I had a quick look at the company, and I have following observations:
First, the company has an impressive growth record in last few years. The revenue grew from 64cr (FY12) to 615 cr (FY17). However, this revenue growth is mainly fuelled by company’s acquisitions. From August 2011 to March 2017, the company has made nine acquisitions.
Second, from current Revenue of 615cr, the management has set an ambitious target of achieving revenue of Rs 2100 by Fy21. The management has hinted in Q4 Fy17 con- call that they have set up this goal with the help of investment banker. I can understand the company setting up the ambitious target (4 years is a long time in technology industry), but relying upon or doing this with the help of investment banker sounds a bit iffy to me and give me, personally, an indication that the company is talking up the share price.
Third, the management has growth minded, which is a good thing for the stock. However, history is ripe with examples when a company management is extremely focused on meeting some specific target or number, they sometimes, go to extreme lengths to meet the numbers. This reminds me wise words from the sage of Omaha (Warren Buffet) “Managers that always promise to ‘make the numbers’ will at some point be tempted to make up the numbers.””
Overall, in my view, the company does not seem to have sounds base to scale up revenue organically, and they are relying on acquisition to get customers or acquire new skills- both things cost a lot of money-otherwise it would not be relying on acquisition to fuel the growth. Due to the number of acquistions, company’s balance sheet (FY17), the intangible asset is worth 153 cr, which is one-third of the current market cap.
By the way, there are not many, I would say hardly any IT company, in India, which has grown by doing an aggressive acquisition. Most of the reputed company rely on organic growth and market as much appreciate organic growth more than inorganic growth in a long-term (McKinsey’s book on valuation…I think).