MPS Ltd

Some of the numbers like ROCE, and ROE are impressive but these 4 reasons are making me hesitant.

1. The YOY sales growth has been nominal for the past 3 years. While the company’s margins are expanding and have reached 40%. Based on the past 10 years’ data on OPM & NPM, one can see that OPMs vary between 34% and 40%. Looks cyclical to me and the company is operating now at peak margins.

2. As I understand, there are two components to growth in a stock’s price. One, PE expansion, and the other, growth in earnings. The PE expansion has already happened with the current PE of 21.4 looking slightly overvalued. Regarding earnings growth, the current earnings yield of 6.6% is almost equal to that of G-Sec or FD rates. – not offering much scope for growth in terms of earnings.

3. Stock P/E of 21.4 and a price-to-sales ratio of 6.2 are reducing the margin of safety for me.

4. As pointed out by a few investors above, the management has taken approval for QIP for an aggregate amount of up to 250 crores for a period of 12 months and will use this amount (deployed within 2 quarters) if some large opportunities become available. (Source: Earnings call). But historically, QIP has not been favorable for individual retail investors. When MPS Ltd. raised Rs. 150 crores in March 2015 via QIP at an issue price of Rs. 836 per share (5% discount of Rs. 880 – floor price), the stock price went down by 22%. (https://economictimes.indiatimes.com/markets/stocks/news/qip-issue-a-harbinger-for-good-times-for-a-stock-think-again/articleshow/54439185.cms). In this case, as some analysts have pointed out in the earnings call, the company could reduce dividends (they have been good dividend givers in the past) and raise debt instead of QIP as raising equity has been a costly incidence for the company. The management is conservative, and they never want to raise debt beyond CFO or PAT. But I am not sure if it’s the right thing to do now.

Some reasons why this company could be in your watch list:

1. The company has revised its acquisition strategy – from buying asset-heavy struggling companies and turning them around to buying EPS-accretive companies from day 1. This, if done properly, can be a great inorganic growth avenue for the company. (Recently they bought a company called EI design based on this thesis which was positively received by Mr. Market)

2. The company is currently making 500 crores of revenue and wants to triple this by FY’28.
   Strategy: 60% of the growth to come from acquisitions and 40% organic growth. And the plan they have to implement this strategy looks solid. If they are able to execute well, tripling their revenue seems achievable.

3. 94% of the company’s revenue (FY22) is generated from USA & Europe.

4. The current market price is in the vicinity of an all-time high price. Though the latest results given by the company have been good, Mr. Market has already factored in those earnings. Its better to wait if the company goes for the QIP route and then take the decision. The approval for QIP will expire in a year. So probably one can wait, watch, and then act accordingly.

Disclosure: Watchlisted, not invested.

Would love to know your thoughts.