Another good pick by @hitesh2710, the stock is going re rating it seems, if q4 rate is maintained in fy17, it still looks undervalued even if one assign 10 PE
DISC : Tracking
https://karisma.karvy.com/images/2016/Allsec_Annual_Report_2015-16.pdf
link for co’s fy 16 AR.
3 Likes
Allsec results out today and predictably are decent.
Topline increases to 72 crores in q1 fy 17 as compared to 51 crores in q1 fy 16.
Net profit increases to 13.12 crores in q1 fy 17 from 3.9 crores in q1 fy 16.
EPS (not annualised) for q1 fy 17 is 8.61 per share.
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Hiteshbhai, that’s a blockbuster set of quarterly numbers. I had made a dipstick entry a month back, but now scared due to the recent sharp run-up. Do you still expect turnaround to continue over next few quarters ? How do you see it now, valuation-wise after this rally and good numbers? Thanks…
Hi Hitesh,
Just want to understand, how do you get hold of such opportunities ? Use of screeners, research reports, input from fellow investors, or any other medium ? As companies like this are fairly not known, just curious to understand what process is being followed to dig such stories and further research.
Regards,
Amit
sandip,
If u look at sequential results since March 2015 there has been a consistent improvement in topline and operating profits till now. So I expect them to do well going forward too. As far as I know this HR outsourcing biz is a kind of sticky biz bcos if I were to employ someone to prepare my company’s payroll, I would not want to change these guys frequently bcos I would consider the salary record of my employees as a privileged information and would not like it to pass through a new company very frequently. So in that sense each new customer acquired would keep adding to the topline for a long time.
Results till now have been quite good. Last year full year EPS was around 20 and this year has started on a good note. Even if the company were to maintain the last couple of quarters momentum in next 2-3 quarters we can be looking at pretty decent topline and bottomline figures for FY 17.
And the run up u in price u mention has been consistent with earnings only. Trailing 4 quarters net profit has been close to 40 crores plus whereas market cap has been 430 crores. So I guess not much re rating till now.
6 Likes
amit,
I think the initial idea came from this thread only. What struck me was the chart pattern when I saw it around april - may 2016 when it had broken out of an inverted head and shoulders pattern with a nice rounding pattern. And when I looked into the results what struck me was the consistent q on q improvement esp in topline. Other than this there was not much info on the company. Looking more revealed that it was into HR outsourcing and that it had had its fair share of misadventures. But atleast the balance sheet was not having loads of debt as is usually the case with companies having a bad time.
And at around 160 odd levels the market cap was 240 crores whereas the profit of last three quarters till dec 2015 was 16 crores. So the bet was that if things kept on improving the stock could get cheaper even if price went up and thats how its played out. q1 fy 17 result keeps the faith going.
disc: invested.
7 Likes
Hi Hitesh,
Thanks for sharing the thought process used for finding this story. I entered this stock around the same time at 140-150 levels seeing the top-line growth. For me what has been impressive is that the company has managed to maintain healthy margins in the last 2 quarters. Generally in the BPO space, margins are hard to come but Allsec is proving otherwise. Given other parameters like promoter increasing stake in March quarter, Carlyle holding almost 30% stake, etc the future looks to be bright for this company. My question is what PE multiple would be suitable for such a growing stock ? Especially since margins are improving and pretty decent. Is a re-rating possible or will it be stuck into a 10-12 PE range (which seems quite low for company delivering such results)
Disc: Invested
sanket,
I guess its difficult to predict what kind of PE Allsec can attract going ahead. For me its not a big problem till the growth keeps coming along. Usually markets tend to take time to assign higher multiples but when the process starts it usually ends on the other pole with a lot of euphoria and fanfare.
I think a key determinant for re rating besides growth would be dividend payout policy. (if and when that call is made.)
8 Likes
Thank you Hitesh ! This was helpful.
I am not tracking ALLSEC but I saw one of their building on the main road in Janakpuri, Delhi 2 days back. And they have this huge poster in front of building through which they were inviting people looking for BPO jobs and those who qualifies will get instant job offer.
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BPO story will not get re-rated significantly from here in current environment where biggies like HCL and Wipro are commanding a PE of just 15 and smaller players around 10. So that puts a cap on re-rating unless these guys are doing something very unique.
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You are largely correct but we need to keep in mind that Allsec’s biz is slightly different compared with plain-vanila BPO. WIPRO and HCL provide IT enabled services which are crowded and competitive as well. Allsectech has non-voice and critical functional processes like payroll which are repeatable and scalable with higher margins. They are also trying to break into data analytics. I am betting on good dividends once their capital reserve is fully recovered from earlier losses. Both promoters have their own Venture capital investment ops so they would like to take some cash home like eClerx or even MPS. However, Carlyle would want to recover its losses and might push them to do some M&A so let’s see how it plays out.
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Everyone player does non-voice processes and data analytics. There is nothing niche about it.
Only difference is that they have a small base (courtesy pathetic execution in past) and this time around they may be having a better handle on execution. So this may show up us faster growth in near future compared to successful players.
Even you look at larger players like First Solution and Hinduja Global, they trade a similar PE.
They are yet to get to their 2006 levels prices. Not relevant but just to highlight that they have missed the bus.
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Q1 PPT, the story looks better than I thought.They had rental income of 5.5cr last FY which is not available this year. They grew profits in Q1 despite MAT adjustment of 2.33cr.
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So I came to know about this company when Hitesh Sir mentioned about it in his portfolio, Then upon looking at the numbers I was interested in finding out the reasons for the QoQ incremental profits and the profit margins etc which were out of the ordinary for a BPO company. So I have made a SWOT analysis based on my research and understanding of the company as per below.
Strengths:
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Company does HR payroll and HR related outsourced works along with other BPO buisness. Some companies I managed to find using Allsec are Aircel, KPMG, Tata international Limited, Wells Fargo, Tesco, Mondelez, More, STAR TV network,Retreat Capital, etc. These are big companies who give steady revenue stream.
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Assuming that Allsec has a per employee based payment structure, Any employee growth in the client company will lead to a incremental revenue for Allsec too.
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Company has ISAE 3402 Type II , ISO 27001:2013 and PCI DSS approvals. These approvals are required for payment card and consumer financial data protection. Any Normal BPO wont be able to get financial buisness due to non compliance of these approvals. Also these are Conceptual level based Audits eg: Servers OS, software, Switches, firewall used, and information Security training and compliance for developers and Staff etc.These will be difficult to be obtained by established players as will require a major Overhauling of their IT framework. All these approvals are checked on periodic intervals.
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Since It is essentially an extension of the client Company even though they may not be the lowest cost provider. The client will hesitate to switch because of the Time and opportunity cost. Also as mentioend in point 3 , Since it is related to financial Data Clients will prefer to stick with a Known and reliable vendor. Thus Company is able to have Higher Operating margins.
Weakness:
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Still depends on export revenue for 27% of total.Any slowdown in these or Indian companies will affect Allsec also. Mitigation is having a diverse customer base which the Company seems to have.
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Manpower dependent buisness model. Their attrition rate is 37%. Mitigation is having a solid process for replacing employees. This the company seems to have. Also this is a Moat as New BPO companies will take time to develop such process.
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Also emplyoee cost is 64% of total. This may come down as Company Scales up in Size.
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Scaling up the business will have huge capex for infrastructure. Company has scaled up in the past, However company needs to be cautious about the same as it has suffered hugely because of sudden decline in buisness. Company seems to be a bit cautious about the same as in the AR they mention as taking only those Buisness which offer Sufficient margins.
Opportunities:
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In the present scenario , They offer a lot of value addition to fast growing companies as they can outsource the Non Critical tasks to Allsec and focus on their Business.
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It will grow proportional to the underlying clients.
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Nowadays Financial Data is digitalised and there is a growing demand for Information Security in Organizations. Allsec is perfectly situated to take benefit for complying with these requirements.
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Other Companies will Offload Payroll and financial processing to Allsec to take advantage of the financial Compliance. PCI DSS compliance alone will cost around 25 Lakhs.
Threats:
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Bigger companies developing and offering more feature rich solutions. e.g Eclerx offers similar facilites and also provides analytics and information processing.
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Any Informational/ Financial leak will cause a Huge loss of revenue and trust.
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Slowdown will huge affect the revenues.
During this research I also managed to research on Eclerx which I think has a similar Buisness model and was impressed by their growth. They also have had a great QoQ growth as well as high OPM, ROCE , with Lower Employee Cost around 40%. They also have a moat based on Knowledge processing.
Would love to hear other VP’s feedback on the company and on this research.
Disc: Invested in Allsec and Eclerx
11 Likes
Great post, Alphin. One nit-pick though. The cost for PCI-DSS is not as high as 5 Cr. It can be done for less than 25 lakhs per year.
Neeraj, thanks for the input. I got the cost from searching online. Do you work in IT field?
Yes, our company gets it done every year so I know.
Sorry for the misunderstanding. Allsec mentions they undergo remote Vulnerability testing hence they are maybe level 2,3, or 4.