Intellect Design Arena PICK for 2015


(Srinivasan) #1

Intellect Design Arena is the resulting Company after Polaris Consulting Services demerged itas products division.

It was listed on December 18, 2014 on both NSE & BSE.

Its an IT Product Company focused onBanking, Insurance and other Financial Services. A uniquely focused Products business, Intellect addresses the needs of financial institutions in varying stages of technology adoption.

Its a one stop shop for banking software products.

It has around 200 clients which includes prestigious central banks such as RBI & Central Bank Of Sweden.

Over 45% revenues is derived from US & Europe and balance from rest of the world

As per the CMD, Mr. Arun Jain, its operating margins are around 50% and can expand further. The company spends around Rs 100 Crs in R&D, which must have not considered while calculating operating margins.

There is a huge scope in India for banking software products. After getting RBI as their client, the company is now posed to exploit the huge potential in PSU banks

The Current Market Cap is @ Rs 1000 crs with revenues of Rs 533 Crs as of June 2014 and cash reserve stood at Rs 311 Crs=> Rs 31 cash per share. Market cap to Sales ratio is 2:1.Networth as of June 2014 is Rs 706 Crs => BV of Rs 71.

Other IT Product Companies like Accelya Kale Solutions @ Rs 990 (FV Rs 10 ~Aviation Software) has a much higher Market Cap (@ Rs 1500 crs)to Sales(@ Rs 300 crs) Ratio of 5:1 and MPS @ Rs 925 (FV Rs 10 ~Accounting & Publishing Software) has a Market Cap (Rs 1556 crs) to Sales (@ Rs 200 rs) Ratio of 8:1

Polaris Financialas Intellect Design makes street debut, eyes 20 per cent growth


(ASPN) #2

This is an interesting find indeed, but fairly valued at 2x mkt cap to sales IMHO. I wish to highlight about Mastek, which has already announced demerging of insurance (products) business. A quick calculation shows that it still has potential to double from hereon.

_ Standalone Insurance Business (Majesco Ltd) :
_
Majesco Ltd (Insurance) sales for FY’14 = 507 cr
Sales figures for Acquisitions done recently :
Cover All Tech sales for FY’14 = USD 20 Mn = 123 Cr (@USD/INR 61.50)
Agile Tech sales for FY’14 = USD 9 Mn = 55 Cr (@USD/INR 61.50)
Total Majesco Sales (FY’14) = 685 Cr ~ assuming 700 Cr for FY’15
As you are aware, IT products companies are trading at anywhere between 2 to 8 times sales.Assuming Majesco’s Mkt Cap @ 2x gives valuation of 1400 Cr

_ Standalone Software & Services Business (Mastek Ltd) :
_
Mastek Ltd Standalone EPS for FY’14 = 16
Assumed PE ratio = 10
Mastek Ltd Standalone per share price = 160
Mastek mkt cap = 22296262 shares * 160 = 356.7 Cr

** Total Consolidated basis Mkt Cap = 1400 + 356.7 = 1756.7 Cr**
Mastek Current Mkt Cap (as on 22.01.15 closing price) = 945 Cr

Standalone figures & other details taken from http://rakesh-jhunjhunwala.in/stock_research/wp-content/uploads/Mastek_Research_Report.pdf

Views invited from fellow valuepickers.


(Karan Maroo) #3

I had a quick look at the company a few days back (When the price was ~80) and figured that it made losses in the last two quarters. Any idea about how to value such a company / rationale for investing in such a company?

I suppose one needs a strong rationale to have the faith to invest in this company - I am sure there must be one, but its something which I couldn’t figure out on a quick look.


(Hrishikesh Kale) #4

Hi,

I have made p and l projections assuming a 20 percent growth rate as indicated by Jain. R and D increase is 5 percent p.a. and Sales and distribution and admin at 10 percent p.a.

I got the following EPS schedule for the next 5 years.

-6.49 -3.49 5.09 16.72 25.58 36.70

So price targets are in the range of Rs. 367 to Rs. 733 depending upon the PE range of 10 t0 20. So we can expect to earn a return in the range of 26 percent to 45 percent CAGR in the next 5 years.

Year 0 1 2 3 4 5

Sales 640.00 768.00 921.60 1105.92 1327.10 1592.52

GM 50.00% 50.00% 55.00% 60.00% 60.00% 60.00%

Gross profit 320.00 384.00 506.88 663.55 796.26 955.51

S and M 272.00 299.20 329.12 362.03 398.24 438.06

R and D 136.00 142.80 149.94 157.44 165.31 173.57

Depreciation 20.00 22.00 24.20 26.62 29.28 32.21

Finance charges 1.00 1.00 1.00 1.00 1.00 1.00

428.92 462.92 499.98 540.39 584.46 632.55

Profit (Loss) after interest, depreciation & amortization

-108.92 -78.92 6.90 123.16 211.80 322.96

Other income 44.00 44.00 44.00 44.00 44.00 44.00

-64.92 -34.92 50.90 167.16 255.80 366.96

EPS -6.49 -3.49 5.09 16.72 25.58 36.70

PE 10.00 10.00 10.00 10.00 10.00 10.00

PE 15.00 15.00 15.00 15.00 15.00 15.00

PE 20.00 20.00 20.00 20.00 20.00 20.00

Price at 10 PE NA NA 50.90 167.16 255.80 366.96

Price at 15 PE NA NA 76.35 250.74 383.70 550.44

Price at 20 PE NA NA 101.80 334.33 511.60 733.92


(Chandrasekar) #5

I don’t own any stock and looking to buy in the near future.

Is the promoters shareholding being about 32% OK in such institutions? How about their integrity and “minority-shareholders” friendliness? Earlier, I had a bad experience with Polaris shares (10 years back).

Their products looking promising and I’m optimistic that they can become market leaders in due course of time.


(Bharat) #6

ARUN JAIN is one of the most ethical promoter .


(NMB) #7

Hey guys,

Projections are all well and good. But we live in tough times and “projections” should be taken with a pinch of salt. Growing at 20% for next 6-7 years? Such a projection is absurd to say the least.

And how can anyone (OUTSIDERS like us) justify paying 1050cr market cap for a company which made a loss of 40crore in last 2 quarters? Thanks, but NO THANKS!

If someone has to force feed me this stock, I would ‘think’ of buying around 40rs/share where I think the chances of losing are very less.

But at 1050cr market cap, im sorry, but there are a whole host of BETTER companies with proper cash flows which are available for investment.

**Stock price going up doesnt mean the company is good or the investment is justified.

Please let me know if I have missed anything here buddy.

Best,

Neil Bahal


(NMB) #8

And if Cash to market cap is a metric, then something like MOIL, NMDC or Hindustan Zinc are much better plays.

Sonata at 60/share in June 2014 was a great investment as they had almost 37rs/share cash in books and the company had completely turned around. I do not think this is the case with Intellect.

Even today, consider something like RS Software which has similar cash on books but remains highly profitable.

Cheers

Neil


(Hrishikesh Kale) #9

Neil,

I am working in this area (IT BFSI products space) for the last 15 years. I think you have not understood the financial model in an IT products space. They have made a loss, but did you see their quarterly results. They have spent close to 100 crores this quarter on R and D and sales and distribution. In the products space as the products mature R and D and sales and distribution drop drastically. You can check the financials of Accelya kale (products in aviation space) and may be also Ramco systems. You will find that in accelya kale r and d and sales and practically zero.

The growth of 20 percent is actually conservative. If you install a core banking system or a risk management system with a client it is like a toll bridge for the next 15 years. The real money is in the enhancements and maintenance that follows year after year. That is exactly what jain had mentioned when he gave the 20 percent projection. He was banking on what i mentioned above.

Yes there are companies with proper cash flows available in this segment e.g. nucleus or accelya. But look at their valuations. Intellect today is in the stage where they were 5 years back and look at the multiples investors have earned.

I know polaris financial suite and it is pretty good. With the investments they are making expect more deal acquisitions going forward and re rating that will surely happen.

Operating leverage is the key here. All new sales directly flow to the bottom line in a product business. With gross margins at 50 percent and slated to increase to 60 percent in products space there is massive operating leverage gains. Net margins shoot up.

Track the margins for accelya kale to validate what i am saying.

At the end of the day you are betting that their products are installed with more and more locations so that this effect comes into place.

I hope the above will help you in analyzing this stock from a different perspective.

Rs. 45 I am not sure you will get that price :):), with their cash per share near Rs. 30.


(ASPN) #10

Hi Hrishi,

That’s brilliant analysis and projections, especially for somebody like me not exposed to IT / IT products industry. One concern though, the company derives 32% revenues from Europe. Do you see any impact of depreciating Euro on the earnings?

Also request your detailed views on Mastek please. Am more interested in the Majesco part (new demerged entity comprising insurance products business). Are you familiar with the Elixir suit of products? Will it be fair to value Majesco at 2x Mkt Cap to Sales?


(Jay) #11

so what is target expectation in 1 year ?


(ASPN) #12

Dear Hrishi,

Request your views on Mastek pls (Majesco, to be precise, which is going to be demerged soon).

Rgds.


(Hrishikesh Kale) #13

Hi advait,

Sorry for the late reply. I will need to look at mastek. Am not tracking the stock.


(karthikeyan) #14

Hi all,

what about Dion global solution…all views are appreciated

Rgds,

karth


(Vishnu Ch) #15

Considering the latest news about the change in focus of Infosys with respect to Products and Design thinking, I would recommend to read the below article from Oct 1, 2014.

Arun Jain was well ahead of the curve.

http://www.thesmartceo.in/magazine/cover-story/transformation-by-design.html

Thinking of design

For this feature, Jain explained to us what he means by the concept of design thinking.

aItas a four-step process,a he says. aFirst, one has to feel the emotional side of how a customer, investor and employee will react. Second, one has to observe the common patterns in the entire industry. Third, to connect the dots among all these different happenings and finally, unearth the blind spots,a says Jain, adding a theoretical layer to his explanation.

This methodical approach meant that the demerger process went on smoothly from all standpoints. For example, Jain and his senior team conducted informal sessions with various subject matter experts and external consultants on what the regulatory expectations were from a documentation standpoint. Jain says, aWe uncovered a fund of information from such sessions and acted upon the findings. Our thorough work in this regard meant that there were no delays in response from regulatory bodies or the court.a

To be sure, the concept of design thinking is something the company wants to use in both its services and products businesses across processes; right from the macro level, where business, technology, people and operations come together to the level of adding features to a particular product.

The macro vision

Polaris 4.0 also earmarks a new phase in the entrepreneurial journey of Jain. A 25-year veteran in this industry, Jainas day-to-day role now includes that of a coach for his five CEOs. He says, aI am glad to say that weave now attracted the best of talent from the industry. My personal role will be to help our CEOs uncover any blind spots they encounter, be it in strategy, systems, style or organisational structure.a

Additionally, Jain also runs workshops with his team members a project managers and above. Branded Unmukt, these workshops focus on upping the aspirational quotient of his people. aIn addition to skill development, one of the key aspects of building organisations is to improve the mindset of people,a he adds. Jainas theory is that the whole organisation needs to be aligned to specific purposes. If one of the companyas goals is to reduce complexity in the customer environment, this whole thought has to be internalized, by the entire organisation.

With the de-merger almost complete, Jain and his team are now gearing up for the next phase of growth. When Jain used the words asoul of a startupa in his note to shareholders, he was referring to the renewed agility of each line of business, a spirit of entrepreneurship where each CEO is completely empowered to grow his piece of the business and to unearth the potential of a powerful enterprise in its own right.


THE ROLE OF DESIGN THINKING IN DECISION-MAKING IS A FOUR-STEP PROCESS.

Jain wants to use the concept of design thinking across the board, right from macro level decision-making to the level of adding features to a particular product.

Feel the emotional side of any decision

Observe the common patterns (across the industry)

Connect the dots among all these different observations

Unearth the blind spots


Polaris 1.0

Till 2001: Touched Rs. 296 crore in revenue with a deep focus on financial technology sourcing for the BFSI industry__

Polaris 2.0

2002-2008: Touched Rs. 1,099 crores in revenue, focus on IP building, acquired OrbiTech from Citibank.__

Polaris 3.0

2009-2011: Touched Rs. 1,595 crores; complexity reduction for clients, worked with leading global firms in banking, financial services and insurance

Polaris 4.0

2012 onwards: Touched Rs. 2,424 crores in FY 2014. De-merger of services and products division. Deep focus on design thinking as a strategy for execution. Five CEOs hired to scale each line of business.

_
_

Disc: Invested for the long term. Please due your own due diligence.


(NMB) #16

Hey buddy,

Well yeah, I may not understand the business as well as you. But I understand that cash flow is still important and profit is paramount.

I hope for your sake that the company is soon able to justify its 1000cr mkt cap.

Coz, the market wont tolerate losses for very long. There will be a point when investors will lose patience.

To be honest, I wouldnt even dream of touching such a company at such valuations. But at 40 bucks a share…I could be interested.


(Hrishikesh Kale) #17

Neil,

Look at it akin to a power plant during the construction phase. This company is building up products and building up the infrastructure to market them. So expect cash burn for one to one and a half year more. But luckily they have 220 crores in cash to spend rather than going for leverage like Ramco Systems has. Jain is predicting to be cash positive in one years time.
So the expectations have been clearly set and the market has already discounted the same. What we need to monitor is the sales growth and gross margin. Assuming that sales grow as projected at 20 percent per annum and gross margins move up a few percentage point and the sales and r and d expenses keep up with inflation operating leverage will start kicking in.
This stock is for those who are willing to wait for 4 to 5 years. It is a long haul.
I do not think you will get this stock at Rs. 40. The chances are very very remote.


(NMB) #18

Hey buddy,

Yes exactly, this is a longer term play.

Please take my words as a healthy debate and nothing more. My only question is why wait 4 years for cash flows when you have cheaper companies in the same sector which are debt free and have a better mktcap/cash ratio. Maybe something like Sonata whose dividend yield itself has crossed 10% for me as my investment price is very low.

Disclosure:- I own Sonata from 60/share.

Cheers
Neil Bahal


(Vishnu Ch) #19

To jump into the debate, i believe Intellect is a classic Mohnish Pabrai stock - “Heads i win, Tails i don’t lose much”.

As Mohnish says, market confuses uncertainity with risk.
Higher the uncertainity and lower the risk, greater is the probability of disproportionate returns.

There is a definite margin of safety built into the price for Intellect -

  1. Management Pedigree and Deep focus on a single niche domain such as full-service BFSI suite not even provided by Infosys Finacle.
  2. As highlighted by @hrishikesh, cash reserves which indicate the “Capacity to Suffer” - a concept recently highlighted by Prof. Bakshi through his tweet on Tom Russo’s Wealth Track interview.
  3. Most important point is, i classify IDA as Category A/A+ VP stock where it is laying the foundation blocks for disproportionate returns in the future.
  4. Unlike Sonata, IDA has bigger oppurtunity size and the ability to build a durable and sustainable competitive advantage, once the switching costs and/or low cost advantage kicks in.

One could counter-argue that is it worth the oppurtunity cost?
IMHO i believe so. If i have bought right, then i need to sit tight. :smiley:

Disc: Invested for long term.


(NMB) #20

Hello Mr.Vishnu,

Agreed. But as Buffett says, do not buy into something what you do not understand. And since I apparently am unable to see this great future for ‘IDA’, its best I stick to something I understand --> Valuations, Cash flows, ROIC, Dividends & Track Record.

But I sincerely hope you guys get a good return here.

Cheers
Neil Bahal