My two cents on the Co and management having followed the company since 2018. To start with SME platform is a very risky bourse to invest in. There have been companies that have been utter frauds and one can’t take big bets on one’s capital.
Coming to E2E Networks. I got interested in this company because it was one of the few startups in the tech space that was IPOing that too at such a small scale which is not usually the case. It was profitable and was listing at reasonable multiples (I think it was 5 times sales) and as usual popped on listing. The purpose of the IPO was very clearly stated that the it was an exit for the VC investors who had I think 30% stake in the company. Another interesting thing was that the VC firm wanted to partly unload their stake at the IPO and if I am not wrong continues to hold it.
I don’t buy at companies at IPO’s so stayed away but continued tracking. As is always the case the stock dropped almost 80-90% post listing in a years time as problems of sales concentration started emerging and sales.
I had already started buying the stock when it was 60% down and continued averaging down. My thesis on the company was this. You can compare E2E to Digital Ocean. Digital Ocean is a global IAAS/Manage Cloud computing business with a revenue of close to $300Mn with a MCap of $2.3B. Their sales is just above 1% of the global market for IAAS. If apply the same metric for E2E for the Indian market sales then it is less than 0.2% with lots of room to grow. If it gets 1% of the market then it can easily be a 150cr+ company with a MCap of 750-1000Cr.
Now for the margin of safety. The whole company was at one point available for 25Cr MCap with a sales of 30Cr. I started loading up and my Average Buying price of INR 27. At this point the CEO/Founder starting buying furiously from the market which gave me confidence to hold on. Although its not been easy holding it.
Now for the business model. This is a self serve model for customers they can buy compute power on demand without a lock in which is flexible enough for someone to not get into long term contracts but also at the same time at risk of discontinuation. What I wanted to see is how the recurring revenues are playing out and as you can see there is growth every quarter.
The other important things to notice is have a clear market strategy. When they had client concentration issues they were focused on the startup sector where there is fierce competition from the likes of Google/Microsoft/Aws which they have now pivoted to focus on SME’s which is not that attractive for these 800 pound Gorillas.
So all in all one has to monitor the management execution and track it for the next couple of years with all the tailwinds of data localisation, movement to cloud and generally competitive costs. Moreover most IaaS business is going to be commoditized to the point that features will be similar and price will become the decision point. This is where I believe that E2E is best placed.
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