Securekloud Technologies Ltd (was 8k Miles Software Ltd), Cloud Computing

Thank you @h_nazkani for digging through.

This is a long post and a little involved, mainly addressing @h_nazkani’s post so please bear. I specifically address the acquisitions and show the disclosure discrepancy and what it implies about valuation of 8K Miles US (which is 8K Miles Software Services Inc.).

Acquisitions in FY 14

The Press Release does not disclose the terms of the FuGen transaction, unlike the terms disclosed later, say Cornerstone acquisition made in May 2017. We can at best infer that 8KMiles US stake reduced in 2014 by ~ 40% in the year FuGen was acquired. Nothing more.

Disclosure discrepancy

In AR 2014, if the share capital of 8K Miles India remained at Rs 45,200 (1,000 shares) and it diluted by about 40%, then one can infer that about 674 shares were issued to others who constituted ~ 40%, making the total share capital at $ 1,674 and total shares at 1,674.

However in AR 2014 there is no disclosure of holdings in subsidiaries as required by Section 212 of the old Companies Act or AOC 1 under the new one. Thus the terms remain opaque. We do not know the terms of the transaction that led to a 40% dilution of 8K Miles US to assess value, but read further to get a sense of this was.

Acquisitions in FY 15

Of the two acquisitions completed in FY 15, Mindprint (disclosed on 09 March 2015) 8K_Miles_Software_Services_Ltd_090315.pdf (247.6 KB) was for $ 100,000 in cash and $ 250,000 in US subsidiary stock. SERJ was acquired in Nov 2014 and the terms were not disclosed. Upon a query by the exchange 8K Miles said the acquisition was in cash for Rs 15.80 crores. No stock was issued.

Disclosure discrepancy

The AR 2015 however shows a transaction that does not make sense. Under the terms of the transaction as attached above, stocks of 8K Miles US were given to Mindprint. If 8K Miles has to give its own stock as consideration for purchase, it can be done either from existing pool of shares or by fresh issue of shares – no third possibility. If it is existing pool, then 8K Miles US would have had to buy it from someone* and issue the same to Mindprint. If it is fresh issue of shares then the holding of 8KMiles India should have come down from 59.72% previously. But you can see in AR 2015 (page 44) that percentage holding stays the same at 59.72%, and (page 82) share capital also stays the same.

This can only mean 8K Miles US first bought its own shares from parties holding the 40.28% and subsequently transferred it to Mindprint. But 8K Miles US also says no related parties were involved. :thinking:

This issue cannot be resolved unless the 8K Miles US Annual Report for FY 15 is shared. However, quite dubiously, in AR 2015, there is AOC-1 disclosure but it shows only Mentor Minds India entity, none of the rest unlike say in AR 2017. So we cannot know any further.

*this assumes there is no Treasury stock held by 8K Miles US.

Acquisitions in FY 16

In FY 2016, 8KMiles US acquired Cintel Systems Inc (expected closure in May 2015, for $ 1 million in cash and $ 1.5 million in stock) and Nexage Technology USA (closed in Nov 2015 for $ 1.5 million in cash and $ 1.5 million in stock). So for these two acquisitions 8KMiles US spent $ 2.5 million in cash.

You say the cash-components were funded by promoter infusing capital (page 120 of AR 2016). In other words the capital was issued was raised by 8KMiles India, which subsequently infused capital into 8K Miles US, which subsequently made the cash payouts, right? Because the acquiring entity was 8K Miles US and not 8K Miles India.

A serious discrepancy and what it (mis)leads to?

The AOC 1 on page 59 of AR 2016, with some analysis, reveal serious gaps between the valuation of 8K Miles US we are led to believe and the valuation t which the transaction was done.

During the year FY 2016, 8KMiles India also increased its stake in 8KMiles US from 59.72% year before to 62.66% and the money infused was ~ Rs 24.5 crores (page 97 of AR 2016). In the same time period, it also issued $ 3 million in stock to the above acquired entities. Let us try and find out the approximate pre-money valuation at which 8K Miles India infused capital in 8K Miles US.
Recall shareholding of 8K Miles India increased during the year from 59.72% to 62.66%. Recall the total capital of 8K Miles US at the beginning of FY 2016 as seen earlier is $ 1,674. Recall this is arrived at by taking $ 1000 to represent 1000 shares amounting to 59.72%, as stated in previous annual reports. In Rs terms @ Rs 65 it is about Rs. 108,840. At the end of FY 16, the total capital of 8K Miles US was increased to Rs 1,898,723 and this corresponds to $ 28,725 at closing exchange rates. This corresponds to a total number of issued shares at 28,725 at $ 1 per share, assumed same as before.

In other words the total outstanding shares of 8K Miles US at the end of FY 16 was 28,725. Of this 8K Miles India holding at 62.66% translates to 18,000 shares. Recall it was 1,000 shares at the beginning of the year. Which means for an additional 17,000 shares 8K Miles India paid up Rs 24.5 crores during the year. In other words, post money valuation of 8K Miles US was about Rs 41.4 crores (= Rs 24.5*28,725/17000 cr). Which means pre-money valuation was 16.9 crores (= post money valuation minus capital infused). At the average rate of 64.13 to the dollar, this translates to a valuation of about $ 2.64 million.

In other words, 8K Miles India valued 8K Miles US at just $ 2.6 million! This after (a) after some multi- million dollar deals, (b) after FY 16 opening book value of about 8K Miles US $ 24 million (AOC-1).

Would any of the remaining 40% shareholders of 8K Miles US allow a $ 24 million business be valued at $ 2.6 million for 8K Miles India? If they indeed allowed an infusion at $ 2.6 million, what does it say about what they really think 8K Miles US is worth?

Not surprisingly, the $ 2.6 million corresponds to more or less the cash payouts for their two acquisitions in FY 16.

You may do a similar math for FY 17 as well and see.

If this is really long and many are put to sleep, another idea is to just check the validity or existence of some of their trademarks (claimed in the past as present) with the US Trademark and Patent Office database.

@rahuljain9 Please check the only conference call in Researchbytes (Q3 FY 18) and I think it is at ~ 50 min. I have no clue about the industry and if the CEO says Cloud Era is a competitor I cannot be any wiser and say no. There are also some interesting queries posed by analysts.

Having made myself really unpopular with the group after this post :slight_smile: , I suggest @h_nazkani we take it offline!

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I would really like the conversation to happen in this thread than offline. I for myself enjoy reading both view points. Nothing wrong with having strong conviction (positive or negative) and sticking to it till proven wrong.

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Thank you Shyam,

The wisdom of experience says it will not be what you think. Since I am not invested, I can be tempted to unleash myself without a care decrying everything about the stock. Those invested are mostly emotionally invested as well. They will see the tone of what I write, likely skim through what I wrote or point a flaw ( (and no argument is 100% watertight) and get anxious + angry that I can take their emotions for a ride. I, in turn, will get upset that they are not evaluating on the merits of the case.

This will descend into ad hominem attacks, glimpses of which can be seen in some responses to my posts.

It happens all the time, and to everyone (yours truly included in his own stocks)

It’s a lose-lose :)).

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Welcome amit mantriji
Kindly give your suggestion
We are already invested
We have read comments from both sides but could not take decision
Thanks

As they say, the greatest risk is not knowing what to do.

Sadly you took a position without proper understanding. If you’re lucky, you can get a good price. Instead of looking for suggestions, think harder.

@diffsoft dont mind the resistance. You have as much right to express yourself as anyone on this forum. I always read your posts carefully and diligently, even if I dont agree with everything. There are many who see value in what you write, including me. So pls continue to write…

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I am a core computer science person, not strong with reading ARs etc. So there is a very high chance I am wrong here, and would be happy if people can correct me with my understanding.

2 different numbers regarding #shares and %ownership have been mentioned:

  1. “During the year FY 2016, 8KMiles India also increased its stake in 8KMiles US from 59.72% year before to 62.66% and the money infused was ~ Rs 24.5 crores (page 97 of AR 2016).”
  2. “Recall it was 1,000 shares at the beginning of the year. Which means for an additional 17,000 shares 8K Miles India paid up Rs 24.5 crores during the year.”

I am not sure if both of the statements can be true together. Stake increased by 3% which resulted in #shares increased from 1000 to 18000?
Since the first statement numbers are from AR rather than calculations, I will go with the first statement.
3% stake at Rs 24.5 Cr => a Valuation of Rs 24.5*33.33 = ~$120M. and Not $2.6 million.

Lets us not get emotional, everyone has a right to express themselves and has a right to be wrong. At the end the aim of the forum is to enable people to take correct decision by leveraging different expertise of the members.

Disc: Invested

PS: I could not check the concall about Cloudera being the competitor. research bytes wanted ph no for registration which I am not comfortable giving. So if someone with an ac can upload the transcript, I would appreciate.

I am guessing the Q1 results might be postponed since today is a government holiday in Tamilnadu due to demise of former CM,M.Karunanidhi

I did a high level analysis of this Company recently and did not consider it worthy of investment.

Following are the red flags due to which I rejected it at an overview level itself and did not proceed to do a detailed analysis:

  • 95% of revenue and profit is accounted for by the subsidiaries, none of which have been audited by the main auditor;
  • The Co seems to be latching on to every latest buzzword - first Cloud, then AI, then Blockchain, etc;
  • Significant increase in FY18 intangible assets (from Rs 82 cr to Rs 255 cr);
  • Positive FinCF every year over the past 8 yrs (totalling Rs 200+ cr);
  • Revenue has increased 30-fold and profit 40-fold over the past 5 years. RoNW has shot up from 15% to 55% over the same period (Is the Company doing magic ?);
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Decent numbers from 8k miles…

Company tried to focus on Intangible assets.


For guys focus on trade receivables.


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Kindly read the article: “These 7 stocks’ fundamentals remained robust despite capex doubling over last 5 fiscals” published on money control.
link is:https://www.moneycontrol.com/news/business/markets/these-7-stocks-fundamentals-remained-robust-despite-capex-doubling-over-last-5-fiscals-2508813.html

Happy about the below things :
Company not delaying results despite the political situation in Chennai today
Receivables reduced from 243 odd crores to 237 crores, eventhough it is small number ,it gives faith that Cash has been collected
Company has made an effort to provide a division of the intangibles and trade receivables

Would be more happy:
If the company would arrange a con call
If Company provides more information about the Cash on hand and reserves of Cash

Disc :Invested.Faith in company increased after Deloitte came into picture

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I traded and exited 75% around 270 and the rest around 310 (20 dma). That was enough of a fee for spending time here. Didn’t expect it to go to 372 and don’t regret selling where I did as I am satisficer and not a maximiser. Besides, none of the price-action felt real. Overstaying your welcome could be very harmful in this sort of stocks I feel.

Hi all,
I have been following this thread on 8K Miles for quite some time. After having read some of the PoVs from fellow colleagues here, I think it may be appropriate to add my thoughts on recent price volatility of this stock and add some comments in order to analyse what valuation this company deserves.

To mention the base for my analysis:

  1. I have been working in the IT Infrastructure management space myself for some years and have seen how the companies like Infosys, Accenture win business in this space (though not specifically in Cloud space).

  2. I had a discussion with couple of AWS Architects to understad what kind of services their partners provide to their customers. From the discussion, it was clear that AWS provides the cloud platform as a service to customers. But not all customers have expertise to move their applications to these hosting platforms. Or the customers needs some more services like, consultancy on movement to cloud, specific software develpment / tools development expertise which they lack for movement to cloud. And this is where the partners like 8K Miles come into picture.

Now trying to put some light on whether the kind of growth 8K miles has shpows over last few years is true or not and what kind of valuation it deserves:

  1. I feel that 8K Miles is a technocrat driven company and as such they are not experts in running a company with top corporate governance. Having said this, it means that they seem to be good at the technical job they are doing but do not know how to maintain top notch corporate governance standards (like say Infosys has been doing for decades). This is where they fail at winning investor confidence.

  2. Seems they (Suresh specifically) are realizing this slowly and to address this issue, they have employed Delloite as auditors. They need to do more.

  3. About the core business they are doing, I see they are one of the ~100-120 AWS certified managed service providers (MSP), for example, which are listed on AWS site itself.
    Managed Service Partners.
    Some of these are big names like, Accenture, Infosys, TCS etc.

  4. I tried to check the profile some of these partners and could see that these are quite good businesses within their country / client business.
    e.g. APITalent is similar AWS MSP in New Zealand. It has grown 400%+ in last 4 years and and has been acquired recently by Deloitte.

https://www.cio.co.nz/article/634844/deloitte-acquires-aws-cloud-specialist-api-talent/

  1. In the Q1 FY 2019 result, 8K Miles has given explaination about the intangible assets. They have been developing some of the could services platforms like CloudEz, EzIAM, BlockChain platform (which really are the proprietary tools which can give exponential revenue wins if developed and deployed correctly). For such assets, we cannot really evaluate the true value of it sitting outside. But if we try to do so, need to think what could be the value 8K can demand for these tools if they want to sell those in market to companies like Infosys, Accenture etc.
    e.g. will Infosys pay Rs. 140Cr (~20MUSD) for CloudEz, EzIAM or Rs 50 Cr (~8MUSD) for BlockChain platform as 8K has put the value of these assets in their BS?
    We do not know the answer but it can be sold for these values if these tools can do what these are supposed to do. I mean the tools can really be useful to earn the revenue for companies.

  2. About the trade receivables, again I can see in Q1, that ~75% of these are less than 60 days. SO is not a very big concern though they need to focus on recovery with sincere attempts or to cut those clients which do not want to pay for the services they buy.

  3. Now with a company which is doing 600-800 Cr revenue and ~180-200Cr net, what can be the value of such a company given that it is working on building the IPs as assets (assuming the revenue certified by respective auditors in respective countries are real - which I do not have much doubt about looking at similar players in AWS MSP list as a baseline). IMHO, it demands at least 10PE which comes out be not less than Rs. 1600 -1800 Cr, if not more than that.

  4. Having said this, the company is in this position today in the market due to sins by management in corporate governance space. As I said earlier management need to seriously work on this keeping the interests of shareholders in forefront. But I do NOT see fundamental issue / fraud with this company.

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Disc: Invested, so my opinion could be biased.

@aspireinvestor
Very good details. I think one point of contention in the previous posts was the related party transactions and subsidiaries. What is your opinion there?

Wrt IPs, it is good to build the IP that can be sold. For example, CMP platforms such as Cloudbolt are gaining more popularity by the day. But CapEx in IPs will also require OpEx in maintaining and competing with market. Tough for a traditional service company to do. May be 8k is cracking that part. Also the valuation of the IP doesn’t hold till they managed to sell it well. A lot of IPs are just lying waste and could be used to mask the OpEx (idle resources etc) into CapEx (building products).

Disc: not invested. Examining the risks

My view

There may be 2 options
1…company is not doing any fraud
High receivables and intang assets may be genuine
Auditors have already given cleanchit
Then over long term stock may go up
2…company may be doing fraud
At present ,pe is around 5.6 even lower than
vakrangee(Vakrangee pe is 10)
Probably market has already perceived its high receivables and intang assets.
So i think downside rosk is low

So,AS AUDITORS HAVE ALSO GIVEN CLEANCHIT,IT IS BETTER TO HOLD STOCK WHO HAVE ALREADY PURCHASED

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