Intellect Design Arena PICK for 2015

(Parag) #123

I got the same impression when I heard/read the con call. It looks to me that Mr Jain is making a mockery of the analysts who are asking him questions about profitability (I could be wrong though).

The company is capitalising expenses for last two years (I think). It is playing hugely in their favour as lower (or capital expenses) are inflating the profit. The effect of expense capitalisation will disappear after 1 to 2 years then they must show some profit or report higher losses.

Based on what I heard on the call, it does not looks like they would start producing the profit on a consistent basis. They may report the profit, but it is very hard to be consistent profit.

(s) #124
Intellect Presentation.pdf (697.9 KB)

(Parag) #125

Have few thoughts of technology changes and “Intellect” in general.

Technology evolution- First, the technology is all-most gets developed in the California, and the early adopters, particularly in the US use it.

Earlier, the technology used to come quite late in India, but due to rapid strikes made by IT industry in general- Indian IT companies are aware technology or use much earlier now. They start developing a new solution or upgrading their product with new technology much earlier now.
For companies like Intellect, they are refreshing all their product to make them “Digital” ready.

I understand “Intellect” has many products catering to the Financial service market, and they are actively upgrading them to be Digital. However, the Digital Focus is not coming at a cheap price. They are investing 10+% of the revenue in their R&D today and the equal amount is in marketing. To make the matter worst, they have many products-some of them have a huge traction and some of them are early stage (loss-making in simple English)- even the company acknowledged that.

I am sure one day they will get good traction, but I am not so sure if they could crack all products. Even if they managed to crack the market, the technology- Digital for example- may change to something new. If the technology change (Robotics, AI, or something which we might not have heard today), is significant- which is often the case- then the company- “Intellect” in this case, is back to drawing board reinvesting in upgrading into the new product.

When Intellect bought the company from Citi and launched “Intellect” in 2004, one would have thought- I certainly did- that they would develop a product which will be remunerative for an investor. Fast forward 13 years, the product is still in development phase, they are still “investing” in R&D and Marketing, and surprisingly still making losses (despite capitalising expenses).

As an investor, I wish the company calibrate investment and generate consistent cash- (as is the case with Accelya Kale). But for a company like Intellect, which keeps investing is so many products at the same time, hoping to generate Profit and positive cash flow is still a long hope.

Would I love to hear from a fellow investor about their thought process about Intellect in particular/IT product company in general? (despite capitalising expenses).

Dis- I have tracking position.

(s) #126

Rights @86 and current price show the pessimism. Money is a funny business and surely some smart guys thought of it , not sure when it actually came to existence. Color of money changed in all countries but the system is still the same. Regulatory bodies formulate policies. Banks, NBFC, Insurance , Investment are all subsets of different ways of how people want to interact with financial institutions. Are these institutions going to close down because of automation, my guess is only if we find Aliens smarter than us and have something stronger than USD. So what will happen to these institutions Crypto currency, Digitization of transaction, more intuitive and predictive using Cloud, Big data, AI and security is opportunity for software makers .Robots are surely not going to take over the banks, Chatbots may be first step to get in a polite way by saying how can I make your life easy Is IDA going to fall in that league. Well your guess is as good as mine. The company has dared to think big, that does not make it big. Do we have talent to make it happen, only time can tell. Arun Jain has been bold enough to think leaps ahead, with honorary salary I would like to believe in him and his model even though the only visibility company offers is through the contracts bagged. Capitalization of software development cost if taken into account sets the company back by couple of years to break even. Is it a Buy …Flip the coin

(Gary) #127

My biggest worry is that intellect is not an “intellectual” organization. Arun Jain is good but he’s not Zuckerbeg or Jobs. He can’t attract the best and brightest …and honestly, without that you can’t build great products. Having said that I"m impressed with the work they did in Blockchain for NAB and some of the core banking suite they have with mobile , social integration.

Second, They are far too thinly spread - 20+ products. Look at OFSS , despite the legacy of iflex they never ventured into insurance. Building products requires deep expertise, ability to sell and sustain upgrades, releases, complexity et al.

Third, I am consistently worried about their lack of AMC growth … Product companies have to generate the AMC in a sustainable manner and it seems that Intellect is unable to charge its customers the way SAP or Salesforce can. Without that, they would continually need capital , new customers and rights issues of the kind we saw recently.

DISC ; I had entered intellect hoping they would prove me wrong on hypothesis that you can’t build world class IT products in India. Not a large position though.

(Parag) #128

First, I beg to differ on this part of the hypothesis- “you can’t build world-class IT products in India”. There are successful products companies which have emanated from India. Few years back, there was one Hughes Software (last decade), Oracle Financial Service, Accelya Kale, but they are far and few.

I think many companies have skills but very few companies possess the mentality and discipline to develop the great product.
For example- Accelya Kale is comparatively small (e.g less than half the size of Intellect), but the market is valuing them more than twice of Intellect.

I wholeheartedly agree with your second points. Sometimes I get an impression that instead of focusing on few products and making them the best in the world, companies like “Intellect and Majesco” start spreading their efforts thin over many products. This behaviour looks like “Empire Building” . They keep developing more and more products, burning more and more money. As a result, their road to profitability is far further down the line. For Intellect, they have been dealing with products for more than 15 years, but sill their products are yet to achieve sustainable profit levels.

Note- I did burn my fingers in erstwhile Polaris by thinking that they would develop the great product- which they did not – at least not in terms of sustain profitability so far. However, I am tracking them now and observing their performance from distance.

(Gary) #129

For me world class is SFDC, workday, finacle etc. I doubt if intellect can get even halfway there.

(Gary) #130

Good signs of improvement - I’m particularly happy about the change of focus from deal value to AMC value. And the focus on collections. Their DSO has improved from 180 (!!) days to 150 odd. Although even 150 for a product company is atrocious, at least there seems to be some financial management focus.

(Dhruv Saraf) #131

Hi Gary, i’m an absolute rookie in this sector, so could you please explain to me what AMC Means in this context?

(Dhruv Saraf) #132

Also, why is the DSO so high for Intellect? Im assuming it is due to the upfront payment receive once a year?

(Gary) #133

Annual maintenance charges…something every buyer of software license pays to the seller and provides a steady source of revenue with little operational costs.

(Gary) #134

DSO are a reflection of how they structure the contracts and how well they execute. If the projects are delayed, clients won’t pay and DSO will go up.

(Dhruv Saraf) #135

so two things
1)majority of bank software implementations are still done on site, with the share of SaaS being lower.
with the advent of SaaS, the revenue model for the industry will itself change with license fees turning into yearly payments instead of upfront one tim payments
2)And with the use of SaaS would there be a diruption to the AMC revenue for these companies?

(s) #136

IT business model is changing as a whole. Buy vs rent decision that does not change requirements of deployment and maintenance. Pricing will be a factor of competition and what USP the company offers. Does not seem to be a big threat. More importantly the company is getting decent wins for software in different segments. Indian banking and financial market acceptance will be keenly watched.

(Mehnazfatima) #137

Guys…pl makeup your minds about investment in Intellect…the stock is very near to a breakout. Its quite possible that it may fly out of your buying range…

(khushi) #138

140 could be resistance in near term, but if manages to cross it soon then a pre-result rally possible till 160. Results on 9 November.

Hoping that it delivers better results this time around.

Disl : invested since 2 yrs.

(Mehnazfatima) #139

Today intellect had a twin breakout…it completed a cup and handle / triangle breakout AND it closed above the down trend line…its now a buy on dips and buy on rise stock…reports of order win from HDFC is doing rounds in the market since quite a few days…maybe, that announcement will come and the stock will start rallying from here on…In my opinion its a huge boost for the company, if it happens…because whats good for HDFC should be good enough for a host of smaller private banks and even PSU banks…

As of now its enough for investors to buy with the knowledge that its a fundamentally good company at a technically good price…with a very good upside potential and very less downside risk

discl…invested from lower levels…

(Dhruv Saraf) #140

Tried culminating all the pros and cons in a single place.

Disc : Invested

(nprao) #143

Hi, Any website link to the HDFC win rumour?

(avneesh) #144

Great results.

Sales: 268cr vs 230 cr (YOY / consolidated)
Net profit: 9.9cr vs 14 cr loss (YOY / cons.)

Is turnaround really happening? how can we verify this? or is it just because of accounting changes.

If anyone attended concall, please post your notes.