Super efforts in first collecting and then compiling the inputs from management/business in BQ/MQ sheets. I truly believe that BQ/MQ sheets compels one to look at the businesses in more structured manner and help one identify his/her blind spots in investment thesis.I have benefited immensely and am sure if one is disciplined enough to follow it with all sincerity, the rewards are bountiful. In fact, I feel (or rather wish!) that all the new threads initiated on VP shall have this templates filled in before is is approved. That forces the initiator to do plenty of work before presenting it to the forum which can improve the quality of discussion and participation.
Coming to MPS, I think the BQ/MQ sheet very well highlights the distinctive features of the business and management and makes a strong case. So, I will focus on the risk factors and disconnect in the story…
- Management has highlighted in the concalls/it’s interactions that there is a clear trend of consolidation of vendors for the industry and MPS is on the right side of such trend
First, if the publishing outsourcing industry is growing at 15% (And if we believe so is the growth for relevant STE segment) and the peers/competitors are growing much faster as Mahesh has very succinctly highlighted with data from competition, then what explains the much slower growth rate for the company and still it ending up on the right side of the consolidation move? In order to be in right side on this trend, shouldn’t it be growing at more than 15% in USD terms to support this hypothesis? Last 3 years, growth is much below this number.
- IF i am inferring correctly, the BQ/MQ sheet implies that MPS business has high entry barriers, the business is sticky and the there is limited competition.
How do we reconcile the above characteristics with the fact that the business faces and will continue to face the pricing pressure from the publishers as indicated by the management? In my limited understanding,if all the three above characteristics are present in a business , it is typically a price setter and not a price taker! As management indicates some whehre, their budget for outsourcing remains constant, However in the same budget, they will get more and more work done. This again is a disconnect, we need to factor in while assigning the business BQ category
The risk because of this as I see, tomorrow if the rupee appreciates significantly, will the pendulum shift in favor of smaller yet long existing players in the industry which have currency advantages thus hitting the twin blow to MPS/other players’ businesses due to lower margins and negative operating leverage (due to lesser volumes)?
BQ Category: Personally, I feel that MPS belongs to a business with B+ quality with management smarts. If they are able to pull of the technological edge as per hypothesis and other players lag in that (as of now we do not have any evidence of proving that other players are not as strong in technology platform as MPS), it may move to A category business.
On lower organic growth I have slightly different take: I think, what is missed by the market today is small but incremental changes happening in terms of client inroad made (top 10 Client contributions), new “core vendor” status won (2 new wins recently), offering gap being filled in (Element and TSI acquisition). All these should be seen in the context of “low contrast effect” and the small incremental gains made from these developments will lead to a tipping point in couple of years which will propel into a higher growth trajectory of above industry growth rate.
Disclosure: Invested. Allocation- 7%; Average Buying price:330