Agree with your point that major CAPEX except acquisitions is unlikely unless some major top line improvement is foreseen in which case it will again be beneficial…regarding domestic opportunity I don’t agree as in your example of school books moving to tablets, more established domestic player like Repro might benefit more than MPS as MPS will have to invest a lot in acquiring domestic clients in which case margins might suffer…but anyway it’s not MPS focus as otherwise CEO would not base himself in US…
Valuations are getting very attractive at less than 15 times FY16e EV/EBITDA but a lot will depend on nature of acquisitions…the long time taken to acquire the company out of QIP proceeds has reduced margin of error considerably for MR. Arora and even a slight mistake on that front might not be taken kindly by the market…however, unless a blunder is committed, correction might be more in the form of time correction rather than price correction…but, in case of a right decision, scope of appreciation seems tremendous and your contention that at current rate odds are more in favour of reward seems logical…
Corporate governance and IR is excellent and the only missing link the acquisition – I hope a good acquisition gets announced by q2fy16 numbers.
Thanks Mahesh for your reply, 1 question though for my clarity of thought -
Why are you using EV/EBIDTA for valuing MPS? I think I also see in other threads like PI that you are using this metric for valuations, please can you explain the rationale. Thanks.
I’m OK that he is taking time to zero-in on the acquisition target. Better to wait for the right opportunity to pounce (fat pitch) rather than swing as we shareholders want him “swing, you bum” - as Warren says. But yes, as you said, after taking so much time the margin of error has reduced.
Also, in the current environment where 1) Publishing industry is at the cusp of change - there are bound to be opportunities as the promoters would like to sell out and take money out given the uncertainty 2) Slow down in global growth.
I use variety of multiples to evaluate appealing quotient of an IO for me…EV/ebitda and cash conversion % wrt ebitda are two of the important ones…
This is because EBITDA reflects the real earning potential of the business unless there are some hidden consistent down the line extra ordinaries whereas cash conversion % wrt to EBITDA reflects quality of the earnings of a company…will explain here with a simple theoretical example…
Say we have a company with CMP 600, 20 cr. equity capital (2 cr. shares of fv 10 each) 500 cr. revenue as of today with 30 % EBITDA margin with 50 % EBITDA to ocf conversion and which has made front ended investments for future growth because of which its net debt on books is say 500 cr…its future potential is 20 % p.a. revenue growth over next 5 years with 1 % expansion in EBITDA margins p.a. with CAPEX requirement at 40 cr. p.a…
With this what we will have is at the end of 5 years its revenue will be ~1242 cr. with 35 % EBITDA margin and a debt free status.
Now as on date at 150 cr. EBITDA, and with 8 % depreciation rate and 50 cr. interest payment and a 34 % tax payment, we will have its EPS at 19.8…so at CMP of 600 its P/e will be 30.3 which might look expensive but it’s EV/EBITDA will be only 11.3 which might be appealing…
Now calculate its figures 5 years down the line, when depreciation would have got reduced to 6 % of sales, interest pay,net will be 0 because of no debt and tax rate will again be at 34 %…so with an EBITDA of 434.7 cr. it’s EPS will be 118.8…so at 11.3 EV/EBITDA then, it’s P/e will be only 20.6 which might look appealing at that point because of company’s consistent growth track record…
It’s a theoretical example and practical examples are not that simple.
You rightly said lets keep our fingers crossed and hope for the best.
Thanks for taking time and explaining elaborately. Let me take time with an example and understand the above post - may be I will do this with MPS itself.
So far, I have been using EV/EBIDTA as a metric to evaluate CAPEX extensive companies.
Might be a silly question… But what would be the opportunity cost for an early investor to still hold on to MPS?
If one were invested at 100x levels for more than a year (assuming no taxation from capital gains), would it make sense to switch now to better growth stocks or do you forsee MPS to be better valued at current levels to deliver the next stage of growth?
Also had a chance to talk to someone i know from digital publishing industry, he said the prospects of growth in US looks extremely promising wherein the average vendor spends have seen increase by about 1.5x with strengthening of dollar. However Europe seems to still struggle a bit where vendor spends are low.
From current rate I see limited downsides for MPS so opportunity cost purely depends on what other opportunities you have at this point of time because I see scope for good appreciation even from here on for MPS because there seem to be many ammunitions still left in company’s arsenal…key monitorable is how well company uses the cash it has whenever it does…even if management can generate less than half the returns from acquired company than it generated in case of Macmillan then wealth creation for investors could be significant which even at current corrected rates many high quality management mid & small caps might not be capable of delivering…company should not burn cash in any way by making high loss making acquisitions or by buying hgh debt…if at FY18 dreamed scale of management, a 25 % + EBITDA margin is maintained consistently with healthy balance sheet then current valuations will look extremely appealing for not only long but medium term investors too.
Rgds.
Discl - Invested in MPS
Note - This is not a buy/sell/hold recommendation and is only part of general discussion.
My only worry is the amount of time the management is taking to deploy the QIP proceeds and with no news whatsoever about it (the upcoming Q2 results and concall could throw some light)… The waiting time is too much and i must say that this is truly testing one’s patientce
On a personal note I had missed out on opportunities like Jubilant Lifesciences, Kitex and 8k miles but i believe that this is one stock that should be part of one’s long term portfolio regardless of the short term vagaries.
your last line summed it up well Sreekanth, don’t be overtly worried about deploying of QIP money, I don’t think 6-8 months is too much time when you want to make a calculated acquisition. Buying any company is easy, Nishith mush be looking for a distressed one or waiting for valuations or waiting for right fit and inevitably these things take time.
True…if the acquisitions doesn’t materialise in coming few months, the acquisitions done after that will need to be right and perfectly right otherwise a very bad example will be set by the management for the investor community which will be very detrimental for company’s long term fund raising prospects…if management is comfortable of its company’s valuations, then no rationale management with zero debt will dilute equity without concrete proposals and no concrete proposals can take more than six months to seal…In today’s dynamic world, time lost is opportunity lost and so a slight right decision taken late could be as good as wrong when you have already slipped to 10th position from 5th position…I am sure Mr. Arora is aware of this fact and so if he is taking more time then we might see a very good game changer acquisition…let’s keep our fingers crossed.
@ Mahesh
Thanks for your insights, in addition to the above, we must also keep in mind that dollar is strengthening on relative terms which distort the valuations of the acquisition, any further delay has to be rationally justified.
PS: What are the other stocks that you have in your radar?
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MPS results were fairly good.
Revenues up 13%
PAT before exceptional items up 24% to 17.5Cr
Trailing EPS is now 34.8, so at current price of 835, it trades at 24x trailing EPS.
EBITDA margins have come down to 35.1 from 38.7%
Top 5 client contribution has gone up to 70% and top 10 are 88%.
Cash on books is now 185cr.
I attended the concall. Here are my notes
EBITDA margins are down because of the acquired businesses.
Someone pressed the management about the reasons for poor growth inspite of the big opportunity size. Management said that the momentum is slow but numbers will eventually come in. They said that the clients generally test the vendors and then slowly increase outsourcing. Even an existing client, when outsourcing a new kind of work/project, starts small and then scales up.
Management said that they are growing at par with the industry. They said they have USD35mn revenues and the biggest player is USD100mn. (I am beginning to think that they are facing challenges in growing. The response was not convincing enough for me. They should be growing faster than the industry)
Rahul and Nishit reiterated that they wanted to double in size through a mix of organic and inorganic growth. But I felt they were not sure when this will happen. They said that it may take 2-3-4 years or a bit more.
Reply regarding acquisition was on the same old lines. They dont want to overpay. Someone asked that when company raised capital, it was assumed that they were already in advanced stages…but then nothing has happened for 6 months. Nishit Arora said they will not overpay 20% just because the money is there, and asked investors to be patient.
I too have attended the con call and Rohit has summed it up well.
I think it was fairly understood that organic growth will be 10% thereabouts in the near future while inorganic growth through acquisition(s) will be responsible for revenue doubling. With 175 odd crore in mutual funds and with person like Nishith at the helm and with patience the right acquisition will happen, it is only a matter of time. Any acquisition related question is answered by Nishith and rest of the questions Rahul answered.
I hold MPS stocks as per my portfolio thread and I’m holding my position as is, so I may have a vested interest in my posts. MPS as a company has a long way to go. Once MPS attains a certain scale which it is trying to, revenue growth will also gather pace like a snowball effect. The company is trying its best to get into this ‘top tier’ vendor bucket is what I understand.
I missed the concall… someone who has attended it if they could possibly discuss some of my queries here? @ayushmit@Mahesh your take now on MPS story?
Why is the acquisition taking so long? (is it a series of bolt-on acquisitions management is looking at or is it a single large deal?). Typically a situation where you are still nascent stage to acquire companies and deal negotiation not even on the cards you should not be raising QIP!!! (Its a very bad practice!) I hope the PE doesn’t get re-rated for this…
Results of Q2 so far look nothing extraordinary… But why have the revenues grown only by 6%? (11% on CC)? Also the bottom-line looks like a case where management have taken price cuts to grow on volumes?
3.What is the outlook of the management in terms of where they see MPS headed? (you have taken profitability up in excess of 30% the only thing that matters now is ability to grow! preferably organically…)
Let me try and answer the questions. Most of what you have asked is already covered in the thread.
Nisith Arora had already clarified in the earlier call that it will preferably be two or three acquisitions as opposed to one to spread the risks. He clarified on the call yesterday that talks are going on and some of them have fallen through at the valuation stage. To surmise that the money was raised without any acquisition target in mind is a stretch. Price negotiations are the trickiest part of any acquisition and quite a few deals fall through at this stage.
Another interesting point that he raised in the call yesterday was that the sellers are seeking out MPS to sell their companies. Sounds interesting but will have to wait for some meaningful merger to happen before we can take this at face value.
As investors in MPS, we should be clear that the organic growth will at best be between 10-15%. I would personally pencil in 10% for my calculations. Their entire sales strategy is based on farming existing clients as opposed to having more feet on the street and knocking on doors of new clients i.e hunting. This is a strategy that they have consciously adopted to keep the sales cost in check. This is why it is important that they acquire companies which come with a steady revenue source as opposed to say a TSI evolve which had the right people and domain expertise but need to be redeployed on new projects to gain revenue.
The management wants to be a $80 million company in the next 3-4 years and they are working towards it.
Rahul Arora seemed more confident on this call as compared to the one last quarter. However, the management was not convincing on the questions about revenue growth. Not knowing the sales and profit figures of the three small subsidiaries that you have before you come to an investor call was a miss as far as i am concerned.
The slack that the investor community is cutting the MPS management is decreasing with every passing quarter and i hope that the management is aware of that.
Please go through the same and take the discussion forward - for more focused and deeper questioning.
To allow and encourage you to read at leisure/offline, Management Q&As are now available as downloadable PDFs. Enjoy! MPS_Management_QA_Sep2015.pdf (179.7 KB)
Nishith comes across as a very matured businessman as well as a person. His clarity in terms of acquisition target is best in terms of what other top business leaders portray. I strongly believe the company’s current strategy is best that it can do in the current position except that I’m not very enthused in the long tail that they have which contribute revenue in terms of lakhs. I wonder how much management bandwidth is ‘wasted’ in managing these accounts. Do we have at least an instance or a few where 1 account from these tail accounts graduated into a million dollar account? There could be few dummy accounts with no revenue contribution and MPS would have kept them alive to continue the relationship.
but i believe that this is one stock that should be part of one’s long term portfolio regardless of the short term vagaries.