MPS Ltd

varadharajanr · November 20, 2015, 5:54am

Names masked as I am not sure if those ppl will like it . these are running notes - the reason why I keep it that way is to avoid my own biases - if I get the stock cal wrong, I can go back and interprept them another way and figure out what went wrong with my hypothesis.

I have some interpretations but will wait for inputs from everyone first. None of these guys have biases against or towards MPS and consequently treat these as facts to a large extent.

Inputs from a VP - biz development of a much smaller PBO (publishign services BPO)

Positioning as a full service content solutions provider is
key rather than an outsourced vendor. MPS scores well there.

Aptara – focussing on other industries such as BFSI, Pharma,
HItech and so on – BFSI – for eg., xbrl filing

Spi global is one of the larger players and they hvae the best platform and sales team

Pricing has been slashed –per page over the last few years. so key is to achieve efficiencies through volumes by doing more work processes with the same client.

MPS has strong focus on cost optimization with low value
added work being outsourced to smaller vendors. Also they had acquired a full
service company in the US

A large publisher typically works with multiple vendors like
MPS, aptara

Most of revenues comes from existing customers or large
publishers – slow cycle to get a new customer.

Publisher’s market is quite challenged – not easy to get
traction – companies look at every cost saved.

Only certain companies have scrapped projects and focusing
on optimizing their digital strategy. Challlenges like open source content,
funding and book rentals are putting pressure on these publishers Companies
have stopped producing content itself as things like book rentals, crowdsourced
content are hanging industry dynamics quite a bit

I was referring to this initiative

Market size is about $ 1 Bn –not growing - may be 2-3 %; 60% - of the work
comes to india – Philippines is next; then you have third world European
countries – like Romania, bosnia – India is the largest and won’t go away for a long tme

e-learning is challenged in terms of profitability as publishers themselves are struggling to make money there.

Inputs from an ex-employee of MPS

Publishers are very conservative –

Marketing in these organizations are not very strong – very
technocrat driven.

Want to push down prices ever year;

Very labour intensive/skill intensive environment

Manual intervention needs to be brought down – figuring out
a way to take care of the changes in work flow can be an efficiency driver. its purely a function of how you can increaes billing per resource through intelligent technology intervention - so its a good CTO who differentiates one guy from another. MPS is improving but still behind SPI

Inputs from a senior guy in a large competitor

MPS Platform – overhyped - too little too late

Services – content – reinvent the content

Tap the content earlier to increase deal size form a client

For eg:

Author handling

Editor services

Pre-press

Post press:

Conversion

Re-purposing

Database enrichment

Content enrichment – adding photos

without these squeeze-ins, additional revenue growth is going to be difficult.

Donald · November 20, 2015, 11:01am

Thanks Varadha.

As mentioned let’s get the focus tighter to compare apples to apples, as far as possible. SPI global has BPO ops as well. So better to focus on TNQ, Newgen Knowledgeware and SPS.

I am independently getting contacts at Chennai. Will come down for a day or two when I can spare some time post doing my homework on the above.

Rokrdude · November 21, 2015, 3:44am

A good article on reasons for Pricing power in hands of publishers in case of scientific journals

The possibility to increase profits in such an extreme fashion lies in the peculiarity of the economics of scholarly publishing. Unlike usual suppliers, authors provide their goods without financial compensation and consumers (i.e. readers) are isolated from the purchase. Because purchase and use are not directly linked, price fluctuations do not influence demand. Academic libraries, contributing 68% to 75% of journal publishing revenues , are atypical buyers because their purchases are mainly controlled by budgets. Regardless of their information needs, they have to manage with less as prices increase. Due to the publisher’s oligopoly, libraries are more or less helpless, for in scholarly publishing each product represents a unique value and cannot be replaced.

Scholarly publications themselves can be considered information goods with high fixed and low variable costs. Regarding academic journals, fixed or first-copy costs comprise manuscript preparation, selection and reviewing as well as copy-editing and layout, writing of editorials, marketing, and salaries and rent, the two most substantial of which, manuscript writing and reviewing, are provided free of charge by the scholarly community. In that sense and contrary to any other business, academic journals are an atypical information good, because publishers neither pay the provider of the primary good—authors of scholarly papers—nor for the quality control—peer review. On the publisher’s side, average first-copy costs of journal papers are estimated to range between 20 and 40 US dollars per page, depending on rejection rates which neither explains open access publication fees as high as 5,000 $US (e.g., Cell Reports by Elsevier) nor hybrid journals, where publishers charge twice per article, i.e. the subscription and open access fees (e.g., Open Choice by Springer or Online Open by Sage Publications).

In addition, the Ingelfinger law, initiated by the publisher of the New England Journal of Medicine in 1969, prohibits authors from submitting their manuscript to more than one journal. Although the law was initially created to protect the journal’s revenue streams and has become largely obsolete through electronic publishing , it is still a universal rule in academic journal publishing, often enforced by copyright transfer agreements. Hence, each journal has the monopoly on the scientific content of papers it publishes: paper A published in journal Y is not an alternative to paper B published in journal Z. In other words, access to paper A does not replace access to paper B, both papers being complementary to each other.

Variable costs of academic journals are paid by the publisher and, as long as journals were printed and distributed physically, these costs were sizeable. In the print era, publishers had to typeset the manuscripts, print copies of journals, and send them to various subscribers. Hence, each time an issue was printed, sent and sold, another copy had to be printed to be sent and sold. However, with the advent of electronic publishing, these costs became marginal. The digital era exacerbated this trend and increased the potential revenues of publishers. While, in economic terms, printed journals can be considered as rival goods—goods that cannot be owned simultaneously by two individuals—online journals are non-rival goods: a single journal issue that has been uploaded by the publisher on the journal’s website can be accessed by many researchers from many universities at the same time. The publisher does not have to upload or produce an additional copy each time a paper is accessed on the server as it can be duplicated ad infinitum, which in turn reduces the marginal cost of additional subscriptions to 0. In a system where the marginal cost of goods reaches 0, their cost becomes arbitrary and depends merely on how badly they are needed, as well as by the purchasing power of those who need them. In addition, costs are strongly influenced by the power relations between the buyer and seller, i.e. publishers and academic libraries. In such a system, any price is good for the seller, as the additional unit sold is pure profit. All these factors explain the different and often irrational big deals made between publishers and subscribers, with university libraries subscribing to a publisher’s entire set or large bundle of journals regardless of their specific needs. Through these big deals, university researchers have been accustomed to, for almost 20 years, having access to an increasingly large proportion of the scientific literature published, which makes it very difficult for university libraries today to cancel subscriptions and negotiate out of big deals with publishers to optimize their collections and meet budget restrictions.

Source1 The Oligopoly of Academic Publishers in the Digital Era

Academic Journals: The Most Profitable Obsolete Technology in History

The music business was killed by Napster; movie theaters were derailed by digital streaming; traditional magazines are in crisis mode–yet in this digital information wild west: academic journals and the publishers who own them are posting higher profits than nearly any sector of commerce.

Academic publisher Elsevier, which owns a majority of the prestigious academic journals, has higher operating profits than Apple. In 2013, Elsevier posted 39 percent profits, according to Heather Morrison, assistant professor at the University of Ottawa’s School of Information Studies in contrast to the 37 percent profit that Apple displayed.

This lucrative nature of academic publishing comes at a price–and that weight falls on the shoulders of the full higher education community which is already bearing the burden of significantly decreasing academic budgets. “A large research university will pay between $3-3.5 million a year in academic subscription fees --the majority of which goes to for-profit academic publishers,” says Sam Gershman, a postdoctoral fellow at MIT who assumes his post as an assistant professor at Harvard next year. In contrast to the exorbitant prices for access, the majority of academic journals are produced, reviewed, and edited on a volunteer basis by academics who take part in the tasks for tenure and promotion.

Paul Millette, director of the Griswold Library at Green Mountain College, a small 650 student environmental liberal arts college in Vermont, talks of the enormous pressures access to academic journals have placed on his library budgets. “The cost-of-living has increased at 1.5 percent per year yet the journals we subscribe to have consistent increases of 6 to 8 percent every year.” Millette says he cannot afford to keep up with the continual increases and the only way his library can afford access to journal content now is through bulk databases. Millette points out that database subscription seldom includes the most recent, current material and publishers purposefully have an embargo of one or two years to withhold the most current information so libraries still have a need to subscribe directly with the journals. “At a small college, that is what we just don’t have the money to do. All of our journal content is coming from the aggregated database packages–like a clearing house so to speak of journal titles,” says Millette.

“For Elsevier it is very hard to purchase specific journals–either you buy everything or you buy nothing,” says Vincent Lariviere, a professor at Université de Montréal. Lariviere finds that his university uses 20 percent of the journals they subscribe to and 80 percent are never downloaded. “The pricing scheme is such that if you subscribe to only 20 percent of the journals individually, it will cost you more money than taking everything. So people are stuck.”

Source 2 Academic Journals: The Most Profitable Obsolete Technology in History | HuffPost Latest News

Original Source http://www.ft.com/cms/s/0/93138f3e-87d6-11e5-90de-f44762bf9896.html

Mahesh · December 12, 2015, 11:43am

FY15 Peer data of MPS have started coming in :

SPS :

On a volume growth of +6.2 %, company has delivered a negative value growth of -(2.17) %. Revenues stand at INR 203.85 cr. (FY14 = 208.38 cr.), EBITDA margin at 53.07 % (FY14 = 54.86 %).

Amnet :

Company has delivered a negative value growth of -(7.11) %. Revenues stand at INR 69.69 cr. (FY14 = 75.03 cr.), EBITDA margin at 37.27 % (FY14 = 35.86 %).

Hurix :

Company has delivered a positive double digit value growth of +14.82 %. Revenues stand at INR 69.02 cr. (FY14 = 60.11 cr.), EBITDA margin at 24.90 % (FY14 = 24.18 %).

varadharajanr · December 12, 2015, 12:13pm

Thanks Mahesh - one of my contacts who is a CXO at one of the above three said that the industry grows only at 3-4 % and one has to work extra hard to deliver a double digit revenue growth and its’ not easy trading margins to growth.

Given that, it will be interesting to see what MPS has lined up. I am starting to worry if there will be a de-rating in multiples if this type of growth persists for a year - sort of like what happened to infy between 2001 and 2014.

Mahesh · December 12, 2015, 1:36pm

Hi Varadha,

Thanks for the industry feedback and keep them coming as this piece is invaluable in our research work.

As far as derating in multiples is concerned, MPS is derated by the market already as otherwise you will not find such a robust cash generating company available at reasonable multiples it is available today. What will avoid significant further derating is management’s proactive strategy in distributing cash. I feel management is quite aware regarding this fact and so is always keeping one feet on accelerator as far as dividend goes till any future clarity emerges. So with almost 3-4 % tax free dividend yield which is equivalent to parking money in saving bank account, not many will like to part with their holdings in this company especially considering management’s past track record in wealth creation. Key is holding on to margins – 35 % + ebitda – if there is any faltering in that then it might meet with significant derating. Otherwise every serious knowledgeable investor in the company knows that end industry is at best growing in single digits and play is only on increasing cost cutting within the same end size.

It is heartening to note (so far) that at least last year MPS performed on its topline at par with its peers (specifically, result declared peers). That doesn’t take away the fact that it underperformed most of its reasonable Indian peers except last year. Results of Newgen and TNQ will be interesting to compare. Even my concern is rising every passing day – not with rgds. to derating in multiples – but the way fund management is handled. No rationale dynamic management can wait indefinitely for opportunities to arise out of air as if you don’t catch the opportunities at opportunate time then it disappears equally fast in air. And responsibility rises tremendously when you raise funds equivalent to almost 70 % of your existing scale – and therefore the pressure to take decision will equally rise when you don’t take any decision for such a long time. So far management had the liberty to choose but I am afraid soon management might find itself trapped into a situation when it will have to take at least a token decision. This is because if you are comfortably growing organically then no one will question but if you are faltering on organic growth and having 70 % of your scale to spend for last 9 months then doubts will surely arise asto what you are waiting for ?? A deal is called a deal and is sealed as a deal when both the parties take some steps forward and finally meet to seal up the deal but if one is just waiting for the mouth watering most lucrative opportunity to seal a deal then if there is luck it might come but at most of the times pratical decisions need to be taken by keeping both present and future interests in mind making a trade off between what is best and what is good.

To make a note, Q2FY16 was the first quarter after almost 10 quarters when MPS degrew YoY organically in dollar terms and situation was not so good at subsidiary level too. I am still keeping my fingers crossed and hoping that Mr. Arora finds another Macmillan (both in terms of opportunity size and valuation at which deal is sealed) as otherwise this long time spent will itself act as a question mark.

These are my personal views and have kept my holdings in MPS intact and have not sold a single share nor bought any over last 30 days.

Rgds.

hitesh2710 · December 13, 2015, 10:34am

Mahesh,

Thanks for the views.

Regarding deploying the funds they have raised I have slightly different views. I also am holding MPS since a long time but I am not worried about the time taken by management in deploying the funds.

What was good was the opportune timing of raising the funds. And now I would prefer to give them plenty of time to find out a bargain deal and only then act.

Management cant act with token acquisitions only to please the market participants. In fact I would prefer that they focus more on the business rather than worry about market reactions. Because market reactions are transient whereas business decisions have long term implications.

And stocks correcting 30-40% from the tops is nothing new in the journey of big winners.

Till now whatever we have in front of us is the track record of the management in terms of improving a dying business after takeover and wealth creation for shareholders.

They are on record about their targets to double their revenues and I would like to give them time to prove their words. The rejig at the top with Mr Nishith Arora giving up the CEO place to his son and himself trying to look after the strategic aspects like acquisition etc seems to be a step in the right direction.

About correction in stock prices, I feel part of it might be due to general market conditions also.

What is good about MPS is the business characteristics of the company. There have been instances in the past too where prior to q1 fy 15 results also there were doubts about the growth prospects and just a quarter or two of good growth allays all fears.

MPS is one company where one can afford to wait because here he is being paid (dividends) for his waiting. I personally am invested in the company now for quite some time but never have had any worries. I feel its a company one buys and practically goes to sleep. And this sleep is more peaceful because of a lack of newsflow as compared to the pharma companies I hold and others I track.

disc: holding as mentioned in the post.

Mahesh · December 18, 2015, 10:12am

Some key observations from my side :

Performance of Acquired Companies :

Let’s first have a look at key financials of the companies before they were acquired by MPS (under Mr. Arora) and the amount spent on acquisitions :

– By spending just INR 15 cr., a yearly revenue of INR 52 cr. were acquired which prima-facie seems a great deal. However, key thing to note is each of the company was almost on verge of extinction and so Mr. Arora extracted maximum bargain out of them.

– Key lies in performance after acquisition of such distressed assets and it is given below :

– Since TSI is only a recent acquisition and has not passed even first full year, so we need to wait for couple of more quarters for its performance to show up.

–Regarding Element & EPS, although post acquisition topline has suffered but that is understandable as Element was in distress at the time of acquisition whereas EPS was more of a steady business which promoter wanted to sell out. There would always be overlap as also phasing out of some contracts once ownership changes hands and so a cut of 25 % on topline is perfectly fine and reasonable.

–Key is bottomline which is the crucial aspect as it is this factor which failed MPS under its previous owner. MPS under Macmillan never recovered from the huge losses it acquired because of acquisitions and that led to the debacle of an otherwise healthy robust cash generating business (Yes !! It will be interesting to note that MPS under Macmillan also was operating at 40 % + margins before embarking on inorganic journey). We will be able to assess this aspect from quarterly performance of subsidiaries as have done below :

–From above it is apparent that Element had more or less stabilised and was, and is, operating at almost breakeven level (we can’t take quarterly margin spikes into consideration and need to look at the whole picture).

–EPS seemed a good acquisition as it provided much needed support to bottomline because of 18 % PBT margin at which it was already operating before the acquisition.

–From the first two quarters performance post TSI acquisition, it clearly seems a drag on the margins (even if we exclude one time charge of 1.60 cr. in Q2FY16). However, its too early to draw any conclusion as only two quarters have passed and such distressed assets take time to recover and breakeven.

–Some things are clear from the acquisitions done so far :

these acquisitions were only for plugging gaps in the offerings of MPS

we should not expect significant bottomline improvement in any acquired company post its acquisition ; atbest a loss-making acquisition could turn breakeven or low double digit margin as is evident from the nine quarter performance of oldest acquisition Element.

TSI also might go the Element way and operate at breakeven few quarters down the line. So, in medium term atbest we can expect a 18-21 % EBITDA margin (because of strong EPS margins) at subsidiary level from the acquisitions done so far.

acquisitions have failed to grow significantly in topline (w.r.t. their topline before acquisition) under MPS and even they have not been instrumental in aiding topline growth of consolidated entity (except simple addition) as is evident from muted standalone growth even post acquisitions.

It is important to understand here that this analysis is only based on past nine quarter performance of Element, past four quarter performance of EPS and past two quarter performance of TSI. Distressed assets even under best management take atleast couple of years to show any meaningful performance.

Still, there are two main reasons of drawing this analysis at early stage (and also keep revisiting our analysis every quarter) :

Mr. Arora is on record saying that acquisitions are crucial for future of MPS and success majorly hinges on right inorganic moves. This is the reason why he has dedicated himself completely to this goal.

MPS under its previous owner failed miserably in inorganic moves. If we draw a comparison here, MPS under Mr. Arora seems to be at a similar stage where MPS under Macmillan was in FY04 post which inorganic journey was started by then management to double the topline in three years. Let’s have a brief look here :

MPS under Macmillan & MPS under Mr. Arora

– It is worthwhile to note here that in above comparison, we have taken into consideration the financials of only business related to current MPS and other businesses like book publishing business (which were part of Macmillan till FY08) are kept out of our analysis.

– Revenue is compared in USD mn. to enable fair assessment excluding currency movement.

– Standalone Revenue of MPS in FY14 & FY15 is 31.1 and 33.2 mn. USD respectively.

– Company was operating at an average 50 % PBT margin till FY04 post which starting FY05 it embarked on inorganic route which saw its margin dwindling to 4.40 % in FY08 when last acquisition was made, finally pushing the company into losses and eventual sell-off to Mr. Arora.

– Let’s have a look at acquisition history of MPS (current business) under Macmillan :

– Within three years of initiating inorganic journey, company’s topline almost doubled from 82 cr. to 154 cr. whereas margins saw a decline from 52.11 % to 9.21 %. Part of it was because management at that time made big loss-making acquisitions with a hope of turning them around which never happened. Part of the current acquisition delay can be explained by this background which Mr. Arora must be very well aware of.

Quarterly Performance of MPS under Mr. Arora

– Having done all these, it is also worthwhile to look at quarterly performance of MPS under Mr. Arora :

– We have done assessment in USD mn. only to arrive at fair conclusion regarding actual growth in business excluding currency movement.

– On standalone basis, topline is almost at the same level as Macmillan era. It is the acquisitions which have provided simple addition to the topline on consolidated basis.

– Key thing to look at is margin performance wherein from single digit EBITDA margin, Mr. Arora has gradually scaled up to 35 % + margins which is commendable. Macmillan was able to operate at this margin level (infact slightly more than this level) when its scale was almost half the current scale whereas Mr. Arora has corrected the mistakes and almost regained Macmillan-golden-era’s margins at increased scale.

– It is the sustenance of these margins and therefore robust cash generating ability of this business at this or even increased scale which is appealing. A simple example can be found below :

Dividend Policy

– After Mr. Nishith Arora acquired MPS uptill now, company has spent 135.88 cr. on dividend payment. Out of this 135.88 cr., 84.70 cr. are received by promoters as dividend.

– When we add this amount to the 30 cr. net cash company has as at September’2015 ex-QIP funds, after four years post its acquisition, if company had not paid any dividend, the net cash at its disposal would have been 165 cr..

– Because of generous dividend payment, company had to dilute its equity to the extent of ~10 % and raise 150 cr… QIP funds. This is the reason why we see serious long term investors in the company like Enam constantly requesting Mr. Arora to have a relook at generous dividend policy.

– Part of this approach towards generous dividend payment uptill now can be explained by the need of the promoters to pay back debt they raised at holding company level to acquire MPS :

– Mr. Arora spent ~45 cr. for acquiring MPS for which he raised 51.36 cr. debt at holding company level. Out of this 51.36 cr. debt, 26.40 cr. were lent by Promoter family so in effect external debt was to the tune of ~25 cr…

– Out of the dividends so far received from MPS, the holding company has, till FY15, repaid entire debt and has started returning money to the promoters via dividend payment – in FY15 a dividend of 19.38 cr. was paid to promoters.

– Now, there is nothing wrong in these and seems perfectly reasonable as Mr. Arora took a very big risk by acquiring ailing MPS via his personal money then, and, so it seems fair to compensate him with reasonable return on his investment.

– The key is what lies ahead – in a reply to Enam in the concall, Mr. Arora was quite forthwith in saying that he will be the first person to curtail dividend payment if he feels its in the best interest of business. Now, with entire debt repayment done and being paid back his own money too with reasonable returns, he can afford to have a relook at generous dividend policy. But, much will depend on profile and financials of acquisitions that he will do.

– It is worthwhile to note here that MPS has a history of generous dividend payment under its previous owners, Macmillan, too (although not to the extent Mr. Arora has done). In a similar fashion, before embarking on inorganic journey, MPS in its previous avatar was known for quite a generous dividend payout till FY06-7. In FY05, it initiated its aggressive inorganic journey by acquiring three companies and doubling its topline in just three years (talking about business related to only current MPS and not book publishing business) ; acquisitions backfired and it went into losses and dividend payments were curtailed to reach 0. Again, part of the reason Mr. Arora taking his own time in making acquisition decision could be because of this almost identical background and I am sure he will be extra cautious this time not to repeat the same mistakes again.

Rgds.

Discl. - Invested in MPS. No Trading in last 30 days.

Mahesh · December 19, 2015, 10:45am

Some Macro Observations :

Currency Benefit

India & Philippines account for bulk of the publishing outsourcing industry. It will be interesting to note respective countries’ currency appreciation/depreciation trend w.r.t. USD and GBP (since these two are the major billing currencies for MPS) :

Key things to note :

– Philippines currency Peso provided the country major advantage till FY09 vis-a-vis INR post which relatively strong INR depreciation v/s both, USD & GBP made India much more competitive than Philippines (only w.r.t. currency we are talking about).

– Peso overall depreciated by average ~15 % v/s USD & GBP in this 15 years of our study whereas INR depreciated by average ~40 % v/s USD & GBP over the same period.

Chennai Floods & H1B Visa controversy Impact on MPS

H1B visa issue might not have material impact on MPS as majority of its overseas staff seems to be local.

Chennai Floods could have an impact on Q3 performance of MPS as ~22 % of its total staff strength is placed in chennai . Also, chennai seems to exclusively cater to LNMS division of MPS as also forms major part of ‘Digital Services’ division which together account for ~14 % of yearly revenue. In addition, it also caters to ‘Books & Journals’.

In absence of any warning from the company, we can’t say for sure whether there will be any impact or not and it could be that major portion of the work might have been temporarily shifted to other locations to avoid any impact. Also, ‘Guindy’ area where MPS facilities are located seems to have been somewhat impacted by floods but to what extent the area was affected that we can’t say unless any VP localite member has any info.

Just to compare, MPS seems to be well placed as compared to many of its peers except Aptara, Innodata and SPi as far as chennai situation goes. Providing below approximate operation size of major publishing outsourcing players from chennai :

Rgds.

suns · December 19, 2015, 10:54am

Its looking stable for now in a downward channel, may be there will be better levels to get in if one wants to.

nelsonite · December 19, 2015, 9:31pm

@rohitbalakrish_ @Donald @ayushmit it would be great if someone from you can help me with my queries below:

I had a look at the Concall and also went through Management Q&A.

My question is that if budgets remain the same annually and year after year with realizations being squeezed and volumes increasing, do the two not cancel each other out. I am a bit hesitant to see where revenue growth is going to come from unless its an acquisition.

They have grown 100% with Elsevier and 40% with Macmillan but we do not know how much of a pricing cut they had to take. For quarterly results only June 2015 quarter had YOY growth of 20%. Annually too, FY 15 had revenue growth of only 11% or so. Why is it not showing up in the numbers.
Agreed that the penetration is low and clients are sticky, there is no threat of new player snatching away clients but unless the budget of each client grows or the company acquires new clients i.e. from among the incumbents of publishing for which it does no work currently, then growth is going to be hard to come by.
As regards having enough cash to do an acquisition and waiting for the right target valuation and complementary skills wise, would it not be better for someone like me who has no investment in MPS to actually wait for the acquisition and then decide on the merit of the investment based on how the acquisition seems at that point of time.
I thank all of you guys for providing such excellent material for us to go through in terms of MQ and BQ insights as well as the Management Q&A.
Please do let me know if my doubts do not seem valid as this is just my opinion.

srnarayan · December 21, 2015, 5:07pm

After Emkay securities, Karvy has initiated coverage on MPS which is good to know…

Attached here is the report for reference. MPS_KArvy_Dec21-2015.pdf (457.3 KB)

@Mahesh: Wonderful analysis as always…Do you perceive any impairment risks due to acquisitions either for MPS or competitors who are growing inorganically? Also if you had to put a thinking cap as management today; would you say that growth has to come only through inorganic way?
Regards
Sreekanth,

Mahesh · December 22, 2015, 7:47am

@srnarayan

Much depends on the profile of acquisitions, but let me make some things clear :

(1) Aggressive inorganic route is only preferred when organically a company is not able to grow comfortably or you have some serious gaps in your offerings vis-a-vis competition. Relative to inorganic route, organic route is always better as such high inorganic quantum, ~70-80 % of existing scale, always brings with itself integration and other issues which if not handled properly can backfire severely on you.

(2) Since you have asked me, if I was in the management, I will definitely be concerned of lack of organic growth and it has to start somewhere for my company to sustain in the long run (unless I want to build the company in medium term and then sell it off). Also, I would not be atall hesitant to admit in front of investors/analysts, who are much more knowledgeable today and have varied data points in their hands to track, that company is falling behind vis-a-vis competition (reasonable indian peers) and these are the problems and we are taking these steps to resolve the problems.

(3) I would not have raised 150 cr. funds for inorganic expansion without concrete proposals in hand unless I was worried of my own companies’ shares valuations by thinking that when concrete proposals do materialise I might not get the same valuation I am getting today.

(4) Its not easy to find everytime a company like Macmillan at the valuation at which it was acquired. Remember, even before the acquisition by Mr. Arora, MPS (under Macmillan) was a great company operating at ~45-50 % margins ; it was loss-making acquisitions and serious overheads at senior level that led to the debacle. This is not to take away the credit from Mr. Arora for the way he quickly made the turnaround possible – if it was some other guy than him this could have been a daunting task – But, when we look for inorganic route, we need to be practical as in this dynamic world, time lost is opportunity lost.

(5) Although many here might not agree with me, but, I still feel that no rationale management will face another AGM by raising before one and a half years, 150 cr. for acquisitions and not making any use of that funds. If beforehand at the time of raising funds, proper timeline was given asto within two years we will acquire then it was ok but post raising funds everytime management has said “we want to seal the deal soon and negotiations are going on”. I feel that we are very near to some sort of announcement on this front and sincerely hope that its not a token decision.

(6) With so much delay already made post raising of funds, I would prefer acquisition for expansion of platform business rather than in plain outsourcing space. However, management is on record stating that they will prefer the acquisitions that are blessed by their clients but such blessings might not be possible in platform space.

(7) In whichever space the acquisition is, it should not be heavy loss making acquisition (as Macmillan did), as it will be foolish to think that everytime a Macmillan like turnaround is possible even from the same guy. As I said before, Macmillan was a unique case where its inherent strength were exceptional ; such cases are rare and not many.

(8) In plain outsourcing play, low margin low debt acquisition will be best but that might not come cheap. As management I need to understand my company’s strength and that is robust cash generation in the absence of aggressive macro (industry) growth. I will give this factor utmost priority while making any acquisition.

Sreekanth…let’s keep our fingers crossed and hope for the best.

Rgds.

Discl. - Invested in MPS . No trading in last 30 days.

kaubaner · December 23, 2015, 1:05pm

Hi,

Thanks for posting detailed analysis of this stock, This has really helped me get up to speed since I was alerted about MPS by a friend.

I totally agree with @Mahesh that depending only on inorganic growth to grow is fraught with high risk, even for someone with Nishith Arora’s track record. Especially now that he has stopped managing the day to day ops and it is left to Rahul Arora. I have been working in the Off shoring space for the last 13 years (not Publishing BPO, but F&A, Investment banking Ops etc) and can safely say that the way to efficiently run the business is a dirty ‘roll up your sleeves’ job. Whether Rahul has picked up these skills to turn around the fortunes of the target company post acquisition, only time can tell.

The one question I do have is if we were to be put in the CEO’s chair what would we do to grow organically given the industry/sector dynamics and current positioning of MPS?

Publishing industry isn’t growing and profitability of most publishers is under severe pressure, and its unlikely that most of the players will have scope to increase their off shoring & outsourcing budgets. So outsourcing wallet size is likely to remain flat.

In order to still cut costs, publishers are likely to push for the vendors to ‘do more with less’, meaning pricing will always have a downward pressure. While vol growth will probably still happen, value growth will be difficult esp with the big publishers. So mining their existing accounts (where they have opportunity since they are only a tiny portion of the overall outsourcing budget of these publishers as per the Mgmt Q&A) will probably lead to vol growth but little value growth. I think their sole reliance on this as a sales strategy is showing up in the stagnating top line.

So one of the options left is to push for expanding their service offerings which can help them increase their share of their existing top clients off shoring budgets. They seem to have a very good breadth of capabilities, but are still a small % of the overall spend by their clients. What key gaps do they have currently which if addressed can help them increase their share? Is inorganic the only way to fill this gap? We should think about that.

Another way could be to go after more clients. They do not have the sales force or expertise to do that on their own at the moment. So maybe investing in sales capabilities (i.e. hire onshore sales guys) could be an option. Otherwise acquire someone who has a non overlapping client base and sales network which could be leveraged. having said that, have any of the earlier acquisitions materially added more bulge bracket clients. I don’t think so but I could be wrong. If anyone has an idea pls correct me.

A third option would be to expand focus to smaller mid sized clients beyond their ‘top 10’ who may benefit from the wider capabilities that MPS has to offer. But this would again require greater SG&A overheads.

Finally, investing and offering platform + KPO to their clients could open up a way to get more business. However, most big publishers have their own platforms already. I am not sure how the cost dynamics work out, but unless the DigiCore platform is materially cheaper its again unlikely it will appeal to any of their top 10. The smaller publishers will find it worthwhile but this doesn’t seem to be their focus.

The point I am making is that we shd try to see what options does MPS have to increase organic growth and then see whether the company is actually doing any of this. Without that hard to see where the incremental organic growth will emanate from.

Disc - Not yet invested but seriously analysing for a significant investment.

Mahesh · December 24, 2015, 7:37am

@kaubaner

Some thoughts from my side on your points :

Rgdg. Rahul Arora left solely to manage the day-to-day operations, it seems more of a succession exercise than anything else. Its just that Mr. Nishith Arora has left the front stage and went to the back-stage. Rahul is based in US whereas Mr. Nishith is based in India were majority of the company’s assets are based and so in a family-run business, it is highly unlikely that such professional positions will matter much. With Mr. Nisith’s full fledged presence, Rahul was getting overshadowed and it was logical for him to take a back-seat. However, once acquisition is done, Mr. Nishith is surely going to take active part in seeing smooth integration of acquired company and its unlikely that it will be left to Rahul alone.

Rgdg. pricing pressures, they will be there and there is no second thought about that but key is aggressive volume growth has to match reasonable value growth. As I have said before also in this thread, severe pricing pressures such as they do not allow any value growth to happen seem to be missing as otherwise many of the reasonable peers would have grown more than 100 % in terms of volumes over last few years which seems highly unlikely.

Also, to give a recent MPS example, company has said in its AR15 that Elseveir doubled books volume YoY whereas Macmillan’s book business volume increased by 40 % ; both seem to be amongst Top 5 clients of MPS ; now, top 5 contribution is 65 % overall so logically such a huge increase in two of the top 5 clients business should atleast have some meaningful effect on value growth of book business right ?? ; but in actual terms what we see is book business registered a modest 1.04 % value growth in FY15 !!! This is despite 0.97 % depreciation in INR vis-a-vis USD YoY. Now, this is the missing puzzle in the entire story that I am unable to sort out.

Rgdg. going after more clients, except for platform business highly unlikely as already they work with majority of the top publishers. In plain outsourcing space, to work with small clients will mean wafer-thin margins and that is not the focus of the company anyway.

Rgdg. platform business, its an exciting business as its more of a non-linear type…and I completely agree with Mr. Nishith on this that if via acquisition or something else, they can find a good sales platform to reach numerous clients for this business then it could just catapult MPS into next orbit as margins could be significantly high.

Overall, I feel that main focus of the management while going for any acquisition could be either to find a good pitch for platform business or to increase utilisation of low-cost dun facility wherein if we consider three shifts’ potential then utilisation is just at 20 % presently.

Rgds.

Discl. - Invested in MPS . No trading in last 30 days.

Mahesh · January 13, 2016, 3:19pm

3rd Interim Dividend to be declared along with results on 27th Jan…seems acquisition is still some time away.

http://www.bseindia.com/corporates/anndet_new.aspx?newsid=32831e49-8605-48c5-818b-88568b4dfe9d.

Discl.- Invested in MPS. Bought and Increased my allocation over last few weeks. MPS currently forms ~28 % of my family portfolio.

hrishikesh · January 21, 2016, 1:48pm

Dear Mahesh,

I dont think linking dividend and acquisition as of today is valid. It was valid a year back where he made small acquisitions primarily out of internal accruals. The result was that whenever there was an acquisition dividends during that quarter was skipped.
Now he will use his operational cash flows to pay dividends while he is sitting on a 160 crore kitty from QIP for acquisitions.
With a global meltdown i think that he might make an acquisition at much attractive valuations. Your opinion on the same please.

Mahesh · January 22, 2016, 7:04am

@hrishikesh

Have not tried to link dividend to acquisition but have tried to highlight the need to raise funds via equity dilution v/s extremely generous dividend policy which, on closer look, has benefited promoters the most. Agreed, even minority shareholders have benefited by this generous dividend policy but if you have a closer look, out of total amount spent so far on dividends worth 135.88 cr., 84.70 cr. has gone to promoters, 20.5 cr. has gone to government for DD tax and only 30 cr. have gone to minority shareholders…and for this 30 cr. dividend, we have got 10 % equity dilution…

optically, big dividends look great to minority shareholders but he has to remember that he is investing in a business and so, he has to assess a particular policy w.r.t. its fairness in terms of business and a generous dividend policy coupled with equity dilution (for raising the same amount of money spent on dividends) and that also to the extent of 10 % doesn’t look reasonable atall.

Generous dividend policy till today was the need of the promoter as they wanted to repay external debt worth 25 cr. and payback themselves 26.4 cr. they spent from their own pockets for MPS acquisition as well as make return on that amount…all that is done… and a good manager like Mr. Nishith Arora might be the first one to curtail this generous dividend policy in case he makes a loss making acquisition or debt-laden acquisition (even he is on record saying this on concall). Till today the major factors supporting MPS valuations were

– 1-- excellent turnaround made possible within a short time which signified Mr. Arora’s managerial strengths,

–2-- Sustenance of high 35 % + EBITDA margins,

–3-- Generous dividend policy which when combined with robust cash generation could do wonders for minority shareholders.

Without these factors, there is no reason for MPS to trade at par and even on some multiples richer valuations than IT biggies like Infosys. Knowledgeable investors in MPS know very well that Macros are not in favour of MPS which even Mr. Arora very well knows. So far Mr. Arora has been wise in managing investor expectations combined with doing what is in the best interest of the company – by good IR, high margins and generous dividends he enabled good valuations at which he raised QIP by diluting 10 % equity.

Only the thing where he seems to have fumbled is raising QIP ahead of time…From the beginning he had maintained that when he will be closer to big acquisition, he will be raising funds and even at the time post raising QIP he had stated that good deals are on table and he wants to close the deal ASAP ; but , no decision in 10 long months is a real real surprise.

Logical thing for a manager to do who is not concerned of sustenance of his company’s high valuations on the bourses was to seal the good deal first and if payment is required to be made immediately then raise short term debt and pay and then raise QIP funds and repay debt. By paying dividends almost equivalent to the amount of funds required for acquisition and then raising QIP ahead of time was not atall a logical thing. Now, if the likely acquisition is not grand success like Macmillan, many valid questions might be raised and it might effect the brand equity of the management. This is my personal view and I can be wrong.

Regarding making acquisitions at extremely attractive valuations because of current meltdown, the market meltdown you are witnessing only as of today, but publishing industry meltdown is prevalent since long…thats why I am surprised of the talk that deals have not materialised because of valuation issues !!!

In my next post I will paste an article posted in November 2015, by a publishing outsourcing consultant, which might be of interest to you and which highlights the kind of macros MPS is dealing with.

Mahesh · January 22, 2016, 7:10am

Publishing Outsourcing: Is Your Provider In Trouble?

Nov 10, 2015, Jim Hill
Publishing Outsourcing Consulting

Many offshore providers in publishing are in trouble.

As many publishers and service providers are aware of by now, especially in the USA, the market for outsourcing publishing services has been in a serious correction or downturn for at least the past two years. This article highlights the top ten reasons why an offshore provider might be in trouble.

Market Overview

The market is not going to go away, but, clearly, the years of very high, double digit, top lines sales increases of 30% - 40% are probably gone—forever. They were good times, though, for sure. And, not likely to return for most providers.

Also, with declining prices on many commoditized services, such as composition, and especially general conversion and ebook services, gross margins with many providers have declined as well, often, by quite a bit. The other issue that I have seen for a while now is that many providers are for sale, but apparently few if any buyers. I will not list those providers here, but believe that is fairly common knowledge to those in the industry. The fact that so many providers are for sale, and no buyers, is a clear indicator that the overall market conditions have softened considerably. Also, the other issue that is a clear sign of a maturing market is that many senior level people with 20 years of experience or more have left or are leaving the industry. Worth noting, I have always found the classic books on marketing strategy and positioning in competitive markets from Michael Porter very insightful on this topic, especially Competitive Advantage. Porter and others have noted the classic statement about declining market conditions: “often, the worst thing that you can do is to get a bigger share of a declining market.”

For public documentation on these observations, I would draw your attention to Innodata-Isogen, and IEnergizer, who owns Aptara, and their recent financial statements for the last few years as public companies. Both companies have had sales in excess of $70 million for a number of years, and have been “first movers” in the market for over 20+ years. However, both companies seemed to have “hit the wall” in terms of top line sales growth over the last few years and have seen sales declines of as much as $10 million or more. Also, Innodata appears to be focusing outside of publishing for growth based on their web site. Again, this is a very clear sign that the market has matured and has become deeply consolidated with key accounts, especially with the top 20+ multinational publishers, where the big sales dollars are generated. As many providers know by now, trying to penetrate a new market segment that they do not have a historical track record currently, or getting traction with a major publisher like Cengage, McGraw-Hill, Elsevier, Springer, Taylor and Francis, and many others, is a daunting task even for the most savvy sales and marketing professionals. Unfortunately, sales cycles can be at least 18 months if not longer for these very large publishers, although many offshore providers often seem delusional about this observation, and often expect large sales from sales people within six months. Especially important–the other key market indicator is that with the top 20+ multinational publishers, the majority of them have consolidated service providers, often by as much as 50%, over the last five years. Much of this consolidation has resulted in fewer providers, although larger sales dollars for some providers, but often, unfortunately, at lower prices. Equally important is a corollary to this: many publishers appear to have reduced the number of senior level professionals who deal directly with offshore providers since they seem to be reasonably happy current providers. Equally important, I believe these observations are especially relevant if you are a sales professional in this vertical. Like other severe life challenges, such as alcoholism, drug addiction, cancer, or mental illness, the negative signs are usually very evident long before they become serious or tragic. If a publisher is generating $250,000 or more with a current provider, and the provider unexpectedly “goes south”, clearly that can be a serious problem for the publisher if they are not cautiously prepared. Publishers being very cautious and proactive about such challenging market signals with providers can be very helpful to plan appropriately for the future.

The following top ten, key market observations might be of interest to both publishers and service providers as to why a service provider might be headed for trouble.

The service provider seems to have a new sales person every 6-12 months. A clear sign that the provider is struggling to generate sales now, not later, and does not understand the sales cycle in a maturing market. I have personally interviewed with providers recently who have $1M+ in current sales, but their goal is to generate $9M in three years, which is so delusional, you have to wonder if there is a mental illness operating with the provider. A very yellow flag since the sales approach seems very tactical and not strategic. Very little if any low hanging sales fruit now. Long gone. Part of the above is very easily checked by using LinkedIn. Just go to the landing page and type in the name of the provider, and see who comes up on the first two pages. Again, if you are seeing 6-12 sales and marketing people that worked for the company for a year or less, that should be a serious concern. As many publishers know, employee turnover is a potentially negative issue since it often effects quality and turnaround times, due to a lack of sales.

A service provider that seems to constantly harp on the issue of “scaling” (more revenue). Again, this often comes across to publishers as being a very short term, tactical sales approach and not long term, or strategic.

A service provider that does not focus on innovation and value, but seems to sell on pricing–only. Everyone has heard this so very stale and dead branding statement from offshore providers: “we do it cheaper, better, and faster, and we have the best price.” This positioning statement died, and was buried over five years ago. Best advice, say “thanks, but no thanks” to that one, or at least be very skeptical. What is the long term value of selling on price? Probably–nothing. Economics 101: when there is an over-abundance of providers and declining demand: prices decline.

A service provider that does not constantly offer at least two new services a year. This shows that they believe in innovation and value and are savvy enough about marketing to know that many older services are often a commodity with declining prices.

A service provider that believes that composition, general conversion, and ebook services will provide future sales growth like they did in the past. This is a service provider that is severely stuck in the past as if it is a clear path to the future. The past is rarely a good indicator of the future in investments and with publishing services. A very red flag.

A service provider that exclusively uses a recruiter to find talented sales and marketing professionals in the USA. This is not a huge group of people, maybe 50+ maximum? A recruiter usually charges about 30% or more of the first year salary of probably a low of $60,000 to a high of maybe $100,000+, so that is about $20,000 to $30,000 per hire. I have personally seen a provider hire three sales people through a recruiter within 18 months, and then fire all three employees at a cost of around $100,000. That is a very expensive hiring practice. Coupled with #1, this should be seen as a red flag that the provider does not have an understanding of this vertical and competitive contacts, and is just not very well connected in the industry.

A service provider that struggles to understand the differences between service “features” and “benefits.” This is marketing 101 in the USA for eighteen year old college freshmen. However, providers often really struggle to get this critical marketing distinction. Customers buy “benefits,” not “features,” and, in a commoditized market, very critical for sales growth with new accounts, especially for smaller providers vying for new accounts.

A service provider who clearly has not learned the importance of quality editorial in their content marketing for publishers. Publishers are in business to sell high quality editorial content. Not complicated. If this is not obvious by now, a very bright, pulsating, red flag. Editing and proofreading should not be a challenge for publishing providers, especially if they sell editorial services, but publishers see it every day, and they must shake their heads, wondering: “what can they be thinking?” This is often very noticeable in email marketing and on web sites. And, is like hearing a presentation from a CPA for a customer’s accounting services, and it is obvious that the CPA cannot add or subtract. This just makes a very bad first impression with publishers who are more inclined to say “no” rather than “yes.” But, so very easy to fix with proofreading.

Service providers that do not understand social media as a content marketing tool, especially LinkedIn or Twitter, and have less than 2,000 connections on the company profile or, especially, profiles for key executives. Or, worse, no profiles. And, these providers seem to rely on cold calling and email from India almost exclusively. This is beyond old school. Many publishers are so worn out with this outdated sales and marketing approach, they cannot see straight. That is a red flag. Social media, now, is not a break through communications platform. LinkedIn has more than 400 million users, much more with Twitter. Providers could be much more progressive about social media, especially smaller ones vying to penetrate the US market. For publishers, again, very easy to do a quick check on LinkedIn and Twitter to determine this market indicator in terms of followers as well as marketing activity. One of the issues that I notice reviewing this myself is that many providers also have a serious SEO issue since they are very hard to find on social media, or worse, they just have no presence at all. What is the provider’s correct name to search for? Often, very confusing. I have taken the liberty to include a chart of some random providers here for easy reference, ranked by what I believe is sales volume. I found this exercise very surprising on a number of fronts. To be expected, some of the larger providers like SPi, Innodata, Aptara and others have much stronger LinkedIn followers than smaller providers since they have been in business much longer, 20 years or more. But, looking at the Twitter numbers: most are abysmally weak. See the chart below. The question mark (?) means that I cannot find the company listed.

Providers who do not understand the sales cycle in a maturing market. A very red flag. And, providers incessantly call and want to meet with a publisher every month or every quarter. That is not an effective sales approach: that is desperation. This is like a bad personal relationship that just did not work out initially, but the man or woman calls and emails and texts you every day, saying “can we get together?” Some might call this “harassment.”

In conclusion, knowing if your offshore provider is headed for trouble is a critical, strategic business decision for publishers. Equally important, providers need to learn how to adjust their sales and marketing programs to the business and industry cycle which has clearly matured and consolidated. I realize that many providers may find my criticism harsh, but the best part of this overview is that all of these challenges are easily solved, and very inexpensive.

pikrohit · January 22, 2016, 9:39am

Thanks for the excellent article. Maybe the 18 month cycle he has mentioned is about to move up?

Following points stand out, specially the first. As per this, an acquisition should have come easily. I was also hoping that management had already identified targets before doing the QIP. Also, now the dollar has appreciated 10% odd, so the purchasing power of MPS has come down.