Accelya Kale Solutions-Niche & Sticky Business

[desinet]

Just wanted to share the IATA Quarterly Report on Airlinen Industry outlook for next two years. Definite positive signs on improvement in the outlook.

Quick Takeaways:

1. Expected Net Profit Forecast )- $12.9bn in 2013 and $19.7bn in 2014. It is significantly higher than the forecast made in Sept. ($11.7bn in 2013 and $16.4bn in 2014). The upward revision reflects lower jet fuel prices over the forecast period as well as improvements to the industryas structure and efficiency already visible in quarterly results this year.
2. Passenger markets continue to outperform the cargo business which remains stagnant both on volumes and revenues.
3. IATA expects 2014 to be a second consecutive year of strengthening profitability (beginning from 2012 when airlines posted a net profit of $7.4 billion).
4. The anticipated $19.7 billion profit in 2014 would come on projected revenues of $743 billion. While this would be the largest absolute profit for the airline industryaoutstripping the $19.2 billion net profit that the industry returned in 2010 - it is important to note that 2010 revenues were $579 billion. The net profit margin in 2010 was 3.3%, some 0.7 percentage points higher than the 2.6% expected for 2014.
5. Forecast Drivers
6. Passenger Demand: Passenger demand is robust and passenger numbers are expected to reach 3.1 billion in 2013 and rise by 6% to 3.3 billion in 2014.
7. Cargo Demand: Cargo demand remains largely stagnant. Airlines are expected to carry 51.6 million tonnes of cargo in 2013, increasing to 52.5 million tonnes in 2014. This modest increase in demand is expected to be offset by a decline in yields (-2.1% in 2014).

Report available here:

http://www.iata.org/pressroom/pr/Pages/2013-12-12-01.aspx

[Mahesh]

As I have said before, my focus will be more on cash generation than pure top line growth....top line will be a factor of many variables, including macros and micros.....however, with current assets and employee base, co. can generate minimum 415-430 cr. top line and if this doesn't get achieved by FY16 I will be disappointed.....growth will not be in straight line as current FY14 might see the co. report 280-290 cr. revenue I.e. a negative growth.....but, if it goes below 33-35 % in Ebitda consistently which is a remote possibility (w/o exchange gain loss) that will be of serious concern to me....otherwise, if it performs as expected in margins with 400 cr.+ top line by FY16 without significant yearly margin variation then I feel stock has room for significant rerating although in the long run....

Rgds.

[myprasanna]

Mahesh,

Great to have the opportunity to interact with people like you, who follow the co closely. Can you elaborate on the source of -ve revenue growth? Is it about the customer who left, causing an estimated 5% drop in revenues?

As I see it, this company has a product, that the sales people are knocking on Airline's doors trying to sell. If more sells - we get a great year. If not - unless someone leaves, the revenue remains in-tact (w/o pricing changes). Am I missing something here?

Thanks,

-Prasanna

[Mahesh]

Hi prasanna,

Yes...I have assumed negative growth based on one top 10 customer loss....although in rupee term it's looking 5 %, but in usd terms it will be higher...I have assumed a 12-15 % loss due to client and have remained extremely conservative on new business contribution....this eventually might not happen and that's why I say FY14 is the real test for this co.....even a flat performance in usd terms will be very satisfactory to me....

On ur. Second point, this is too simplistic assumption of a business model....yes, co. has products, not one but few in different segments of one broad segment airlines....what is great is that co. uses its own products and offers kpo/bpo to its clients which improves their margins and reduces cost burden on them.....as majority of business's is transaction based, with growth in client, co. also grows....it is this annuity based revenues which imparts greater stability to accelyakale's top line in an otherwise volatile track record of product cos.

Feel free to get back to me in case of any further query.

Rgds.

[kunalpatel_5267]

Now, after having an overview of the group, let's go further down the line to assess AccelyaKale's importance to the group :

at subsidiary level....the way group structured is -- whatever cash is generated is distributed and therefore rests in parent and any major financing whatsoever is required is done by the parent via loan to subsidiary....major debt is only raised at parent level and not at any subsidiary level._

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External Debt is alsonegligible financingseems

I appreciate humble efforts in this thread. This is the modern power of knowledge sharing.

I have 2 points to discuss here.

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1)You have listed reason of paying higher dividend in 2013. Cash is generated by Subsidiary and distributed to parent to repay parent's loan. On paper it looks like Subsidiary is debt free. So that is very good concern to track in future as well. However I believe Parent is doing good in cash management and not diversifying from its core expertise.

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2)Somewhere I read before few years, next round of IT evolution in India will be dominated by IP holders. In 2013, we have seen hundreds of product development startups funded by VCs (specially in Bangalore). AKSL has potential to be among trend setters in India. (something like Infosys, Wipro did in early 1990)

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[myprasanna]

Thanks Mahesh.

I spoke with a relative of mine, who is a top management executive in the airline industry. Here's what stood out from the discussion:

)- Kale guys are the market leaders in revenue accounting solutions. No-brainer for a top airline. Competitors are not even close. Pricey solutions though. So might go with a startup if we are launching a new airlines, but will probably switch once we get scale, to Kale.

)- Since they are the market leaders, they must have close to 70% market share in the revenue accounting space. Not much room for growth in that space, but can grow with the airline industry as a whole.

)- Months of Nov - Jan has the most traffic and sales.

)- He mentioned Sabre had the best reservation system and would choose that over Kale any day. He was fine with having multiple vendors and does not buy the premise of integration solutions personally. He wants well tested modules. He also mentioned that Sabre and others (Sita) had revenue accounting modules but Kale's is the best.

)- The biggest point of surprise at this juncture for me and him, was why the net profits doubled for the past 2 years, and the likelihood for it to continue. Since the revenue accounting modules have reached market penetration, which new module is all the rage now? If we know this, then I can work backwards and figure out the odds for future growth.Any idea anyone?

My personal guess from reading the Annual reports is -- Finesse MBS. It seems like an add-on to revenue accounting, specifically to manage receivables and payables. Will dig more..

If anyone knows the source of the exponential growth - would be great to understand. It is really clear that the downside from here is limited. There is strong dividend support to the stock, and the possibility of exponential growth is tempting.

Thanks,

-Prasanna

Disclosure: Buying as much as I can.

[atulgarg]

Prasanna,

Thanks for these inputs. It helps a lot to get the inputs from someone in the industry.

Good to know Kales are the best in revenue accounting & Sabres are the best in reservation system. Can we get an idea what all modules an airline needs to use and which module constitutes how much of cost for an airline for all the modules. Also What is market share of the closest competitor (who it is btw). AK has recently launched a new solution for small scale Airlines. Will that help them have some of the market in upcoming/small airlines..

AKs revenue is of the order of 300 odd cr. And in some of the reports, it was mentioned a mkt size of ~$800mi (4800 cr), which indicates a lot of scope for growth, these figures need to be cross validated though. Accelya has a client base of 200 clients and kale is servicing ~65 out of these. There lies the scope for growth, along with the growth of already growing customers.

Thanks a lot.

[Mahesh]

Kunal....

1)You have listed reason of paying higher dividend in 2013......

No Kunal....although prima facie it seems like that because of high initial debt taken first at the time of formation of spin-off group Accelya in 2007 and then at the time of acquiisition of Kale in FY11, its the cash-debt-structuring of group which seem to be at play here for higher dividend payout.....as i said before, cash from all subsidiaries is distributed to parent and if any fund is required it is supplied by parent....if repayment of loan was the reason then final dividend by AccelyaKale in FY13 was not required as loan was repaid well before declaration and payment of final dividend......still, let's check FY14 dividend payout to confirm this....from accounts of all the subsidiaries of Accelya group which are in operation since 2007, almost entire cash is distributed to parent....however, in case no additional debt is taken by the parent in FY13, then this will be the first year when external debt will be negligible at parent level and so dividend policy will be interesting to watch.....however, it seems logical that dividend payout will be kept closer to 100 % going forward too....

Debt of parent will surely be key monitorable.....

**2) **AKSL has potential to be among trend setters in India. (something like Infosys, Wipro did in early 1990)

AccelyaKale is already a trendsetter as it has one of India's best proven succesful kpo/bpo model......the only thing lacking so far was robust cash generation which is associated with such successful business models and that is what seems to have started post acquisition by Accelya....

[Mahesh]

Hi Prasanna....

Thanks for your feedback......rgdg. your points....

- Since they are the market leaders, they must have close to 70% market share in the revenue accounting space. Not much room for growth in that space, but can grow with the airline industry as a whole.

I doubt they have a 70 % marketshare from global perspective....they command close to 8.4 % marketshare in this space as i have said before also.....Mercator is the largest player in this space followed by NIIT & SITA.

- The biggest point of surprise at this juncture for me and him, was why the net profits doubled for the past 2 years, and the likelihood for it to continue.

over last few years, co. totally shifted to annuity based model....what this model did was it shifted onus on the co. to improve productivity and therefore improve margins....co. used its own products in this model and therefore scope of improvement was tremendous.....the significant growth in margins that you see is the result of this annuity based model wherein because of increase in revenues owing to addition of Accelya, it was able to increase per employee revenue significantly which improved its margins considerably....part of it also might be due to SIS going live in last two years although how the IATA-partnership model is structured that we are unaware...comparison can be drwan with Accelya World SL which is involvedfor BSP with IATA and is also operating at 60 % + margins since FY09....an overview of EBITDA margins of largest subsidiary (second largest is AccelyaKale) over last few years of the group is given below :

	FY12	FY11	FY10	FY09
EBITDA Margin	65.21 %	63.22 %	61.79 %	65 %

It is really clear that the downside from here is limited. There is strong dividend support to the stock, and the possibility of exponential growth is tempting.

I agree prasanna...but, a word of caution, any investor looking to invest in Accelyakale has to remain prepared for wild sort term price fluctuations on either side....although long term story seems intact and there is also likelihood that what we have seen over last one and a half years in terms of wealth creation, has the chances of remaining ontrack even in future, but, its the story for long term....rgdg. dividend support, markets will look for further one year i.e. current FY14 to check whether liberal dividend policy continues in this tough year.....rather than looking for exponential growth which I don't think is possible in FY14, we need to look for steady growth till FY15 with same cash generation.....if this happens then stock has to get rerated further....

Rgds.

Discl.- Hold and looking to accumulate more

[myprasanna]

Atul,

I can certainly clarify more queries. Regarding your queries:

)- Can you tell me the name of the 'new solution for small scale Airlines'? Where did you read about it?

)- Are all those 200 clients airlines?

Mahesh,

(1) Good to be corrected on the revenue accounting market share.

(2) You're right. Sales growth was "only" 40% in the last 2 years, and wealth creation has come from margin improvements.

(3) Is there specifically that makes you believe exponential growth is not on the cards from FY14?

(4) Over the long term - Do you feel the story looks like accelerated revenue growth? Are the triggers related to change in management? They are introducing a bunch of products, and does the story revolve around market adoption? I feel like the above are true, but as you rightly point out the signs are not yet there on the numbers.

Thanks,

-Prasanna

[atulgarg]

Ak is calling the new solution Accelya all inone offer. The link from the BSE is below.

http://www.bseindia.com/xml-data/corpfiling/AttachHis/Accelya_Kale_Solutions_Ltd_031213.pdf

From Accely.com

At Accelya, we help over 200 airline customers streamline their financial processes. We also help them gain insights on business performance using decision support tools and data analytics.

[atulgarg]

I would like to hear Mahesh inputs on growth, but yes, I don't see exponential growth triggers as of now. Growth comes from

1-growth in airlines. (modest at best)

2-new customers. (This will lead to growth albeit at a slow pace. In fact I would like it to be slow, so that Ak reaches its full potential, if a lot of customer are added too soon, it will fizzle out)

3-New modules (pointed out by Prasanna & and need to be understood better)

[kunalpatel_5267]

@Mahesh

Thank you for your detailed reply for everyone's concerns here. It looks you have higher conviction for AKSL.

@Prasanna

Thank you for raising important questions.

@Atul

I appreciate your hard work and providing useful info.

[kunalpatel_5267]

Read recently

The Indian product landscape comprises more than 3,400 companies, with around 500 firms being created every year, for over a decade now, according to a recent report released by industry lobby group Nasscom. The total revenue of the sector is close to $2.2 billion, but is predicted to grow into a $10 billion industry by 2020.

That is close to 25% CAGR growth ahead.

http://www.livemint.com/Specials/5RBZi1qLwMN9v34XTJXxCJ/The-changing-face-of-the-software-products-sector.html

[Mahesh]

Prasanna, Atul...

On your queries.....I am not ruling out anything including, if not exponential, a steady growth.....but, FY14 should be tough for Accelyakale since it has lost one of its major client.....hence, to be on a safer side its better to assume a slight negative growth from the co. this fiscal....story needs to be assessed from there on asto whether I feel despite possibility of a negative growth in FY14, story is worth considering or not....my answer will be yes and that's because of market positioning and technological edge that this co. has......I will only get concerned if margins get affected otherwise I will be staying put in this co. and will be looking to adding more in 560-580 range if bad q2 or something like that provides such opportunity as I feel the stock is worth much more than its currently quoted.......however, don't take my reply as an indication that there are no risks or risks are minimal....not atall, risks are there but I have the appetite to digest such risks as I have build good conviction on analysing this co. including its parent.....but, every investor has to do his own homework and assess the story from his angle rather than going blindly after anyone......I am here to clarify any doubts with best of my capacity and which is under my knowledge limits....

Rgds.

[Mahesh]

today's price rise trigger seems to be the news on bloomberg tv india which says Silver Lake PE is close to buying Accelya....

Rgds.

Discl. - Holding on to entire position with review rate kept at 880

[desinet]

Following is the link to the clip.

http://www.youtube.com/watch?v=f-DxoYU-CZQ

Published onDec 26, 2013

In a deal that could be valued at about $350 million, private equity firm Silver Lake is in talks to buy out Accelya Kale, formerly Kale Consultants, from parent Accelya World Holding. Accelya has been looking to completely exit and had been in talks with Indian IT firms in the past as well. In an exclusive, Bloomberg TV India discusses Silver Lake's aggressive acquisitions in the technology space and its interest in Kale.

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Going by the news item, the valuation of $350 million for 74.6% stake translates into a market cap figure of 2909 Cr.

($350 million x Rs. 62/USD /0.746 = 2909 Cr)

Is the valuation justified?

[Mahesh]

Hi Manish,

As I have said before also, any valuation talk that can be had should logically only be of whole entire Accelya group and not only AccelyaKale....rumours aside, this was and is a great story and sincerely hope it doesn't get delisted...

Rgds.

Discl- Hold

[jk321]

In that case, Won't it be better to sell on this rumour & buy it back as dust settles?

[Mahesh]

If yourquery is relatedto my holding Jatin, then I will not touch my holding till the price reaches 880....at that level i can consider some profit booking....however, this call every individual has to take and in case of any major development even i need to reassess levels....

Just to clarify, I have notfactored insale of Accelya while making investment decision into this co. and sodespite such rumour I will stay put and consider my exit points only based on my previously thought of basis.

Rgds.