MPS Ltd

MPS uploaded the investor presentation
http://adi-mps.com/Investors/pdf/MPS%20Financial%20Performance%20FY15%20Q4%20Ver2.0.pdf

Thanks dhwanil for summing up the MPS concall.

I too heard the concall and was pleased at the confident tone of Rahul Arora regarding ramping up of revenues.

One thing I cant get is why they cant grow fast organically. Is it due to entrenched competitors or is it the nature of the business?

Overall the strategy of the company seems good. Diluting stake at high prices and then using the funds to go for acquisitions which fit their requirements.

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Thanks Dhwanil and Mahesh

Hitesh - This is the same question I was thinking about. To me, it seems like clients are fairly sticky in this business, and to grow your share of wallet, you need to penetrate more areas and clients for which you need to acquire companies. So the overall pie is growing at an average clip; but to get a higher share of the pie, you need inorganic growth.

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@hitesh2710 , @karanmaroo

Three things to it ā€“ first, the pie itself isnā€™t growing aggressively and second MPS has lost out on the opportunity because of transformation phase it went inā€¦it is no longer in top 5 in the segmentā€¦SPS last year went ahead of it, Newgen & Lumina are just few steps away and new players like TNQ and Amnet are emerging in 100 cr.+ scale clubā€¦even in platform space, impelsys and hurix are emerging strongerā€¦so while MPS stagnated because of transformation it went into, its peers grew aggressively and took maximum advantage of the rising pie and shrinking competitionā€¦

Infact I am surprised at the prominence given by Mr. Arora on pricing pressures, as if that would have been the case, all would have experienced it and would have not grown that aggressively (have already given YoY growth figures of prominent peers before)ā€¦We have the pure volume growth figures of only SPS with us and from that no pricing pressure is evident ā€“ in FY14 it grew 34 % in value terms and 24 % in volume termsā€¦in FY13 it grew 29 % in value terms while again 24 % in volume terms ; in FY12 it grew 22 % in value terms and 19 % in volume termsā€¦

Evenif we consider such high growth registered by SPS to be majorly because of its parent Springer, but, Newgen and other players have not grown at a lower pace either which demonstrates their firm footing on groundā€¦

This brings us to the third reason and that is ā€œbeing closer to clients mattersā€ā€¦almost all the managements, except TNQ are based in US or have close connections thereā€¦MPS completely restructured its overseas set-up once it got acquiredā€¦post that it slowly build presence in US via acquisitions and stationed Rahul Arora & his wife Yamini Tandon thereā€¦FY16 will therefore be crucial testament for organic growth ; infact I will say if company canā€™t grow in double digits organically in FY16 then its best to play this story for inorganic growth onlyā€¦recent organisational changes are also interesting in this regardā€¦from the commentry it seems order book is already gained and Rahul Arora seems confident of growth but coming two quarters will be crucial to observe.

Rgds.

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To add, Aptara and Innodata, the two largest players with which MPS wants to close the gap and reach to their revenue scale within 3 years, are very aggressive and have strong middle-level management resources which MPS is lackingā€¦publishing white papers, participating in industry awards, doing indirect marketing and constantly remain in the mindspace of clients are very important things that make you an indispensable part of the clientā€¦MPS is much stronger in offshore and is much weaker in onsite and its onsite strength which will drive revenue while its offshore strength that will drive marginsā€¦a well balanced approach is what is desired from MPS and letā€™s see if it can achieve that.

Rgds.

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Hi Dhawanil,

Thanks for summarizing the concall details. Its great to hear Mr. Arora. and given their good track record with the acquisitions till now, it will be interesting to see what they do with the bigger acquisitions coming up.

As per textbooks and history, acquisitions are not easy and can bring trouble tooā€¦but at the same time there are cases of CEOs who have done exceptionally well with the acquisitions. In this case its good that Mr. Arora has a substantial owner stake and from the concall interaction seemed very careful on not committing a mistake and doing an acquisition just for the sake of doing it :smile:

Ayush

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@ayushmit I canā€™t agree more with you. Growing inorganically is a slippery path and not many have traversed that path successfully. Mr. Arora, does have an exemplary record on that front but that does not preclude any failure going forward.

However, the comforting factor is that they are taking their own sweet time and not saying ā€œyesā€ in hurry (and I hope institutional investors too acknowledge the same and does not push the management to deploy QIP proceeds in fixed time frame). Also, they are quite clear in what they want and at what value. That, at best, reduces the probability of going wrong!

However, if they get it right, the sheer return that they can generate on the additional capital deployed will make this story very exciting. At the moment the odds seems to be slightly tilted in favour of investors.

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Thanks to all of you for this insights. But as David einhorn would say, ā€™ how do we get an analytical edge over the othersā€™ ? and stop believing just what the management says - not that I do not believe them, but I feel far more secure if I can validate it with an independent data point.

is it possible to talk to a competitor, ex-MPS employee to see how easy it will be for MPS to :smile:

  • push this new platform
  • move clients away from SPi, new gen etc.

I had got feedback from a competitor that MPS will struggle for topline growth as low hanging fruits have all been plucked out and it did prove right. I want to get to the real bottom of this -

I also know that there are also very easy, small acquisitions as the industry is already consolidating rapidly, So acquisitons from now on will have a lot of hair - debt, profitability issues, growth etc. which are not easy to handle.

I am just inverting - what makes us so confident that they will deliver from hereon ?

Disc : invested but looking to add more
Thanks
Varadha

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I find that MPS is in phase similar to eClerx is in. Both are struggling to growtheir traditional businesses resulting in acquisitions to grow. eClerx management had said in a concall that most of KPOs find it difficult to grow in the same domain after sometime. This strategy will most certainly bring inherent volatility and will remain dependent on their integration skills.

@sumi00,
eclerx & MPS have different issues altogether and so it will not be proper to compare and draw any conclusion.

@varadharajanr
What makes me so confident that MPS can deliver from hereon is :
(1) The Strategy :
ā€“ Current management acquired the company in a messed-up situation (at a scale of USD 32.4 mn.),
ā€“ turned it around with a small topline hair-cut (7 %), [in FY13]
ā€“ regained the scale upto acquired stage (via acquisition in FY14) and on that scale worked at second best industry margins, [in FY14]
ā€“ acquired more to surpass a decade back scale (FY06 = 35.5 mn.) while operating at same margins as also maintaining debt-free, cash-rich status [in FY15] and
ā€“ simultaneously implemented investor friendly policies which made its marketcap rise ten fold and
ā€“ then raised funds enough to double the current scale at just ~10 % equity dilution.

All these looks simple when written down in words as history but is truely commendable. Now, since in past we have such a good example of implementing right strategy at right time, its only two milestones remaining to be scaled to reach top 3 position in the segment and that are acquiring right companies and integrating them well. If you hear most of the recent concall commentries carefully you will be surprised to hear how many times Mr. Arora has stressed on two aspects ā€“ ā€œitā€™s very important that we get this (acquisition) rightā€, ā€œwe donā€™t commit any mistakes as its easy to get carried awayā€. After seeing the track-record detailed above and with the guy (who has final say on any acquisition) himself very careful that he doesnā€™t do any wrong or commit any blunder, it will take a very big mistake on his part to not do this in a right way.

(2) High Promotersā€™ Stake at 67 % :
When promoters stand to loose more than minority shareholders, seldom a rational, dynamic management makes mistake.

(3) Early Lifecycle :
Except high dividend payouts, we have still not seen any typical signs like splits, interviews to media by management, wide-spread secondary market participation by fund houses, etcā€¦ Even if you look at concalls, widespread participation is not there from well known research houses. If the company is for the long run as management is indicating and if it wants to position itself amongst top 3 in its operating segment, then current stage seems to be only the early stage of entire wealth creating lifecycle (may be second stage) and this to me is crucial as if the business sustains, scales via organic or inorganic moves, maintains debt-free status and continues with investor friendly policies then in the long run such stories get disproportionately valued when real visibility comes.

(4) Cash & Monetizable Asset :
With 175 cr. cash already on books and 30 cr. worth of Bangalore property which management has indicated since long that it wants to exit and no possibility of keeping this cash idle as management itself has indicated that it wants to aggressively use this cash over next two years to become top 3 player in the segment, if management is able to use this cash wisely, then at current 223 cr. scale, future seems very interesting unless they throw cash around (via needless unrelated acquisitions) or burn cash (via losses or interest payments) ; possibility of both look remote to me right now.

(5) Proactive Management Moves:
When I gave a deep thought to recent organisational changes implemented, I realised how practical and serious the current management is for the future of MPS. Company is now running and moving fine at decent margins and at this stage the most important event that could make or break the future of this company is the use of 150 cr. cash. So although it seems Mr. Nishith Arora has given a good platform to his son to now take the reins but actually he has completely dedicated himself to focus on the most important event that could make or break his company. This seems a very proactive move to me.

(6) Peers Growth :
Almost all the 60 cr.+ scale peers of MPS are showing healthy growth in double digits over last few years which indicates that industry is not that bad. Its just that MPS has to put its own house in order and play catchup with them.

Having said all these, story of MPS could be at risk in case an acquisition brings with itself the following :
(1) Very Low EBITDA Margins in the Long Run :
A long-run, permanent low EBITDA margins below 15-18 % will be a disaster for the valuations of the company.I am assuming a steady-state EBITDA margins of 23-25 % for the consolidated entity as on such a high scale sustaining 35 % margins might be difficult.

(2) Low Dividend Payout :
In case any acquisition brings with itself high debt or high losses which in the long run affects dividend payout then valuation on the bourses could definitely suffer.

(3) Mispriced Acquistion :
Although possibility of this is rare, but, in case 150 cr. worth of cash that is available is not used wisely and is used to overpay any acquisition, entire story will change.

(4) Significant Standalone Degrowth :
Although possibility of this is also very rare at current scale but in case company looses any significant client then despite acquistion the growth might not show up which could affect valuations as also future fund raising.


In all these Varadha, we have assumed only 5 % organic growth and if that surprises on positive side that could be added bonus. You see such scale isnā€™t possible in the industry in which its operating in unless you have wide service offerings as also you enjoy core vendor status with all the major publishers as parent industry is very concentrated. If the things were to worsen for specifically MPS, then it would have been done so far but that hasnā€™t happened. Post acquisition, it arrested negative growth in FY14 by growing in cc terms by 3.3 % (I am talking about standalone numbers only) and now again in FY15 at 6.6 %. However, there is no denying of the fact that peers, especially Indian peers, are growing very fast organically and that could be seen as both positive as well as negative. In case industry as general now stagnates then MPS has only inorganic avenues for growth but at the current stage it seems to have scope for both, organic and inorganic growth (FY15 numbers of peers are still not known).

To conclude, there are many variables to track, but the amount of cash that is with the company atpresent as well its past (post ADI acquisition) tilt the odds in favour but it will be only and only acquisition profile that will be crucial for next move.

Rgds.

Discl. - Invested

Note ā€“ This is not a Buy/Sell/Hold recommendation and is just part of a general discussion post an event. No investment/divestment decision should be based on this.

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Interesting take on MPS vardha and mahesh.

One possibility not covered is MPS selling itself to some worthy suitor. Looks remote currently but not out of the realms of possibility.

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Hi Vardha,

Your questions are very valid at this point of time given the companyā€™s track record on top line growth in last couple of years. Sharing my views on what I have gathered so far

  • Considering the consolidation in the industry that is happening, Scale is greatly important to ensure that the company continues to grow. I personally feel that lower scale (business per client, clients/service offered) may actually be working against the company compared to peers. - The only way to achieve this scale is Inorganically for MPS. From whatever I understand of the business, once you get an entry as ā€œcore vendorā€ in a company and start offering a service, typically it is a sticky business. The service/platforms are so intertwined with the business processes that clients may not prefer to switch core vendors as long as you are performing satisfactorily. Hence, it is very tough to get entry as ā€œcore vendorā€ of a big client (Mr. Arora also alluded to this in concall while talking about win with a big client) I do not have any doubt that if MPS is to reach to the top 3 slots and take the competitors head on, it must grow inorganically.

  • Secondly, it is important to keep the context in mind. As Mahesh has rightly mentioned, for the current management, the first priority was to put its own house in order before they take a big leap and that surely was not an easy task. They have done a commendable job on that front. Even if you refer to previous calls, only last couple of calls, management has mentioned that they are now focusing on ā€œgrowthā€. In fact, in last concall, Mr. Arora acknowledged that the ā€œtransformationā€ phase is over now

  • Thirdly, and to me most importantly, as an investor, why should it matter if the company grows organically or inorganically? What matters to an investor is that the business generates sufficient free cash flows from its operations and management deploys the surplus capital efficiently to generate decent returns on the same. Hence, if company uses additional capital to buy out revenue of USD 20 million having margin of 10% for USD 10-15 million and improves the margin to 30% over couple of years while continuing to grow the acquired business at decent pace of 10-15%, and in the process generates 30-40% RoCE, I as investor would not have no qualms about it!

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The book Outsiders by William N Thorndike Jr, describes 13 outstanding CEOs who created tremendous wealth for their shareholders. There a lot of them took the inorganic route when they got good deals and even diluted equity when stock price was suitable to pile up cash. And some of them often bought back equity when things were in their favor.

Nishit Arora reminds me of some of them. We might be in the early part of the journey.

Till now he has done exemplary work turning around the company and taking it to the next stage. Guys like Ayush who must have got in early must have made tons of money in this one.

As dhwanil pointed out, as shareholders we should not be worried about the acquisitions if they are designed to add to shareholder wealth. I like the way he diluted equity when prices were attractive and now he is sitting on a nice cash pile to deploy when he gets fat pitches.

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@hitesh2710
MPS selling out itself seems unlikely, atleast at current stage, mainly because of lack of proper acquirerā€¦who will buy the company or find value in it ā€“ any publisher wonā€™t be interested as once ownership changes from neutral ownership to vested ownership contracts will not flow to it (as was the case under Macmillan era) ; any tech major wonā€™t be interested because of the scale involved as the largest player in this space is just worth 650 cr. INR and for such a scale a very specialised focus is required (in case parent publishing industry itself resumes aggressive growth then someone could get interested but itā€™s also highly unlikely)ā€¦both the larger players in this space are dealing with their own set of problems so any acquisition of MPS by them also seems remoteā€¦
Its only PE players who will be interested to acquire substantial stake in MPS as they love to invest in such niche companies which operate at high margins and generate good FCFā€¦possibility of them coming into picture seems likely in either second round of funding which will be larger in quantum and that might take place around FY18ā€¦or via recent acquisition (from 150 cr. QIP funds) wherein MPS might acquire controlling stake in such companies which are funded by PE players.

@desaidhwanil
Your third point is perfectly right theoretically but practically, when we look at as an investor it is rational to get concerned of too much inorganic growth in the absence of organic growthā€¦organic growth signals robustness of a companyā€™s internal business model whereas (only) inorganic growth suggests dependence of a company on varied external factors to sustain and grow (this is the reason why I am still hopeful as almost all the good peers of MPS like SPS, Newgen, Amnet, Impelsys, Hurix, etc are showing organic growth which makes me believe industry dynamics are not that bad atleast as far as players with significant Indian presence are concerned)ā€¦an organic growth, evenif its only 8-10 % accompanied with high EBITDA & PAT margins will always get more rewarded than possibility of 30-40 % inorganic growth accompanied with uncertainty regarding its turnaroundā€¦

You see dhwanil in real life its not easy to find often acquisition targets like MPS (even I am surprised till now that how Macmillan sold MPS so cheap with all the hard assets it had !!)ā€¦even in case of acquisition of MPS, if ADIā€™s dehradun facility had not been there up and running, such a quick turnaround was impossibleā€¦hence, as you pointed out, such targets worth USD 20 mn. having margin of 10 % donā€™t get sold at USD 10-15 mnā€¦why they will get sold out ??unless there is possibility of 40-50 % negative growth or are loaded with debt so at PAT level are making lossesā€¦so far you have seen only acquisition of the scale of max. USD 2-3 mn. and significant growth with such acquisitions isnā€™t possibleā€¦all such acquisitions were on the verge of closing down if they donā€™t sell out soon and so turnaround with a negative topline growth is possible with them but significant topline growth is very difficult to achieveā€¦

As MPS moves up to USD 10, 15, 20 mn. acquisitions which are worth that , i.e., have scope for revenue growth as well as chances of working at high margins, acquisition price will get that much higherā€¦Since its targeting US based acquisitions, at such a scale its not easy to just acquire and move considerable work offshoreā€¦in case if any company does that there will be resentmentā€¦in case MPS acquires only majority control and doesnā€™t acquire complete ownership then there could be management differences and integration issues involvedā€¦like these there are many variables which are uncertain and therefore its but natural to get concerned for inorganic growth.

Rgds.

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I would like to point out following points from concall

  • The revenue growth last year was 18% excluding currency effects.
    Sometimes they book and order at lets say 63 and realize it at 62.5.
    This optically reduces the numbers.
  • They have added 2 new clients that have a potential to generate multi million dollar revenues. One was through the acquired company and the other was on their own. He was very proud of the fact that this was done during the time when the big publishers are trying to reduce the number of vendors.
  • I agree that the reorganization is very well thought out. Rahul Arora
    will work on organic growth, closer to the clients. They mentioned ā€œthere is a strong growth momentumā€
  • Nishith Arora said that the margins can expand if the revenues grow. ā€œSo revenue growth is the keyā€. This means that they are putting a lot of focus on revenue growth.
  • The target of 80-100mn USD revenue was mentioned as a number they want to get close to. This is where the 2 bigger competitors are as of now.
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CVC is all set to acquire Sercoā€™s Indian operations (formerly Intelenet) and merge with SPI Global and list within 6-8 months. If this merger fructifies, it will possibly be one of the largest mergers in India.

Serco had bought Intelenet in 2010 from Blackstone for around USD 634 million. It is now planning to sell the company because of financial crisis. Barring a couple of assets in the UK BPO business, entire erstwhile Intelenet has been put on the block. There have been multiple discussions and a proper and formal bid process was launched. CVC, a UK-based PE player, has emerged as the frontrunner. All discussions and due diligence has been completed. CVC has also put in a non-binding bid and a term sheet may be signed soon.

CVC has a portfolio company or rather it has been invested in SPI Global, which has been looking to come into India for some time. Now, CVC is looking to merge SPI Global and Intelenet. Once the merger goes through, CVC intends to list the merged entity, which is likely to be above USD 3 billion. It is also looking at an IPO listing in six months.

Read more at: http://www.moneycontrol.com/news/cnbc-tv18-comments/cvc-emerges-frontrunner-to-acquire-erstwhile-intelenet_1481161.html?utm_source=ref_article

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Mahesh, how is this relevant to MPS??

@vnktshb
SPI Global is one of the largest players in publishing KPO industry and is a peer of MPS.

Rgds.

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Recd annual report yesterday. The management commentary is very gung-ho.

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Annual Report 2015 link attachedā€¦first time post acquisition of MPS by ADI, such a comprehensive AR is made with detailed commentary on both history and future. Even some future numbers are talked, on which management was very conservative till now. Confidence on aggressive revenue growth seems to be increasing at management level.

http://adi-mps.com/Investors/PDF/MPS%20AR%202014-15.pdf

Rgds.

Disco. - invested

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