infrastructure company in India, besides the hyperscalers which are all MNCs by the way. They wanted to fill this gap and establish themselves as a hyperscaler from India”.

What do they mean by that : client can do all this work by himself, but if you are very small company or start up type imagine the cost of setting up an inhouse (chips and server) set-up and cost of running it. This is the gap they are talking about. When you are small compnay in size your entire money must go to product development bucket or sales/marketing bucket not to this type of infrastructure bucket right! This is exactly the gap is.

Okay, that leads to the next question why should a client go to E2E not to AWS or Azure?

We normally get carried away by looking at big players AWS, Azure etc and ignore small players. There are numerous small players in US which caters to different industries like agricultural, marine, food processing, medical, disaster recovery, disaster recovery. In that context there is a space for all sizes (small, medium, and big). It’s not the time to assess the moat, as a matter of fact never try to find moat in small companies always look at their differentiated strategy and execution (imo). E2E is ticking two boxes perfectly so far. How are they doing it? you can study the concal. No point in repeating it. But I would say one thing just google how many cloud service companies are making more than 250milion in rev in US, you will be amazed!

Different example but same context : Criteria to become a RateGain client is that the hotel should have at least 50 rooms and a $100 Average Daily Rate (ADR). Rategain doesn’t focus much on the smaller hotels or the bottom of the pyramid. Because the small hotel can’t afford Rategain product cost at same time Rategain can’t improve the small hotel sales effectively. What is this telling you? There is a gap here! There is space for a small player here!

E2E has identified similar type of gap in cloud platform service offerings and executing it nicely (in fact killing it!). To be honest more credit should be given to industry growth not to a particular player imo.

The difference is of course unlike a SW product (Rategain), E2E is into physical infrastructure means huge capital requirement is always a need. (look at their fixed assets, it’s more or less directly proportional to their sales number)

You can optimize the services and size but to increase sales you must increase your assets just like typical manufacturing plant. It’s not a SW product type “build once, sell million copies”. So, the word CAPEX will ring in your ears every time you hear their concal better get adjust to that!

Perhaps the most important questions are how long this growth/momentum can continue for E2E?

Few Ans:

• As long as their “product market fit.” Strategy works.
• Until more players enter into this space spoil the margins and make it a complete linear game.
• If any of their client big they will shift for a more reliable services like AWS because cost is no longer is a driving factor for them reliability and security and all-round capabilities like security, analytics, big data, blockchain, API management, different databases blah blah etc etc
• the day E2E tries to get into scale and go head on with biggies E2E get slaughtered. E2E neither has deep pockets nor the capabilities of biggies.
• Remember TATA and Jio has not yet entered at full scale why? The market itself is not ripen enough in India to make a strong profitability case for them, they know exactly when and how to enter, with Indian Govnt in their pockets they can drive away AWS, Azure, Gcloud all international players conveniently with single PM’s pen stroke.
• Forget about biggies like AWS or Azure even our small Indian players like TCS and Wipro’s (yes, they do offer cloud service not the platform though! if you don’t know) can spoil the game here. if they concentrate. It’s that easy to be honest!
• So, what is E2E is playing is low hanging fruits game grabbing game.
• Just like Jio moment, tomorrow, if Ambani comes and offers free service for certain time to certain size that will wipe out small players like E2E and consolidates the space. That’s completely possible couple of billion dollars is peanuts for him.
• Finally, the game that E2E is playing has a ceiling limit. We can’t not tell how high is that ceiling at this point precisely but stick to it as long they keep delivering. I know this sounds cliché but frankly there is no IP/loyalty/lock in period/customer stickiness/switching cost/pricing power you name it nothing exists in this counter in addition to this add technology disruption on top of it.
• And finally, a cliché statement global chip shortage, semiconductor chip demand, upcoming technologies etc

Before concluding my post just want to say few points about “Tech”

In tech business, anybody can displace anybody. The greatest Irony that we all gone witness in future is by using Ambanis’s Jio’s cheap data rate some smart guys like (Sahil, biased ) will build a tech business and beat Ambani in wealth creation. That’s the power of tech. Is Ambani is not aware of this? He knows it but can’t do anything about it.

In a commodity business you have to undergo through both the ends of pendulum swing. Sales and margins of the Company were phenomenal during last 3 years and they are bound to revert to mean which is also evident from last 10 year figures so nothing surprising.

Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 Mar 2019 Mar 2020 Mar 2021 Mar 2022 Mar 2023 TTM
OPM % 17% 12% 13% 8% 8% 11% 9% 7% 10% 17% 18% 19% 16%

Jun 2020 Sep 2020 Dec 2020 Mar 2021 Jun 2021 Sep 2021 Dec 2021 Mar 2022 Jun 2022 Sep 2022 Dec 2022 Mar 2023 Jun 2023
OPM % 20% 14% 15% 17% 15% 12% 18% 25% 24% 18% 17% 17% 12%

With the Commissioning of Ammonia Plant now onwards Depreciation & Interest from Ammonia plant will hit the bottom line without any incremental contribution(top line or bottom line) at the current stage. Further, there is a downward trend accros the chemical sector where even so called specialty chemical business are also not being spared…

Brother, where can we find this everyday data.

Can you please guide ?

**Invested in SJS