Here is my detailed assessment of performance; as always, I would like to hear your and other shareholders’ thoughts.
The results are not up-to-the mark. As per the company, results cannot be compared quarter over quarter, instead they should be compared across fiscals. This is because the main driver of revenues, the software support/maintenance income, has seasonality. (Most of the annuities turn up in Q4, that is why Q4 FY 2018 looked so much better).
Comparing Q2 FY 2018 vs Q2 FY 2019 performance, both revenues and EPS have seen de-growth. This explains the lower circuit on Friday.
As always, in the press release, the company talks about how well they performed and how rosy the pipeline of contracts is. (You can open any press release for any quarter in the past, and there is a full page on how well the company has performed and will perform, which has never been the case!!). This, of course, demonstrates a lack of competence. A more competent and mature approach would have been to state: “We understand that we have not performed well and that the new contract license revenue run rate is not as promised. We are still optimistic about the future (if you really are, that is) because of the following reasons……. and therefore expect to grow at X% over this fiscal”. This would have demonstrated a grip on reality instead of peddling poor performance as “healthy performance”.
But then again, there are bigger problems than “How to phrase a press release/media release”……like, ………massive destruction of retail shareholder wealth, for instance
So, where do we go from here?
I have decided to give this some more time for the following reasons (as always, I do not want to influence any one’s buy/sell decision):
Comparing H1 FY 2019 to H1 FY 2018, EPS has increased from -0.53 to 1.6. Trailing 12 month standalone EPS is now 1.86 –(-0.53)+1.6 = ~4. But consolidated EPS, assuming no changes from last year, will be around 2.5
On the plus side, given that the price has already reduced from 248 to ~40, it should find a bottom soon (In other words, the pump and dump is almost complete). On the flip side, given that Q2 performance is not good, the stock price might reduce in the near term and if NIFTY were to break 10000 to the downside, then the stock will break its previous lows, unless of course some news around new contracts comes in.
I think the stock price movement is less about financials/valuation and more about manipulation/orchestration. If you have read Parts 1-8 of my analysis above, then the case is strong that the stock has been pumped and dumped, or in other words, it has been manipulated. Whoever had to gain from the manipulation, has already gained. If more money has to be made, stock price has to go up, if that makes sense. In other words, I still believe the “accumulate-pump-dump-re-accumulate” theory described in Part 8 of my analysis above. Whenever the re-accumulation process is completed, the stock price should go up, unless the financial statements themselves are manipulated and there is much more than what meets the eye.
Finally, my intent is to present only “data-driven-analysis”, that is be unbiased and avoid unfair criticism. My objective assessment of the company is that
- They do have a good product (it has been recognized by Gartner and Aspire) which points towards a competent software development team.
- Further, they also have a good software support/maintenance team; that is why clients continue to pay annuities and keep re-using the product.
- The sales, marketing and business development teams are “under-performing”. Here is detailed analysis to justify the point: As per the company, the ratio of AMC revenues to new license revenues is 85:15. So, last year they earned 55*.15 = 8.25 crores in new licenses, that includes upsell/cross sell of customer experience related modules to existing clients. The company has offices and just one sales agent in Dubai, Florida, London and Singapore. Let’s assume they have just one sales agent in Hyderabad. 5 sales agents in total generate 8.25 crores annually, which is dismal. A sales agent’s CTC is around 150-200K USD in total, in developed countries. The sales agent is barely justifying his/her CTC. (I am assuming only one sales agent in India while the company has an entire marketing team). The promoter keeps giving the same excuse to justify the repeated poor performance: “He has just one sales agent in every continent”. But the data is telling us that this is not the problem. The problem is that the one sales agent is not performing as per expectations and if this were to be addressed, the revenues would have been higher. This problem can only be addressed by a competent management.
Long story short, I think highly of the employees of the company as per the analysis above. But the incompetence of the promoters/management just ruins it for everyone. The same company, but with better promoter/management quality, would have resulted in a much better outcome for shareholders. (This holds true for most companies that have destroyed investor/shareholder wealth)