Expleo Solutions (Earlier: SQS India BFSI) – A niche Small Cap Value Pick

Gone through the Transcript Q2FY22 AR Call and summarizing it here:

1. UPDATE ON MERGER PROCESS: merger process currently for the unlisted companies it is the official liquidator of each state has to submit the report to their respective NCLT once that is over NCLT of those states will take into consideration before the pronouncement of the order. With respect to NCLT, Chennai, as a process they have sent it to the other regulatory authorities for the representation, if any. The next hearing is around 12th week of December. So, we expect it all to close by end of the year.
2. The merger should be closed by December 31 and combined entity should start publishing the results from Q1 Calendar year 24.
3. Post-merger margin we are expecting an EBITDA we are looking around 16% to 18%.
4. The entities, which are going to be merged had a revenue of around Rs. 95 crore in Q2. And EBITDA of around Rs. 18 crore, which is around 19% EBITDA. PAT for the unlisted entity is around Rs. 11 crore. In Q1 it was around 85 Crore.
5. The group revenue of the unlisted entities Pune is around 85% to 90% is the group revenue and for Bengaluru entity it is around 10% to 15%.
6. At a group level we are not listed. We are owned by a PE fund and total ER&D revenue at a group level is around 60%.
7. Any M&A affect related to selling the stake at group level will not impact the shareholders of the Expleo Solutions.
8. Employee target is 5500 next year from the base of 4200 last year.
9. Capex Plans: We do have plans of capital investment primarily from expanding our capacity, we are running short of capacity in Bangalore, we may also find requirements in 2023 in Chennai as well.
10. On the people front, we are planning to hire graduate trainees in a similar scale as what we did in 2021 around 500 to 600 people over the course of the year.
11. US Business: Nothing much by Indian entity. However some acquisition may be done at the group level. A data management acquisition was done couple of quarters back and that is contributing to the growth. From the earlier single digits to around 13%. And it should grow to 13% to 15%.
12. Digital Transformation: We have done a transformation over the last five years moving into DevOps automation. We also started with some of the software development as well. Configuration, testing, installation moving in the cloud all those are the ones where we are focusing, that’s what we classify as digital.
13. About Slow down in Europe: At group level we focus on aero and defence industries. And even in the automotive sector, we don’t really see a slowdown of customer investment in digitalization. From these industries we are not seeing any demand coming down.
14. At the group level, this year a growth of around 25% and we are even expecting that we will outperform the market in 2023.
15. Growth: Orderbook mostly comes from renewals and order from customer is same as it was in 2022. (60% to 70% same). We are yet to add growth to this.
16. Our ambitions is to grow in the range of 25% to 35%. So, for that the current growth rate at what we are projecting around 4% Q on Q.
17. Dividend: Current priority is Merger and than group is also looking for M&A. So the decision on dividend has been postponed.
18. SOME CONCERNS: Capital allocation within the group and sending it abroad is a concern to maximum analysts.
19. On the constant currency, it is quarter-on-quarter the growth is around 1% but, if I look at year-on-year for the same quarter, the growth is around 47%, PAT is 35%.
20. Q2 is the first quarter, where digital revenues have actually de-grown.
21. Management is not able to give any long term vision about growth.
22. .