PART 8
This is a continuation of Parts 1-7 of my analysis on this stock. I’d recommend that you read those parts first before continuing ahead.
In Part 5, based on data and analysis, I had concluded the following three points:
1. The stock has been pumped and dumped
2. The promoters are not trustworthy
3. The stock price can go up in the future
I have explained the rationale behind the first two points above, however, have only touched upon the last point on stock price appreciation. This Part (Part 8) is on this point and is required for the sake of completion of my analysis.
Make no mistake, this stock is of poor quality. Any stock that gets pumped and dumped and where the underlying company practices poor standards of corporate governance (by not sharing material information on time with shareholders like non-existence of contracts, revenues being written off etc.) is most definitely a stock of poor quality. This is a fact. It has been explained in detail in Parts 1-7.
A poor-quality stock in rare cases can still provide very good stock appreciation and I will make a persuasive case that this stock belongs to this group of exceptions.
I want to present the following three arguments on why I think the stock price will appreciate in the future: (This will also help retailer investors / forum members who have been quite patient for a very long time)
1. Supply Demand Mismatch
2. Technical Analysis
3. Fundamental Analysis
Understanding Supply Demand Mismatch
Most, if not all retailers already knew and correctly concluded that the stock has been pumped and dumped in the beginning of 2018 itself. See the link below from Quora which has a huge number of upvotes.
https://www.quora.com/Why-is-the-intense-technologies-stock-continuously-on-a-downtrend-inspite-of-good-results
What retailers do not know is that just because the stock has been pumped and dumped, it does not mean that the stock price will not appreciate. Stock price increase is purely a function of EPS growth. If a stock is of a poor quality like this one, valuation multiples could be on the lower side. Yet, the price will appreciate, if EPS growth occurs and technically, demand for stocks exceeds supply.
To understand demand-supply mismatch, lets break down the pump and dump process:
This process has 4 phases, and the last phase leads to a supply demand mismatch as explained below:
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Accumulation: This phase started before June 2016 prior to BSNL contract announcement. In this phase, insiders accumulated shares for a long period of time at a low rate. You can check AKG Finvest and UNO Metals share holding patterns on BSE website.
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Pump Phase: This phase started on June 28th, 2016 and ended on Feb 9th, 2017. (stock price hit 248 on Feb 9th). During this phase:
- Non-existent contracts’ (might exist in the future) announcements and non-existent revenues’ booking led to massive stock appreciation in a couple of months’ timeframe.
- A sense of euphoria is usually seen in this phase and retailers concluded that they need to own this stock at any cost. (Read messages during this time on this forum itself, as an example)
- Insiders, operators and retailers all contributed to the pump phase.
- Dumping was started by insiders towards the latter part of the phase.
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Dump Phase A: This process started in Feb 2017 and ended on June 1st, 2017. This phase is the first part of the overall dump phase. It is short and leads to a steep drop in stock price (60% drop from 248 on Feb 9th, 2017 to 96 on May 31st, 2017). In this case, retailers were confused as to why the stock is nose-diving and while some of them exited at a loss, many did not sell as they did not understand why the price had dropped (I have already spoken about the poor communication practices adopted by the company towards shareholders in earlier sections)
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Dump Phase B and Re-accumulation: This process started on June 1st, 2017 and ended on July 17th, 2018 when the stock price hit 49 on BSE (80% drop from peak). This phase is a slow, long winded, patience-testing, grinding process where the key purpose is for insiders/operators to take back/re-accumulate the shares from retailers, who bought the same shares at a high price in the first place from these very same operators.
Pump and dumps at a smaller scale also occurs here as explained and proven in Part 6 of my analysis above.
We cannot blame retailers for panicking and letting go of their shares as a) They have lost a large chunk of their investment. b) They worry that they may lose more and c) They see other multi bagger stocks appreciating in price and want to rebalance their portfolio making up for the losses.
The important point to note here is: As shares keep getting reaccumulated at lower and lower prices, supply of shares dwindles. Those retailers who want to sell and move on would have already done so. Those retailers who have decided to stick with the stock will not sell. So, there will develop an acute supply demand mismatch. Demand will always exist as insiders and operators have ample funds. Supply will cease as retailers stop selling. I strongly believe that the reaccumulation phase is also over and ended on July 17th when the stock price touched 49 on BSE.
Here is some data to prove my points:
Proof of Pump Phase and Dump Phase A: Already explained in Parts 1-5 above where insiders dumped shares at a high price (or gave it to others like CSE etc. to dump it for them)
The proof of Dump Phase B and Re-accumulation is: The insiders AKG Finvest and Uno Metals bought back shares from retailers at a price of ~80 and have not run for the exit as per shareholding patterns. (I am sure insiders have bought many more shares). This itself points to share price appreciation as insiders holding on to shares and not running for cover is a good sign. (AKG and Uno hold 6 lakh shares as per the latest shareholding patterns)
The proof of supply diminishing is: Look at trading volume over the last few weeks to early part of 2018 or even 2017. Trading volume has been a few thousand in the recent past (even normalizing for being in “T to T” segment) and it was in multiples of 10000 most of last year and early part of this year.
This argument on supply demand mismatch due to reaccumulation needs to be verified against technicals and fundamentals as well, which I have done in my analysis detailed below.
Technical Analysis:
The chart patterns show that the price did not breach ~50 zones which was a strong support area a few years back. The stock most probably will not breach ~50 zones at all. At the current price, valuations give a lot of comfort, as explained below. Further, insiders holding on to their shares bought at a price of ~80, points to the fact that sooner than later, stock price might cross 80 zones. The stock formed a final “base building” in the month of July between 50-60 zones and is further consolidating. The uptrend started on July 17th when the stock touched 49. This uptrend is here to stay.
Fundamental Analysis:
I will detail out my valuation methodology and potential stock price ranges for different ranges of revenues earned. This might help out other forum members. Realistic price targets can be obtained only from sound valuation methodologies. (and not from WhatsApp messages / other online forums, which are trash)
To value a software product company, one good methodology is to use Market Capitalization/Sales multiples.
The multiple not only changes for different software product companies, but also changes for the same software product company with time. The multiple ranges from 1-10, and it is quite difficult to command a 10 times sales multiple unless the product becomes a benchmark in an industry, around the world.
An early stage start-up might get a Mcap/Sales multiple of 1-2. That is because their revenues are on the lower end compared to the costs. (unless they possess a strong strategic advantage (patents, investments from renowned funds etc.))
A company that is close to breakeven can command a Mcap/Sales ratio of 3. This can be higher only if visibility to pipeline of revenues exists.
Valuation of this stock:
As per the last conference call, of the total revenues earned in FY 18, Annual maintenance contracts revenues formed 85% and new license contracts formed the remaining 15%.
AMC (Intrinsic) Revenues Valuations
A few important points regarding AMC revenues:
- The revenues are legitimate (unlike historical BSNL revenues which were recognized only for pump and dump purposes as detailed in Parts 1-5 above). These revenues have been earned year over year and the receivables have been converted to cash; therefore, the probability is very high that they will continue to be converted to cash in the future
- The revenues are associated with software support, upgradation, answering queries raised by clients etc.
- The revenues are generated from clients with good brands; these clients will keep up their commitments
- The digital CEM/CCM product is critical to the functioning of the enterprise. The probability that an enterprise will continue to use the product year over year is high as enterprises continue to invest in digital transformation
The question is: What is the valuation of AMC revenues?
FY 18 revenues = 55 crores
AMC revenues = 47 crores (85%)
Consolidated annual costs = 52 crores
Since AMC revenues balance out consolidated costs, to much an extent, a Mcap/Sales multiple of 3 can be applied.
Share price assuming AMC revenues only = 47*3 / 2.23 = 63.
Today’s share price is less than AMC revenues valuation. The price is lower than intrinsic value!
Total Revenue Valuations
Here is an estimation of future MCAP’S/ share prices:
Last year, new license contracts totalled 8 crores. This year, the company could double the revenues fairly easily due to the following 4 possible reasons:
- The base itself is low and the company has an experienced sales agent in every region, who should be able to perform better!
- As per the most recent concall, sales agents will be provided additional variable bonuses to incentivize performance and generate more license revenues
- BSNL contract might become existent finally. This contract which has remained non-existent for the last 2 years will not generate revenues for the first half of FY 19. It will become existent in the second half, as per the company (based on Media release of Q1 FY19 results)
- From a qualitative standpoint, demand for products that can enable digital transformation is high. Companies in every country have a digital transformation budget. IT service companies have shown steep appreciation in share price due to digital projects. Every IT service company has rallied in the last 6 months. It is very strange that this company, with an important product that can enable digital transformation and where the use cases for the product are plenty, has not turned around. But the AMC valuations detailed above, give a lot of comfort and any new contract will take the price upwards.
AMC revenues may go up by ~10% due to inflation / new clients’ addition in FY 18.
There are two extreme cases of valuations:
- Low extreme case: New license revenues in aggregate coming to 16 crores. (assuming BSNL provides little to no contribution this fiscal year)
This will take the valuation to = (47+ 0.1*47+16) *3/2.23 = 91 per share
- The best case is new license revenues going up to 30 crores (assuming half from BSNL and half from other clients)
The valuation now becomes interesting. BSNL revenues will come at no additional cost. Mcap/Sales itself might go up to 3.5 to 4, simply based on operating leverage at hand.
Valuation = (47+0.1*47+30) *3.5/2.23 = 128 per share
Valuation comes to 147 per share assuming a valuations multiple of 4.
Therefore, in the next one-year, worst case scenario, share price will touch 90 and in the best case will touch 125-150. Today, share price is less than intrinsic value; intrinsic value being, valuations of AMC revenues which is mostly guaranteed and has been seen year over year. (100% genuine and not fake)
If overall market environment is positive, better valuations are possible. If new license revenues exceed my ranges, you can use the methodology above for calculating new targets. However, valuation multiples may be lower given the history of the stock. Reaching the peak price of 248 might take time and we can forecast only once the company has reached 100-150 zones on new targets.
All of the above is based on realistic and logical valuations, using publicly available information.
Summary:
I have given three different arguments to prove that the stock price is quite low. I have repeatedly said that “We can get a much better price to sell our shares” and now I have logically substantiated my stance.
Just like how the arguments associated with a “pump and dump case” are strong and convincing, I find my arguments related to appreciation in stock price equally strong and convincing. These two points are not at all contradictory purely based on logical analysis.
To conclude: @vij, to answer your question: The nightmare has already ended. It ended on July 17th, 2018 when the stock price touched 49. Now, things have turned for the better, and the case above is convincing. Hope other forum members/shareholders find my analysis helpful.
. No other outcome is optimal.
