Looked up this co’s annual report after it came on my screen due to its high quarterly growth on a small annual Sales of just 45cr, alongwith divident payout 40%+, and high ROCE, ROE.
Looked too good to be true…So wanted to explore in depth.
Wanted to check majorly if the numbers are genuine (big if), what niche have they identified for growth, how are they maintaining ebitda margins of 40%+ (when all other pure play services small& mid IT players have ebitda margins of < 20%) while competing for talent in new skill areas
Went thru F22 AR in full. Observations:
- This co. has probably the youngest CFO with just 3 years of “total” work exp. (Umang Soni)
- Co. has regd. office address of Saket, and corp office in Noida. But uses a statutory auditor from Jaipur. Why did’nt they use anyone from Delhi NCR?
Also, internal auditor (RSAV &Co) has the same Saket address as the regd. office address of the co.
Other members on the board also don’t give much confidence - Co. pays a salary of 9 lakhs p.a. to its CS & Compliance officer (young lady) vs 8 lakhs p.a. to its CFO
- They say 35+ clients in 20+ countries with top 5 contribution of 48%. Building top class teams via “lateral hiring” in key focus areas of Big Data/AI&ML.
Sales is 45 cr p.a. (45/35 = 1.3 cr sales per client) In these 35+ clients, the co. would be doing very small work for a majority of clients. - This co. has identified all the new tech buzzwords right in the CRM, Big data, AI, ML, Mobile app development space. And has taken tech partnerships with Salesforce (CRM) and few other open source techs. But, When you look on their website, in the service offerings, what they have written does’nt showcase any competency in these areas. They just use names and write generic descriptions
Pg 85: Revenue by Technology shows Salesforce 39%, Java 15%, Big data 16%, Mobile 14%, AI ML 11% - From FY12-FY20, this co. was practically dead. F20 sales 8cr. Op profit 1 cr. (OPM 13%)… And then sudden jump in F21 (Corona year) F21 sales 24cr. Op profit 11cr (OPM 45%)
- Pg 58 of AR says the Average net profit of co for last 3 financial years is 3.9cr (vs 8 cr if you calculate from P&L info)
- Pg 79 lists out the Sectors the co provides services to: 1st mention Real estate, Then, Ecom, Finance, Telco, Healthcare.Pg 81 again mentions Real estate.
vs See pg 86. Revenue by Industry… No mention of Real Estate in % breakup. Top customer industry is IT & Services at 33% because this co. is an empanelled vendor to IT services firms.
Revenue breakup also shows that it is a pure Service provider. IT services 94% and Product is meager 6%. - Pg 82 says 100% of revenue is generated from Export sales (vs Pg 85: Revenue by geography: 74% is Exports and 26% domestic sales)
- Pg 82: Demand environment is improving with Ksolves getting empanneled as official vendor for many large IT firms
(How can a vendor make twice the operating margin than that IT firm itself?)
“Supply side constaints” are seen in highly skilled areas and attrition is controlled by offering salary hikes & flexi work from home
Short term gaps will be filled by external professional contractors on hourly billing basis
11.Pg 83: Read “Our competition” section & “Business risks & Concerns” section.
a) Their attrition is around 25%, b) They compete with global tech service providers in response to RFPs… Read “Clients often cite … xyz… for awarding us contracts” I can only laugh at this. This is clearly an exaggeration - Pg 83: Strategy: Aims to open onshore delivery centers in USA & Europe. Key focus area for next 12-18 months
- Currently, Offices in Noida & Indore (Pg 80)…Co. does not own any office building. No mention in fixed assets. Entirely Rented office space.
- Receivables are 40% of total assets. Receivables have grown much faster than Sales (F20 – F22)
Trade receivables turnover ratio dropping year on year (Pg 154: -53%) - Consolidated cash flows show after tax CFO of Rs 10cr from which company paid dividend of Rs 12cr (Think from point of view of: Capital allocation)
- Employment related expenses [Salary expenses + Professional fees (contractors)] growing much faster than Sales
- Other Expense disclosure Pg 163: Business development expense “down” yoy, Office rent expense “down” yoy: Down ??
- Promoter steadily selling out stake in the market (clearly current price is richly valued vs stated financials
My take:
This is a very small IT services co. focusing on new “hot” areas but neither the promoter nor senior tech leadership has any “experience” in these hot areas. They can hire talent “laterally” which any IT services company can from another.
33% of their Sales is to other IT services cos. as subcontractors. It surely cannot have OPMs of 40%+… The 35+ clients they say at Sales of 45cr… I think the work they are getting is very small revenue per client work which other IT cos. wont be interested in doing. They can keep growing with “low revenue per client” work till a certain revenue size, say sales 400cr (avg 10 cr per client). But, going forward,
- Operating margins will surely reduce
- Working capital will keep getting stretched yoy (Receivables growing much faster than sales)
- Talent acquisition in hot skill areas will always remain a challenge. Pay high and poach.
*Does this co. have any strength? : I don’t think so. Its just a subcontractor to other IT services firms.
*Co. is paying out dividend more than its after tax cash flow from operations. Does’nt look prudent given that it plans to open onshore centers in US & Europe. I think the high payout is to attract investors into trusting the financial nos., to prop up stock price, meanwhile the promoter can cash out slowly. Anyways, the fundamentals will deteriorate in the future.
*Do i think numbers are genuine? : No. I would say exaggerated. With receivables growing far higher than Sales. Alsom In the AR, we saw discrepancies in the textual description of business, vs the data provided in figures
Also, What would you think of a CFO (aged 25 years) with just 3+ years of total work experience?
If I am the promoter of this co, and my numbers are genuine, I will not make such high payout given my growth plans ahead (I ll pay less than my after tax CFO… maybe 20% of my free cash flow at max) , and, I would definitely not reduce my stake right now (unless i feel my nos. will deteriorate in the future)
I would not put my money here. Happy to hear your thoughts
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