Kellton Tech - Growing IT company


(Sridhar ) #143

Hi Rajeev, so as per the article, SMAC services providers(or companies which focus on adding intelligence via AI and analytics) stand to gain in the coming future, then Kellton is in the right space.

But the question is why the website or ARs don’t talk about its AI capability? I doubt if they are on the look out for AI companies as they rely very much on the existing infrastructure of IBM Watson. And even if they utilize analytics in a particular project, since the service is sourced from another entity(IBM) there isn’t a great value addition individually from Kellton. Probably this is the reason for margins not improving over many quarters. Invite fellow investors’ views to understand the situation better.

Disc: Invested


(Rajeev M. Parashar) #144

In the last concall, they mentioned they are foraying into AI and blockchain.

Going by what’s mentioned on their website,

  • Their AI services seem to be geared towards Retail/B2C Businesses. Only one of those services use IBM Watson.

  • For analytics, they use Hadoop MapReduce, Cloudera, HortonWorks; Hive; Tableau, Splunk.

The value addition comes from how these tools and technologies are exploited to fulfill the client’s digital transformation needs. How good kellton really is at these technologies is difficult to answer. (The IT Companies tend to show off their capabilities through their blog. Kellton’s blog is filled with numerous technical posts on Drupal modules, and mostly non-technical, generic ‘why digital transformation is good’ kind of posts. I would like to see a few ‘technical’ posts on the ISMAC stack.)

The low margins may be a function of

  • aggressive hiring (as argued by @vibs6615) & a dearth of talent with skills in digital technologies.

  • From the concall - “Margins on enterprise work is lower, but agree to those projects if there is a potential of larger digital work from the client & their industry peers.”

The actual investment risk arises from the acquisition fueled growth. The high profile clients give some bit of comfort. We just have to wait and see if the management walks the talk, and more importantly, if the pick up in the US Economy is for real.

Disclosure: Invested.


(vikrantmehta888) #145

Did anyone attend the conference call? Can you please share the highlights of it?


(vagator10) #146

While the P & L continues to grow, the balance sheet throws up some questions:

  1. Debt is ~ 100 Cr used to fund acquisitions, but there is receivables of ~ 146 crores. So why go in for long term borrowings? the receivables should be good enough to help go debt free.

  2. Very high goodwill. If the net profit margins are only 10%, is the company overpaying for its acquisitions? usually Kellton doesn’t reveal the cost of acquisitions.

  3. If the SMAC space is so hot and in demand, the margins should be higher. 8K nets about 20%. 10% tells me that the company doesn’t have strong purchasing power.

  4. The QIP if I remember correctly was to be for US $ 3-4 Mn. Does the company not have this level of cash?

  5. Promoter pledge doubled. Although the overall level is still ok, it tells me that the company is cash starved.

Invite others’ thoughts.


(Rajeev M. Parashar) #147

Q4FY17 Concall Notes:

  • Added 9 new clients in the quarter.
  • Orderbook: 6 Months visibility. Average deal size has gone up by $100k. Managed to reduce the number of customers by only a handful. Hope to reduce the number of customers in FY18 by a more significant number, while increasing the revenue.
  • Lenmar acquisition done for customer base (BNP Paribas, Deutsche Bank) to increase the revenue share from the BFSI segment (BFSI segment adopts newer technologies faster than others). Lenmar has $11M Revenue, 10% EBITDA.
  • Total Headcount: 1400. Increase in Headcount in the quarter: 130 - out of which 100 from Lenmar (20% on H1B Visa), 30 hired in India (People hired from traditional IT will take about a year to be productive in digital technologies, & hence the hit on standalone margins this quarter).
  • Technology excellence Group in Gurgaon is always on the lookout for new and emerging technologies. If we invest in 2-3 emerging technologies, hope is that one of them will pay off. Forayed into AI, blockchain & deep learning which already have paying clients.
  • Competition: 1. With regards to Indian IT Biggies: A Bank in Ireland has Indian IT Biggies working on their traditional IT, but has asked Kellton to come up with their digital transformation/strategy. 2. Smaller companies have deeply specialized niches, but they can’t do a holistic big picture digital transformation like Kellton.
  • Forex Pressure: Majority of loans in dollars, hence a natural hedge
  • QIP/Fund raising will be done only when the market sentiment towards the IT Industry improves. Acquisitions, if any, will be done from internal accruals and debt (Debt is easily serviceable as of now, but don’t want to keep on taking debt to make acquisitions). D/E at 0.6 is same as last year although the debt in absolute terms has gone up.
  • Increase in promoter Pledge to raise debt for Lenmar acquisition. No other tangible assets for an IT Company to raise debt from a bank.
  • UP Govt still finding its feet, but they are positive about the mSehat platform & may increase it to beyond just 5 UP districts. They also want to use the platform for other services. No specific timeline on when this might happen. Talking to other states to implement mSehat. There are other platforms which have been built for other states which can be leveraged and replicated in any other state. Marketing will done this year.
  • FY18 Guidance: 15-18% organic revenue growth, no guidance for inorganic growth.
  • As of today still maintaining the 2000 Cr revenue, 16% EBIDTDA, 9-10% PAT margin guidance for 2021.

Disclosure: Invested.


(aashish2137) #148

From the concall, things look pretty much in control. What is the reason for laggard performance in the market other than general slowdown of IT sector?


(Rajeev M. Parashar) #149

I can think of a few reasons:

  • It will take time for the management to win back the Market’s trust after previous instances of aggressive revenue guidance to possibly jack up the prices to do a QIP.
  • The company’s inability to do a QIP at these prices will hurt its ability to do further acquisitions. The market doesn’t believe the company can grow organically.
  • Low margins compared to 8k Miles even though both are quite different in what they do. Low margins also mean the market doesn’t like company to take on debt to make acquisitions.
  • Significant jump in Goodwill on the B/S. This is bound to keep going up because of the company’s penchant for acquisitions. The market fears a possible impairment at some point.
  • Possible lack of understanding of how different digital technologies are from the traditional IT.

(aashish2137) #150

Kellton has been extremely range bound between 100-115 in the last 10 trading sessions. Can someone throw light on the technical aspects of this?


(vikrantmehta888) #151

I am very keen to understand technical analysis of Kellton too! It goes down by 4-5%on a bad day with hardly 20-30K volume, usually it is down by 1% on hardly 10k-20k volume, on surge days it goes up by 5-7% where volume is always near 2-3L.
What does this signify? Once i had read about the Thrust indicator which is simply multiplication of change in price by volume. This Thrust indicator is highly positive for Kellton for past 10 months, (i dont know before)
Also, the automated technical analysis shows the stock oversold. I am really not sure how to relate this “oversold” technical indicator to best buying opportunity.


(rahulparekh22) #152

Hi, while going through my monthly analysis of my holdings - two things strike out for me in Kellton now:

  1. Grandeur Peak Fund has been aggressively increasing its holding in Kellton: probably to take advantage of the underlying negativity which is holding the stock down - which is a good signal and which sometimes we investors miss out on because we think more about the short term negative overhang than the big picture

2)Also, the recent fall in stock price (feb-june) is accompanied by very low volume. In my opinion, a sustained fall in share price with low volume does not signify much or shouldnt be focused upon much - but thats my opinion again

3)Lastly, at a P/E of around 10-11 one year forward, for a company growing organically at 10% QoQ is cheap in this market and this probably falls in the Shankar Sharma category of limited downside vs much much higher upside atleast from these levels


(shadd) #153

FPI’s have increased stake by 1% to 4.92.
Is it a good bargain to buy at 102?
Disc:invested in small qty.


(vikrantmehta888) #154

Hi, which quarter are you talking about? Q1FY18? Because, i dont see any change for the last quarter.


(Pramod) #155

Forbes


(Sarabjeet Singh) #156

On long term charts, it looks like Kellton is getting ready for a breakout:

Views invited if you can spot something else as well in charts.

I invested recently based on tech indicators for entry price and I believe long term story looks good from a 3–4 year prospective. At this price risk seems to be covered to a major extent.

Thanks to everyone who contributed on this thread as it helped me a lot to understand about this company.


(newrb) #157

One aspect I am unable to understand about Kellton Tech is why their net margin is low. They should be able to command higher rates for work in new technologies - digital, AI, Machine learning etc.

I dont own Kellton. For those interested in this company, I would suggest to dig deeper to find out why margins are low.

Indian biggies are still catching up in digital and new age technologies. The key here is whether client consider them to be providing end to end services including consulting. While developing an app is not difficult, for a lot of clients, moving to digital involves transformation of their business processes and complex integration with their existing back end landscape. The key players to watch out for are Accenture and Cap Gemini, as they have been investing quite heavily in this. I also wonder whether Kellton can compete with the likes of Accenture.


(vikrantmehta888) #158

Even after 52 days since the end of Q1, these guys are unable to declare the results date, what a sad management! They need these many days to cook up the books?


(Rajeev M. Parashar) #159

@vikrantmehta888
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=32931d98-5a46-41f3-b4a9-7b07689479ce

Company is implementing IND-AS and keeping in view SEBI Circular dated July 5th, 2016 allowing extension by one month for submission of Financial Results pursuant to Regulation 33 of SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015 for the quarter ended June 30th, 2017, the Company will be submitting its Financial Statement for the quarter on or before September 14th, 2017.


(Sarabjeet Singh) #160

Nice growth shown in quarterly numbers:

http://www.bseindia.com/xml-data/corpfiling/AttachLive/026fa83a-5052-4e48-88ef-374f3b634450.pdf

Disc : Invested


(Parag) #161

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).


(Parag) #162

I came across interview of Prof Sanjay Bakshi where he is talking about patterns to avoid

Sanjay Bakshi: Well, I have a longer list of patterns to avoid as compared to success patterns.

Serial acquirers: I generally dislike companies which grow inorganically, especially when they take a lot of debt to finance the acquisitions. While some platform companies - Berkshire Hathaway being the prime example - are huge wealth creators, generally speaking, platform companies destroy value. So one needs to be skeptical while evaluating serial acquirers.