A few things that need a deeper look –
At ~80 Cr annual revenue for FY23, employee base is around 500. Revenue per employee of INR 17-18 lakh and PAT per employee of ~5 lakh. Payroll expense for FY23 was ~35 Cr which means salary/employee of ~7 lakh. A large IT company does revenue/employee of INR 45-50 lakh and profit/employee of ~7 lakh.
What is it about Ksolves that they manage to retain such a high % of the per employee billing as PAT? Obviously a company can have an edge when it comes to cost management, especially if the work force is young and located in non metro cities. However this differential cannot be more than 15-20%, one can speak to employees based at cities like Mangalore, Mysore & Kochi and check this out
The client list is primarily IT organizations, which means Ksolves is just working as a staff augmentation player who can supply resources in specific technologies at a very short notice? But aren’t large IT companies supposed to have better bench strength, training programs and access to wider pool of people because of their brand name and bigger cash balance? Especially at an average salary of 7 lakh/employee, Ksolves is unlikely to have employees with superior technical skills. At best they can supply employees who are decent enough to get a simple job done at maybe 60% of the cost. If so, is this low end business model worth paying 30 PE for?
At employee payroll expense of 35 Cr per annum, monthly outgo on salary will be ~3 Cr. The business has more than 60% coming in from exports, hence the bulk of the money sitting as cash balance is needed by their bankers to ensure some sort of guarantee to do FX conversion activity. The provisions of 6 Cr+ are most likely provision for Income Tax on the balance sheet (FY23) and there is 15 Cr of AR pending at an average DSO of ~70 days going by the annual report.
All employee expense heavy companies prefer to have atleast 6 months of salary sitting in a liquid fund/FD so that they can pay salaries for sure even if they have a short term asset liability mismatch. But here is a management that wants to take out every single paisa that is possible as a dividend rather than create this much needed buffer on the balance sheet. This is very non-standard and deserves a very serious look.
Maybe the unsaid thing here is that promoters would rather have money in personal bank account than have it sitting on the company balance sheet where there are complicated contractual liabilities that can hit them any time? One of the biggest risks in IT business is the OTC nature of contracting where one can never know the real extent of liability that a service provider signs up for. As a junior engagement manager in my IT services stint, the first clause I would review was the limitation of liability clause followed by Indemnification & IP rights in case of custom development. What exactly is the scene at Ksolves? Why are the promoters so eager to swipe out money from the company rather than create a 6 month cash buffer in case of any exigencies?
For FY22 the top 5 clients were ~45% of the revenue which means revenue per customer of ~4 Cr within the Top 5. This is miniscule by any standards (as of date) and indicates that the business has minimal integration with things that are of importance to their customers. For an LTI Mindtree (listed as a client), a dependence of 4 Cr per annum on a vendor is inconsequential to say the very least.
If the bulk of the business is coming from IT companies, that indirectly implies that the business doesn’t have any direct customer connects at all. Most likely underinvested into sales teams and gets negotiated hard on everything by their larger IT peers (who understand business and technology far better than them).
The final point is the rent expense of ~63 lakh for FY22 that translates to ~18,000 per employee per year. One can understand that it will be a hybrid of WFH heavy model, hence rent is much lower. But the usual accounting practice is that any lease should show up on the balance sheet as a right to use asset (all other IT companies do this), which means the office space taken for use is not a long term lease but most likely a set of seats in a share workspace like a Wework. At an employee base of 350, most organizations would rather prefer a much cheaper dedicated space model on a long term lease (even if a dedicated floor within a wework) rather than stay on the rent model. The outlook here once again points to a short term view rather than a long term view on how to growing the business and securing good workplace assets for the team. I could be wrong here though, just that this needs a deeper look too.
Sometimes wonder why investors are happy to pay 30 PE for a business just because it has had 2 years of fast growth. This is nothing in this business that indicates longevity or differentiation at this point of time. Happy to hear counter points to this
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