MPS Ltd

My two cents:

1. The company is a IT platform business. While there may be some shallow cyclicality owing to economic slowdown in the west, the margin fluctuations are likely due to periodic acquisition of margin-dilutive businesses which are then turned around and brought up to speed margin wise. Whether this strategy will continue to work in future, we’ll have to see. There has been some indication of acquiring better quality businesses, so let’s see how that goes.
2. With a market cap of 1852 crores, a topline of 501 crores, and PAT of 109 crores, the Market Cap to sales is around 3.7, and the PE ratio is around 17. If the QIP happens, it will take the market cap to around 2100 crores, and thus the PE to almost 21. But if they use the capital to make a smart acquisition which adds to the topline and is margin-accretive, then the PE will still be in the high teens. My view is for a debt-free company with an EBIDTA of around 35% and a dividend yield of around 4%, not to mention ambitious growth plans, the valuation seems fair if not cheap, especially compared to other IT companies.
3. I agree that the QIP could be a concern since there are always risks involved in inorganic-led growth, and equity dilution is rarely a good thing for existing share holders. I trust the management though, since they have created a lot of value for shareholders ever since they took over more than a decade ago. I am optimistic that they know what they’re doing. Whether that trust is misplaced, only time will tell.
4. My big concern continues to be potential for AI-led disruption. Rahul Arora seems confident they will be fine (as mentioned in the last concall). I will be watching this closely though.

Disclosure – Invested, biased.