Credit for discovering MPS has to go to Ajay Relan of CX Partners. He recommended a buy of the stock in December 2013 when few people had heard of the Company. With great confidence in his voice, he called MPS his “stock pick for 2014” and advised investors to buy on the basis that the company was/is at an “inflection point”.
Ajay Relan and his followers have made a fortune from MPS because at the CMP of Rs. 931, the YOY gain is 317%. The gain over two years is a mind-blowing 644%.
Ruchi Burde of Emkay Global also deserves to be complemented for her brilliant stock picking. In a research report dated 6th May 2014, Ruchi recommended a buy of MPS on the ground that the Company has a huge size of opportunity and the execution ability to take advantage of the opportunity. She also opined that MPS has the “perfect recipe” of high ROCE and high dividend payouts to enrich investors. She also pointed that the then valuations (Rs. 368) are “not in sync with future fundamentals”. Ruchi confidently predicted that “MPS has the potential for multi-bagger return for investors if the growth story unfolds on expected lines”.
Investors who acted on Ruchi’s brilliant advice are sitting on fabulous gains of 153% in about 6 months time.
Anyway, now the question is about the future. Ruchi and Manik Taneja have now issued an “Initiating Coverage” report on MPS in which they have conducted a thorough analysis of its working and prospects.
The duo points out that outsourced publishing services industry is at an “inflection point” and that operational challenges of the publishing industry will catalyze outsourcing, resulting into multi-fold growth in the outsourced publishing services industry. They explain that over FY11-14, the revenue for a few peers of MPS in the outsourced publishing services has grown at a CAGR of 21.9% to 28.7% in INR terms.
It is also pointed out that MPS has itself undergone a successful transformation and that it is now poised for growth. MPS has undergone a series of cost optimization initiatives which have led to 2.4x jump in EBITDA over FY12-14.
The benefits of the cost rationalization initiatives can be seen in the results of the Sept’14 quarter where MPS reported an EBITDA margin of 37.4%, up 570bps YoY and PAT margin of 25.8%, up 940bps YoY. The successful turnaround has transformed MPS into a highly profitable business venture and management is now focused on profitable growth ahead, Ruchi and Manik say.
On the all important question of valuations, Ruchi and Manik point out that while the present valuations at ~20x/17x FY16/17E P/E appears a tad expensive, this needs to be seen in the context of improving growth prospects. It is also pointed out that MPS has cash generation which is in line with the best in the Tier I IT Services space and a dividend payout at ~70% and that this deserves premium valuations.
The duo has accordingly recommended “accumulate” with the target price of Rs. 1,000.
Unfortunately, the target price forseen by Ruchi and Manik is within touching distance of the CMP of Rs. 931. However, if what the duo predicts as the size of the opportunity for MPS comes true, the sky may be the limit for the stock.