Intellect Design Arena PICK for 2015


(Hrishikesh Kale) #21

I agree. The demerger has resulted in focus, which was missing when they were the products division of polaris.
The problem of having services and product under the same roof is the differential economics of both businesses. Product division is looked upon as EPS diluting in the short run because of the investments in R and D and sales. This results in pressure from shareholders. Generally in the quarterly results obsessed markets this is a big dampener. E.g. KPIT is struggling with the same issues with its huge investments in their automobile product development being looked negatively by the market. So generally you tend to fall between two stools.
With a focused approach expectations are set with clear disclosures. I request the boarders to go through the investors presentation on the IDA website. They are extremely transparent and have given clear commentary on any diversions from their projections (E.g. sales have increased just 12 percent this quarter because two deals finalization got postponed). One of the deals was realized a fortnight back (HDFC bank Sri Lanka).
I have tried to use a discounting model to find its valuation assuming that they walk on their projected path.
Cash EPS : -13.52 1.41 68.51 144.25 238.69
Discounting them at 15 percent gives me a valuation of Rs. 192 presently. Though boarders might call it looking too much forward it gives a benchmark for evaluation of projections against actual results.
BTW Jain has projected a 22 to 26 percent growth rate in the next two years and gross margins of 55 percentage. Now there are two aspects to it.

  1. The license fee revenue will be lumpy with deal wins.
  2. More importantly with every installation of say a Core banking system it gives a great view of future enhancement and maintenance revenue streams as an installation of a CBS is usually for a period of 15 years. So unlike a service company there is a high degree of confidence in future revenue streams, so it is just like a toll bridge.
    For those who want the projections please ping me I will mail it across which can be used as a benchmark to map actual results with projections. Cheers.

(ASPN) #22

Wel said @Neil but I beg to differ on the ‘understanding’ part.

What Buffett and Lynch has preached is - don’t buy what you don’t understand. The understanding, imho, refers to the business model, not the paramaters of valuing a company (viz. valuation, cash flows etc). We cannot apply these parameters to IDA as there are no profits as of now. But what about the future?? Thats where deep business understanding comes into play.

Just wanted to point this out. Pls don’t take it otherwise.

To stretch it further, Peter Lynch has given several examples of Doctors buying into Chemical companies or Chemical Engineers buying into Pharma stocks :smile: . The way Hrushi has analysed IDA, somebody working in the Software products space and having deep understanding of business model can only do it. I suspect @crazymama also has IT/ITES background :wink:. And thats why the collective work done on this forum is gives fresh insights and very different perspectives.

Cheers…!


(Vishnu Ch) #23

@Advait_6270 Yup… your suspicions are correct. I am indeed from IT background.

My interest in the stock was piqued by “Design Thinking” approach of Arun Jain, which was ahead of the current fad created by Infosys’ Sikka.

EMEA and Asia Pacific is still under-banked and the oppurtunity size is huge.
In that sense, it is an emerging moat company.

Only question is, can it widen its moat by leveraging the switching costs effect (through a combination of value-addition/tight integration/low cost relative to global peers)?

Disc: Invested for the long term.


(NMB) #24

Hey guys,

Obviously I hope you guys make some serious money on this one. I just do not like to get into turnaround plays at such valuations.

A couple of other turnarounds in my portfolio included Indo Count in 2014, Nitin Spinners & Uniply this year as I spoke to the management and they clearly laid out their plans and I could see that the turnaround had begun. Best part was that Cotton prices fell from $2 to $0.58 and that made the investment even sweeter! :smile:

Best of luck!

Neil Bahal


(Manish) #25

Have you tracked Dion Global ? Whats the company’s background ?


(Vishnu Ch) #26

Intellect Design competes with Infosys and Tata Consultancy Services on core banking systems. In global transaction business, it competes with Fundtech and ECI, in capital market treasury with Misys and Sunguard and in insurance with Guidewire.

The company has around 125 clients and across all the businesses with clients across 45 countries. The anchor clients are all top four UK banks Lloyds Bank, Bank of Montreal in Canada, he said.

Intellect Design gets revenue through a one-time licence fee, annual maintenance contract fee and implementation service, he said.

The company also serves Citi Bank in Europe, he said.

The US is very difficult market because Intellect Design competes with local American companies like Fundtech and Mysis for treasury. Their rate card is very different when compared to Indian companies. “If we don’t compete with Infosys and TCS, I am better off and I have a better pricing advantage to clinch deals. So that’s where the initial hurdle of establishing our footprints as reference clients,” he said.

Disc: Invested


(M S S Murthy) #27

IDA may not be classified as a turn around case in the classical scence.The business plan of the company is such that the business is expected to produce loss for first Two years to reach the critical turnover in the third year to earn profit .


(Vishnu Ch) #28

Annual Report 2014-15 available on the company website.

Interactive Version
http://www.intellectdesign.com/investor/annualreport/2015/index.html#numbers

Normal PDF
http://www.intellectdesign.com/investor/reports/annual_report_2015.pdf


(Jana) #29

Few videos to learn more about Arun Jain: https://goo.gl/jC4YW7

Regards,
Jana


(Vishnu Ch) #30

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/B4C0285D_7A5F_466B_AF95_85345127335A_140839.pdf

I believe the bank mentioned in point 3 is most likely IDFC.
Would like a second confirmation.

Thanks to @hrishikesh for bringing this article dated in 2002 to notice

IMHO, Arun Jain was the innocent party.
Putting it out in the open for review.

Disc: Invested


(RSingh) #31

On the analyst conference call, the following were some of the takeaways wrt financials:

  1. Targets doubling revenues over FY16-18. Targets $200 mm (Rs. 1,220 cr at current exchange rates) in revenues by FY18
  2. Gross margin target of 55% - 60% by FY18
  3. R&D expenses to remain at $20 mm a year, with possibility of a 10% variation. Hence by FY18, should be around 10-12% of revenues
  4. No major capex planned
  5. SG&A at a certain revenue threshold (threshold not mentioned) should be 25% of revenues.
    Side note: this could be a moving threshold as Arun Jain also said on CNBC today that its possible that IDA would re-invest excess margin for a few years to gain market share which will ultimately result in long-term annuity business. That seems reasonable for a product company and some analyst notes also reflect this as a prudent strategy

So long-term normalized PBT margins could be 20%, not necessarily achievable in FY18. But with a possibility that some of this margin is consciously re-invested for higher revenue growth, the financial trajectory of profits itself is difficult to gauge. Another way to look at it is that if the Company is demonstrating growth rate in excess of 25% and gross margins are inching from the current 50% to 55%-60%, then the model is potentially working.

Disclosure: invested.


(Hrishikesh Kale) #32
  1. The market of banking products is the biggest in all sectors as banks have been tardy at adopting technology changes. Many of them are still working on old legacy systems.

  2. The revenues are from three sources
    License fees
    Maintainence services
    Professional services

  3. Gross margins from license fees is the highest followed by maintainence and finally professional services.

  4. Big guns like Temenos have progressively increased gross margins by increasing percentage of license fees as a portion of total revenues. They have outsourced professional services to partners like cognizant, infy etc.

  5. IDA has just 10 percent of total revenues in license fees versus 25 percent of Temenos. So more deal wins is crucial for IDA to improve gross margins

  6. Here are the valuations of Global peers EV/Sales
    Temenos 5.8
    ACI 3.5
    Bottomline 2.9
    Ifs 2.1
    Nucleus 1.2
    OFSS 6.7

IDA has EV / Sales of 1.64. So if you see it has a huge gap in valuation from the market leader - Temenos


(Varadharajan Ragunathan) #33

thanks hrishikesh

I was looking at intellect and then I realized I already hold accelya at the same mcap and that’s a vastly superior business that’s quite undervalued simply because they have had 18 months of stagnant growth.

since you are from IT industry, can you find out about the general outlook for aviation vertical and about accelya’s solutions - for the same mcap, you are getting a business that generates 4 % dividend yield, has ROE of 8 0 % + and pays out 85% back as dividend.


(M S S Murthy) #34

I believe that the following two aspects will inhibit a continuous and significant growth of Accelya Kale in the long term .

  1. Nature of industry segment - civil aviation is known for a not so good performance even you look at it world over for past 50 - 60 years not withstanding that the scale of operations have grown enormously .
  2. The size of market for ticketing and related services in civil aviation is limited .
    As against this , Banking Software Products offers a relatively bigger market in an expanding and profitable industry .Due to this I forsee a great future for IDA.
    Request Mt Rishi Kale to react .I know thaboth the companies are under his radar .
    Note . I have no investment in Accelya Kale .I have significant investment in IDA .

(bibhu ashish panda) #35

There is some new item in today’s ET print that Mr. Jain is planning to sell his stake in Polaris consulting business, the services side, as he is planning to focus more on the product business.


(Varadharajan Ragunathan) #36

Agree on the aviation market but then competition in BFSI is much higher. Tough to say - I could argue for the tail winds in civil aviation now - lots of traffic, low crude oil prices and cross border trade is highest.


(M S S Murthy) #37

I would consider that the intention of Me Jain to plan for sale of his stake in Polaris- if found to be true- is a big positive for IDA . Such sale of his stake would reflect the confidence of the promotor in the potential success of the product business of IDA .


(M S S Murthy) #38

Coupled with the stake sale of Polaris , Mr Jain is reported to have added further shares of IDA to his existing holding of ~37% .His recent statement is more specific about the growth prospects of IDA ,30% for next one year or so .


(Hrishikesh Kale) #39

Well the big shark Rakesh jhunjhunwala has doubled his stake here. That explains the run up of almost 70 percent in a fortnight.

Using the discounting method I presently value IDA at 209. This is using a 24 percent growth rate for the first three years.


(chirag jain) #40

@hrishikesh

RJ was holding 3.74% stake ( if i am not wrong ), so you mean to say he has doubled to ~7%.

At what price he bought ? If you have any Idea

regards

chirag