It seemed in the starting that 8K Miles is trading at insanely high PEs. So decided to do some projections and analysis and believe that it is fairly priced (and probably undervalued as well). Attaching the sanpshot of the same (source: screener, BSE). Mar-16 to Dec-16 are P&L projections assuming same growth rate and margin profile for the next 4 quarters. Would like to hear views from other members as well on the same.
Current Quarterly-PAT is Rs. 11 Cr which adjusted for Dep is Rs.15 Cr making the annualized Cash PAT = Rs. 62 Cr (Cash PAT is a better indicator for valuing software companies rather than accounting PAT)
This implies, with current Market Cap of Rs. 2,110 Cr, 8K Miles is trading at ~ 33 P/E multiple = 2110/62 (even if we assume the growth rate to be zero going forward)
Now, a high growth company will always appear overvalued if trailing or current earnings are used to evaluate P/E multiples. So taking a 1 year forward annualized Cash Earning multiple, 8K Miles seem to be trading at P/E of 16 X
Looking at it from a different view point, company will be trading at ~Rs. 3,800 Cr in an year
a) if company is able to sustain its current growth rate for the next 4 quarters (20% Q-o-Q) and
b) if current margins are maintained for the next 4 quarters, and
c) if valued at 30 P/E at that time
Now question is:
a) why 8K Miles will be able to maintain 20% Q-o-Q growth rate ? What if it doesn’t ?
- 8K Miles has demonstrated the same consistently in the past because of
i) Promoter (Suresh) has mentioned in interviews that they are now working on 3-5 year long projects with enterprises which can extend to a decade as well (managed services business model)
ii) They have cloud platforms/products (Identity Access Management, EzRx) which are more or less a recurring revenue model SAAS model - this is where they edge over other cloud companies (e.g. Cambridge Technology model) which are mainly into project/orderbook kind of business or, at best, managed services
- Product Expansion: It is expanding into financial services now for additional growth apart from its strong hold - pharma/healthcare
- Geographic Expansion: it is expanding now to Europe as well.
- Inorganic Expansion is an area that company has explored successfully in the past
Even if company slows down to 15% or 10% Q-o-Q growth in an year, there is very limited downside as per calculations.
b) Maintaining margins: Mr.Suresh Venkatachari (CEO) is confident of maintaining margins - in fact, in multiple interviews, he has explained as to why operating margins will increase going forward. 8K Miles is slowly moving into recurring/subscription/SAAS revenue stream (long tem) and moving away from orderbook/project based revenues. He expects the break-up to be 70% (subscription/long term revenue) : 30% (orderbook/short term revenue) in the near future. And hence, he mentions in the interview that profits will grow non-linearly because additional revenues will cause less than proportionate expenses going forward. This makes sense since their Cloud IAM, Cloud EzRx prducts seem to be successful (after their 2013 launch of Cloud IAM product, their quarterly revenue has not gone down even once which shows the strength)
Sharing one interview:
- now the question remains, whether the market continues to apply current 30 x P/E on this stock in the next one-two year or not.
Most of the listed companies don’t even achieve the yearly growth which 8K Miles is achieving quarterly (20% Q-o-Q). There are probably not more than 20 companies out of a full universe of 5000+ listed companies which are achieving a Q-o-Q growth rate of 20%.
- Further, There are very few high quality companies which can command an EBITDA margin of 35% and expect it to improve going forward.
- Inorganic growth being supported by internal accrual is a huge testimony to the earnings quality
On a sensitivity analysis and conservative basis, even if revenue growth gets lower , margins remain constant and market doesn’t value it at a lower multiple than 30, downside seems to be pretty limited.
Inviting views of others …
Disclosure: Invested recently based on above rationale.