Infollion Research Services Ltd – Moated Microcap with Differentiated business?

I’ve recently entered the stock and I’m surprised that a platform based company which is poised to grow, is operating on an asset light business model and has the potential to develop a strong moat in the coming years is available at a TTM PE of ~29-30. I wonder why? Is it because,

1. It is an undiscovered gem?
2. Investors haven’t fully understood the company’s business model? (my assumption: it maybe the case)
3. I’m overestimating the company’s growth potential and its ability to build a moat?

I guess time will tell. For now, here is why I’ve taken a position in this wonderful company.

A. Company’s Biz Model & Opportunity Size:

I believe this was the first thing that drew me to the company, i.e. what it does. Very simply put they act as the facilitator (via their platform + their biz/account management team) between their clients (consultancy companies, PE/VC firms, asset managers, financial institutions etc.) and relevant experts in their domain. These types of companies are known as Expert Networks (ENs). And being a platform based “network”, there is a possibility it may develop a moat in the future in the form of a network effect. How so?

• Well, more experts on the platform will mean more demand from its clients, more demand from its clients and businesses will mean more experts will get listed, more experts will lead to more clients and so on. This virtuous cycle will continue till a strong network and thereby a network based moat is formed (very loosely think of how InfoEdge did this with Naukri.com).

Now if you are wondering, why do both these parties need a facilitator to make this happen? Can’t they connect directly via LinkedIn and/or social media? My simple take on this – these are vetted, verified and top-notch industry experts made available “on demand” to the company’s clients who are not running a mom and pop store (as a reminder they are offering services to consultancy companies, PE/VC firms, asset managers, financial institutions etc.). When you are making decisions that involve millions/billions of dollars and as a consultant when your neck/job is on the line, a small consultancy fee paid to verified/vetted expert(s) is pocket change in the larger scheme of things. Furthermore, it strengthens the external due diligence being done by them. Read this and this if you want to understand how investors/consultants use expert networks and why this service is important to them. If you want to further understand ENs better please read these wonderfully written blogs (source: Inex One).

1. How do expert networks operate?
2. How many expert networks are there?

On a side note, I guess it was happenstance that earlier this year I got an opportunity to interview for GLG (Infollion’s competitor). While the interview didn’t yield much, the preparation involved made me understand the business model of GLG better (and thus Infollion). As it happens, I was also approached by GLG (a few months after my interview) to be listed as an expert on their platform. This further made me understand how ENs operate.

B. Growth Opportunities

(i) Revenue growth

• As per management the company has been growing its sales at 40% (+/-) over the last 5+ years including FY24. While the management hasn’t provided an explicit guidance for FY25, reading between the lines suggest that they should grow by 30-40% in FY25.

• What about long term growth rates? I’ll stick my neck out on this one and suggest that the company should continue to grow their topline 20%+ every year (very conservatively) for the next 10 years at least. Why so?

  • Management has suggested their Indian growth story is directly linked to the Indian economy. Now if you were to believe the govt, finance ministry, RBI and external agencies, India should be growing between 6-8% for the next 3-5 years, thus the company should continue to do well.
  • The EN market globally is ~$2.3 billion in size and growing at a decent clip depending on the economic environment globally (source: Inex One). Infollion is looking to enter the EN market of the US and Western Europe (both mature EN markets). However, the size of Infollion (FY24 revenue ~INR 50 cr) means any growth from these regions will increase their topline meaningfully over the years.
  • We are probably in the worst period of global economic growth in recent history due to inflation, interest rates etc. leading to a decline in VC/PE investments. When the economy turns around, Infollion will benefit further.
  • Overall, for me, Infollion is a small drop in the wide ocean of ENs and hence they should continue to grow nicely for a long time.

(ii) Margins

• As per the management,

  • Gross Margins: They are comfortable with the gross margins they are operating at as their number #1 priority is to grow the business further. So, no growth is expected here for the time being (note: a lot of the ENs work on GMs of 70-90%, so I guess over a longer time frame, the GMs may even go up for Infollion).

  • EBITDA Margins: Again, no expansion expected here. They’ll operate in the 18-20% range for the next few years.

  • Net Profit Margins: Derivative of the above margins. However, as per management this may grow more than GMs and EBITDA margins as they scale further and better use their tech platform to connect more experts with their clients (better mining and thus lower costs). This is expected to grow he bottomline more than the topline over the next few years.

C. Valuations:

• TTM PE 29-30: Seems reasonable to me considering the topline should grow by 40% (+/- 10%) over the next few years. If the bottomline grows further, the stock is even more reasonable. To me the stock is fairly valued at the least.

• PEG ratio: 30 PE / 40% growth = 0.75. Again reasonable.

• DCF value = 329 (source: morningstar). CMP of the stock is well below this.

• Rerating chance: High over time. I think the company should be trading between 50-70 PE considering the asset light model, good growth prospects, chance of a network based moat developing and a management team that is highly qualified, reputable and transparent.

• The above valuation metrics, opportunity size, growth potential, asset light model, possibility of a network based moat developing and a good management team make it a no brainer of a buy for me.

D. Operating metrics and other parameters:

• Despite its small size the company is a FCF generating business. And it will remain so going forward.

• ROCEs, ROEs, ROIs. ROAs etc etc are all extremely healthy.

• Debt free company with INR 30 crores of cash on books. Cash is ~12% of the market cap of the company currently. The company can use this as a war chest to expand into new geographies.

• Good FCFs means the company will always keep generating cash for future growth opportunities and eventually for dividends.

E. Stakeholders, the board and other investors:

• Mr. Gaurav Munjal is a first generation entrepreneur that has built the company from scratch. He currently owns ~52% of the company. With skin in the game and fire in his belly (hopefully!) he can take this company to great heights.

• Mr. Munjal and the rest of his team are highly experienced and have completed their education from decent/high profile colleges. The board is full of members from IIT. All of this as an individual investor gives me confidence

• Prominent investors (past/present) include some worthwhile names: Blume Ventures, India Equity Fund, Alternative Investment Fund and ITHOUGHT Financial (helmed by the super conservative investor: Shyam Sekhar)

F. Competitors and Risks:

(i) Competition:

• While the company is one of the leaders in India, it does face stiff competition from some notable global peers like: GLG, AlphaInsights, ThirdBridge etc. It is to be seen how the company grows and develops its moat with competition from deep pocketed and well entrenched global players like these.

• The above competitors plus some others is what the company will also have to face in the markets of North America and Western Europe.

(ii) Risks:

• Competition from well entrenched players doesn’t let them grow meaningfully beyond a point in the US and Western Europe.

• Bigger players in India undercut them on pricing or throw more money at the problem and stall/limit their growth.

• As an investor there is a risk that one of their bigger competitors may acquire them and that may bring this story to a premature end.

• Regulatory/Legal risk. For e.g. some experts end up providing info/an edge to analysts, traders etc. that leads to insider trading etc. Here is an example of how this happened with GLG.

• AI scraping expert transcripts that provide consultants with the info without having the need to engage with them.

• Economic slowdown in its main market of India and aspirational markets of US and Western Europe.

Disc: Invested and biased. Not a SEBI registered analyst/advisor. Please do your own due diligence.