Black Box – Turn around story?

Background

Black Box Ltd (erstwhile AGC Network Ltd) provides digital transformation solutions globally like connected buildings, structured cabling, deployment of IoT devices, networking, cyber security, digital workplace and Unified Communications, Data Center and other managed services. It also sells IT infrastructure products like converters, switches, cables, KVM and audio visual by importing these products from US, Europe and Taiwan and does white labelling of the same. Besides, it has also got its own line of products in the KVM & AV space with R&D facilities in Limmerick (Ireland) and Bangalore.

BBL has partnered with leading technology vendors (OEMs) like Avaya, McAfee, Palo Alto,
Cisco, Corning, RingCentral, CommScope, NEC, Juniper, etc to provide ‘end to end’ solutions
to its customers.

Investment Thesis:

To understand the investment thesis not only current business dynamics would have to be considered but it would be prudent to know about company’s history and how things are unfolding as looking at past financial results will not make much sense.

I feel this is an apt example how a good management can turn around companies in bad sector. AGC has built a reputation for acquiring inefficient businesses (with global potential) at frugal valuations, integrating them with their existing operations, scaling them up rapidly while ruthlessly cutting costs to achieve the stated goals on profitability .

The janam kundli of company is as follows:

Black Box acquisition:

Black Box was going through turbulent times and was available at distressed valuations. AGC management found that the issues were with internal rather than business model.

How successful has the management been in turning around the operations of Black Box:

The management has truly been able to script a turnaround. This can be validated by the
following:

• Post-acquisition in 2019, the management has not infused any further capital into
  Black Box. On the contrary, the debt level has been brought down from $90 mn to
  $35 mn.
• The cost of debt has also fallen sharply from 12% to ~4% currently, improving
  profitability.
• The wallet share of existing customers of Black Box increased under the new
  management. To put this into context, one of the largest social media company in
  the world was a client with Black Box with annual run rate of $3mn. However, under the new management, the wallet share of this client increased by more than 10x
  in 3 yearsto >US $30 mn. The management expects the wallet share to again double
  in a year or two.

Having steadied the boat, focus once again was to drive revenues. It added a new revenue
stream of data center management and undertook a spend of US $16 mn to revamp the
sales team with better skill sets.

The management also acquired many small companies post Black Box acquisition to add
new functionalities in its offerings.

Investment rationale and upside potential:
Guidance from management:

For FY24 these are the targets:
Revenue: 7k to 7.5k crs
PBT Margin: 6% – 6.5%

Assuming an exit PE of 20 and taking revenues at 7k with PBT margin of 6% with 20% tax rate, it gives a stock price of ~ Rs 400.

The business revenue model is of course much more broad than what I have mentioned here, and for that I would suggest to read the investor presentation else the post would be too large for initial thesis as I wanted to concentrate on turn around part.

Disc: Invested and biased.