MPS Ltd

[Mahesh]

Newgen Knowledgeworks FY15 results are out…this time detailed consolidated financials are provided by the company so we have much clearer picture of margin scenario rather than previous approximate derivations from DRs, PBT margins or Cash Flows.

Consolidated Topline in FY15 has grown by + 2.08 % YoY to stand at 155.42 cr…Consolidated FY15 EBITDA margins stand at 22.36 % against 22.42 % of previous year…this is against standalone FY15 EBITDA margins of 32.91 % v/s 36.78 % of FY14.

If we consider consolidated PBT margins, correct data for which we have for all previous 4 years (including Other Income), they stand at 23.25 %, 21.90 %, 29.45 %, 28.08 % for FY15, FY14, FY13 and FY12 respectively.

Employee expense on consolidated basis for Newgen stands at 45.20 % and 46.66 % for FY15 & FY14 respectively as against MPS’s 42.01 % & 42.92 % for FY15 and FY14 respectively.

@pikrohit

True Rohit…but management might have a valid counter argument to this point by saying that they have parked the money in liquid funds and we should expect atleast 7.5-8 % yearly return on that, so as long as INR stays at current 67.50 to USD till March 31 2016 (as against 62.53 of 31st March 2015) the purchasing power remains the same unless dividend is distributed out of that income too.

In any case, we need to be realistic as far as acquisition goes :

(1) Acquisition might be only India-based or US-based as guided by the management and is logical too.

(2) Consolidated 35 % + Margin sustenance might be possible only with an India based target, with US based target, unless its in platform space, consolidated margin might come down to atbest 28-30 % if not 25 %.

(3) With India based target, scope for margin improvement might be much higher as against US based target because there is a limitation to the amount of work that can be moved offshore.

Looking forward to Q3 results on 27th …market estimate seems to be 73 cr. consolidated topline with 38.5 % EBITDA margins…key will be subsidiary performance and its margins and concall commentary post results.

Rgds.

[Mahesh]

Rgdg. relative and possible chennai floods impact on q3 results which I stated earlier, compliance officer has communicated that there was no material impact of the floods on the company and all client deliveries were met on time. I think this was important matter which slipped off my mind to communicate here so doing it today.

Rgds.

[vnktshb]

Does anyone have the results concall details

[senthil_kamaraj]

Concall is at 4.30 PM today. Details will be available 3 hours before.

[vnktshb]

Please post the same as soon as you get it

[Mahesh]

Concall at 4.30 pm today

dialin nos. - +91 (22) 6746 5870 // 3960 0670

BTW Company’s revamped website launched today…lets see how are the results .

Rgds.

[soodhakar]

MPS Ltd has informed BSE that the Board of Directors of the Company at its meeting held on January 27, 2016, inter alia, has considered, approved and declared the 3rd Interim Dividend of Rs. 8/- per share for the Financial Year 2015-16.

Disclosure : Invested

[vnktshb]

From the results it is obvious the company is struggling to grow. Good company and great management. But if the industry pie is not growing I dont think MPS can do much. Yes it can acquire and grow with QIP proceeds. But as someone pointed earlier "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.”

[Mahesh]

Results doesn’t seem good atall…first some statistics :

Standalone constant currency quarterly performance (figures in USD) post acquisition by Mr. Nisith Arora :

Quarterly Performance of MPS North America (all the companies acquired by Mr. Nishith Arora) under MPS :

Key points to note :

(1) On standalone basis, growth momentum regained by MPS in last two years (FY14 & 15) post recovery from Macmillan mess seems to be completely lost.

(2) Even on three acquired companies, Element, EPS & TSI, as on date, company seems to be on verge of ~40 % haircut in topline with no significant improvement in margins. Element is almost 10 quarters old, EPS, which was profitable even before acquisition, is also past 5 quarters, only TSI is 3 quarters old where we need to wait slightly long for performance to show up…but question is was TSI under so much mess that it can dent the performance so severely ??

(3) As per management disclosures, TSI was at a revenue runrate of INR 18 cr. in CY2014 with ~3.5 cr. loss…EPS was at a revenue runrate of ~15 cr. with PBT of ~2.75 cr. in CY14…so effectively, both should nil out each other atleast on bottomline front…Element was already turned around post 1 year of operations and brought to double digit margins…so where is the problem that needs to be seen.

(4) In seasonally the best quarter we have only 1 % cc growt in standalone topline and for MPS North America too out of 52 cr. scale of acquired companies (before acquisition), in 9 months we have 23.05 cr. topline. I was atleast expecting a double digit revenue in subsidiary in Q3, being the best quarter for the industry and company.

(5) If future acquired companies are heavy loss making and are US or UK based then we need to tone down our margin expectation significantly it seems.

(6) Improvement in standalone EBITDA margins and high dividend payment seems to be the only saving grace.

Discl. - Sold some today to rebalance portfolio. Watching concall commentry closely.

Note - This is not a buy/sell/hold recommendation of any sort whatsoever and is part of general discussion. This is just a statistical representation of the facts & figures & derivation out of that is my personal view and I can be wrong. No investment/divestment decision should be based on this.

[hitesh2710]

Flat results from MPS Ltd

Mahesh has highlighted the details so no need to re iterate things.

As said before saving grace is the dividend payout which keeps continuing. So till now dividend of Rs 22 declared.

No of clients billed goes up from 112 to 118 and contribution from top 5 clients is 65% as compared to 70% for q3 fy 15. Same applies to top 10. Part of it might be due to acquisitions contributing new clients for the company. Now company needs to mine more from same clients.

Acquisition remains the key monitorable whenever that happens. Concall details whenever they come about would be interesting to go thru esp in view of questions related to acquisitions.

[srnarayan]

They mentioned a structural shift in earnings due to seasonality and hence instead q3 which is traditionally best quarter will have to compare full year earnings. Can anyone throw light how is this possible given tsi and other acquisitions would have just turned around.

@Mahesh how does the valuations for a fresh investment entry change now? They mentioned they have taken qip investors confidence of not hurrying up acquisitions in order to ensure long term growth sustainability.

[desaidhwanil]

Flattish results for MPS. Key highlights of the management commentary on concall

• All three US entities have been consolidated in one entity MPS North America and cost rationalization/optimization has been done to ensure administrative costs are reduced
• Management would have liked better revenue growth however due to different seasonality attached to businesses acquired in US, the Q4 may turn out to be seasonally better quarter than Q3. The order book is very strong and management seemed confident (and alluded) to a strong growth in Q4
• It is better to compare company’s performance on yearly basis rather than on quarterly basis
• In the quarter, 6 new client additions and included some marquee names as well
• Acquisition delay- They reiterated their aspiration to double the topline in next 2-3 years through combination of organic and inorganic growth. However, management also re-iterated that they prefer to do it right rather than doing it in time specific manner. Mr. Arora again mentioned that they are in no hurry, however they continue to be in discussion with many companies
• Mr. Arora reiterated that the continue to cast the wider net in search for the best fit acquisition and there is no dearth of opportunities. However, company would want to ensure that they make right decision and get the acquisition at right valuations. He also mentioned that he would want to be sure of reasonably good payback period of the investment they make for acquisition
• Management mentioned that they have taken large shareholders post QIP into confidence with respect to the dividend policy and the cautious approach on acquisition
• MPS technologies- contributes 10-15% of overall revenue directly and continues to grow. Indirectly, it is instrumental in increasing productivity of its employees thus reducing cost and improving margins
• Company’s relationship with top 10 clients remain very strong at the same time they continue to add new clients. It takes at least 12-18 months to get decent business from new client as it requires first gaining the confidence of the client in initial months, then increasing the volume based on higher trust, then delivering the milestones for the project and finally billing for the work.
• Company has turned around the first two acquisitions and are now bottomline positive. TSI, they expect to breakeven in next couple of quarters
• Most of the times, company has to pass on the rupee depreciation advantage to the client
• Higher volume at lower cost is advantageous for MPS due to it’s higher productivity due to digicore operations and substantial manpower operating from Dehradun facility. Not many players can compete with MPS’s cost structure hence lower prices will enhance the business prospects for MPS
• There is enough spare capacity in Dehradun/Chennai/Noida hence capacity is not a constraint. Most of the centres currently work on ones shift basis, which if required can operate in multiple shifts to increase the capacity
• Company aspires to increase productivity of its menpower further. They are increasing the revenue without increase in headcount indicating higher productivity.
• Company would prefer to do acquisitions of the size so that it remains largely net debt free company. Their focus on acquisition is in academic/educational publishing. They are open to both smaller multiple acquisitions as well as single large acquisitions. They are examining both kind of opportunities at the moment.
• Management indicated that they will not rush into acquisitions because some of the stakeholders may be running out of patience. They are there for a long haul and want shareholders to appreciate it.

[hitesh2710]

Some points I noted besides dhwanil’s excellent round up on concall

MPS North America has grown 58% Year to date in fy 16. From whatever they mentioned the transformation of these entities is still on.

Smaller acquisitions done in the past have taken a few quarters for proper integration.

MPS is the envy of the market (if one talks to the market participants).

Digicore is useful as a direct growth engine and indirectly it improves productivity. It automates and streamlines publishing process.

Income from qip money (other income which was around 7 crores in q2 but only 0.33 crores in q3) has not been considered in q3 and will feature in q4. (it was there in q2). I guess income is probably received six monthly.

Some cost cutting measures have been taken in q3. esp in bangalore facility, and noida (?okhla operations) as well as amalgamation of US operations in MPS north america.There is no timeline for acquisition. the delay is vindicated by downturn in markets. They dont want to put pressure on themselves by sticking to timelines for acquisition.

Return on cash in balance sheet is 7.5% pre tax. Invested in liquid funds. Small amt in debt funds.

There was a sort of veiled reference to a good q4 many times while answering questions. There seems to be an ace up their sleeve for q4.

[Mahesh]

Excellent sum-up Dhwanil & Hitesh…you both have covered almost the entire concall commentary very well…just few corrections as per my understanding of the commentary :

(1) In addition to consolidating all three acquired entities under MPS-NA, what they have done is consolidated Element & TSI under K12 division because of which it was difficult to provide separate revenue figure of TSI.

(2) Although management was confident of good Q4, but as usual they refused to commit whether Q4 will be bigger than Q3 so whether historical trend of Q3 being seasonally the best quarter will remain or not that is unclear.

Now, some observations :

I continue to maintain that Disconnects remain and continue to widen even post Q3 results & concall commentary…Before mentioning anything want to state it clearly that management seems genuine and ethical – and I repeat, ‘Genuine & Ethical’ but it seems that they are unable to admit certain things because of market and business dynamics…but as an investor, when numbers don’t matchup for stated things I need to be cautious as one more bad quarter could raise extreme caution, in general, amongst investor community for the company.

Explanation for muted Q3 – Likely Better Q4 ??? – A look at the history :

Those who are following MPS story closely and have heard management since the time Mr. Arora acquired MPS must be aware of all the initial management commentaries where Mr. Nishith took pain in explaining in detail why Q3 is the biggest quarter for the company as well as industry (even under Macmillan it seems Q3 was the biggest amongst all 4 quarters for the current acquired business). Now, management is right in its saying that if there is more project-based revenues or content-creation projects, revenues might be lumpy and may be booked more in one quarter than other. But, for significant project based revenues which are expected to be booked in next quarter, normally employee bench is created. Let’s see the total employee trend over last many quarters for MPS :

As can be seen, total employees have infact decreased from the level of 2982 in Q1FY16 to 2974 in Q2FY16 and further to 2909 in Q3FY16.

Another important notable thing is, for the first time post acquisition of MPS by Mr. Arora, Dehradun has seen layoffs or atleast stagnation in employee count for two subsequent quarters.

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Counter argument to this could be project-based revenues or content-creation projects might be more onsite than offshore, but, in absolute terms atleast some addition should be visible in employee count which is missing.

An answer to this could be TSI employees – 15 odd that they have taken on rolls – but, do they have capability to generate revenues of almost INR 0.50 cr. per head for one quarter – only time can tell.

Now, lets leave this aside for the moment and look at last year’s Q3, that is Q3FY15…

Those who were present in Q3FY15 concall (those who were not present can hear transcript on RB), remember the explanation given by management of then muted quarter --”since Q3FY14 was a big quarter and having higher base so Q3FY15 looks muted”…so this is not the first time management has faltered – consecutive two quarters’ YoY they have shown muted growth and that too with unconvincing explanations…

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58 % YoY Growth YTD in MPS North America – is it Logical ??

Management has told to look at 58 % YoY growth in MPS North America for 9MFY16 and see it as a very positive sign— in previous 9 months we had only and only Element revenues booked for 6 months and for 3 months we had EPS+Element revenues…Element had a topline of INR 15.09 cr. in first full year of operations under MPS and EPS as management has told had a yearly topline of INR 15 cr. before acquisition and was not bleeding as it was just a selloff by an aged promoter who wanted to retire…

Now, look at current 9MFY16 where we have Element+EPS+TSI revenues booked and that too aided by 6.6 % currency depreciation (9MFY16 USD-INR Average = 64.67 vs 9MFY15 USD-INR Average = 60.66)…So, now let’s do the calculation :

– Element booked yearly 15 cr. revenues under MPS in first year and we will assume nil growth and nil currency impact so effectively negative cc growth even after 10 quarters under MPS,

– EPS booked yearly ~15 cr. revenues before acquisition and was healthy profit making but still we assume here 10 % haircut in topline with no currency benefit which will effectively mean 16 % haircut in topline even after 5 quarters under MPS,

– TSI booked 18 cr. yearly revenues before acquisition but was bleeding so here we will assume 50 % haircut in topline without currency benefit which will effectively mean 56 % haircut in topline…

So, then we should have 15+13.5+9 cr. = 37.5 cr. yearly topline on the most conservative basis for MPS North America without assuming any growth whatsoever i.e. 0 growth…out of 37.5 cr., we have booked 23.05 cr. in 9MFY16 with 14.45 cr. still remaining to be achieved in Q4FY16…

Are we not fair in giving more than 50 % haircut on recently acquired entity TSI and more than 10 % haircut on EPS which has already passed 5 quarters and negative cc growth for Element which has passed already 10 quarters ?? so after such a fair assessment where is the growth visible in MPS North America in 9MFY16 ??

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Current Valuations ??

Let’s do a valuation exercise for MPS at CMP of 650 against most established and promising Indian listed IT companies…

As can be seen from the above, at current rate of INR 650 per share, MPS trades at premium on many valuation multiples to even Wipro, HCL Tech, Eclerx & Persistent and almost at par to Infosys, TCS & Mindtree.

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Finally, though I want to believe the management but numbers just don’t matchup the talk and when numbers don’t matchup I like to play safe. Q4FY16 or likely acquisition profile will be crucial – faltering on even one of them might not allow MPS to trade at premium or even at par valuation to other IT biggies…this is my personal view and I can be wrong. For the time being high dividend payment might support the valuation.

Discl. - Have Sold to reduce my allocation and looking to sell on every opportunity. Would like to take fresh call post Q4 or Acquisition profile is known even though it might mean reentry at an appreciated rate.

Note – This is not a buy/sell/hold recommendation of any kind and is part of just a general discussion. Discussion is based on available statistics & facts and based on this no Investment/Divestment decision should be made.

[richdreamz]

@Mahesh

An observation based on your posts of which I’m a fan (PI forum and MPS forum), take it in the right spirit if you may.

• On the same day, you can convince anyone on both sides of a trade (either buy or sell) with your insightful posts without any material change in the prospects of a company!

On my thoughts,

1. I too think the management is being soft on explaining the tepid growth, but as investors, we should have firstly invested in the company knowing the slow growth of the industry itself.
2. The bet was on
   a. management’s ability to grow inorganically (doubling revenues in 2-3 years)
   b. management’s integrity and prudent approach to business - Nishith is against taking ‘high debt’ acquisitions for the sake of it and most likely the acquisition would have a payback period of about an year. I agree with this as acquisitions should be done primarily based on "RoCE accretive’ and NOT ‘EPS accretive’. Most acquisitions are done for ‘size’ so the management will be counted as top 5 among its industry and other ‘egoistical’ reasons.
   c. high quality business (repeat nature of its business, sticky clients), high financial metrics, high dividend yield (which may likely be continued - if at a reduced level - as the acquisition would not be a high debt one).
   d. Management did mention that the relationship with its top 10 clients is on a strong foothold and this would help them mine more revenues.
   e. Regarding the employee headcount, the revenues for MPS is NOT directly related to manpower as much for other service oriented companies like Infosys where high bench count ‘may’ be an indicator of future projects. But, even this metric was useful only a decade back. This metric is no more an indicator at all where automation is the order of the day. I hear Rahul Arora saying that MPS digicore has in fact helped them de-link direct proportionality of revenues vs. manpower.

Either good or bad, I liked the below -

1. QIP at high price, timing is as precise as you can get as the current equity downturn started just after his QIP!
2. Again, this delay in acquisition turned out to be blessing in disguise as the valuations would have surely reduced because of current economic conditions. Again, good delayed ‘time’.
3. As per Nishith in yesterday’s call, there is no dearth of opportunities as people are willing to sell companies, so this may be buyer’s market and he might be looking for that last drop of juice and correct valuations.
4. I would like to believe management on their promise of doubling revenues and on making the right acquisition.

I personally feel, MPS is still low risk and high reward preposition coupled with opportunity cost compensated by high dividend yield attractive due to acquisition trigger with an eye on Nishith’s money managing ability comforted by presence of HDFC and Goldman Sachs.

As a matter of disclosure, I hold MPS and no decision should be taken based on my views and my holding bias could be playing games with my mind.

[Vijayk]

Agree, Given the valuations downside is definitely limited.
And there is a decent probability of decent upside in 2-3 years.
However, one would need lot of patience here.
“Stock market is the place where money is transferred from impatient to the patient”

[hitesh2710]

I too agree with richdreamz that Mahesh can convince people on either side with the barrage of information.

If one listened in to concall, there is clear mention of improved productivity due to digicore and that probably might explain the reducing employees. And if one has to stay in the game and maintain profitability improving efficiencies is the best way to go forward and hence reducing a few employees here and there doesnt matter too much.

And comparing different companies esp most of those which are large caps (elephants cant dance for too long) would be fraught with fallacies. Plus one has to put in div yield and ROE which are two biggest drivers of valuations.

I would like to consider MPS as a standalone isolated case and think about valuations. and try to cut through a lot of clutter of information overload.

Based on FY 16 expected earnings provided there is nil growth in q4, the eps figure could be 33-34 per share. Based on that for a company with net cash balance sheet, divident payout ratio as high as 60-70% and excellent return ratios, Since the company is sitting on a load of cash which has been earmarked for acquisition they can afford to pay out dividend in q4 as well. With all these facts I feel safe staying invested in MPS. I would give more time to management to play their cards to pursue growth. And I agree with Rahul when he says that MPS has to be looked at as a company where results have to be compared yearly rather than quarter on quarter.

When stocks start quoting at 4-5% dividend yield it usually implies that a scenario of no growth in near future is anticipated by markets and probably thats why stocks are available at these div yields. Otherwise there are lot of stocks quoting at more than 30 PE also which have in fact shown de growth in past couple of quarters.

Coming to prospects of growth talked about in this concall atleast I could see a lot of confidence of management about doubling their revenues in a time frame of 3 years or more. I would be even happy if they double in next 4 years.

disc: invested since a long time.

[Mahesh]

@richdreamz

I am not trying to convince anyone regarding my viewpoint…just presenting the facts and figures…please don’t take it badly…I have a habit of digging deep into any company and when I find a single disconnect, I create puzzles in my own mind and analyse a company from varied angles to check where is the answer…I just put data points (which I myself make for my analysis) on forum for everyone to see so if I am wrong somewhere or if there is a hidden answer which I am unable to find that anyone can point out…

Rgdg. MPS, if you check my previous posts too, I have maintained that I am unable to solve the puzzle of muted value growth coupled with significant volume growth…For Q3 I was expecting at least 74 cr. topline on consolidated basis with 5 % cc standalone growth at 9.6 mn. USD and a double digit INR topline in MPS North America since in q3fy15 Element had posted a topline of 4.85 cr. and EPS had posted a topline of 1.66 cr. and with assuming even no YoY cc growth we could have at least 7 cr. topline from both these entities…now, TSI posted revenues of just 2.87 cr. in 1hfy16 so I was assuming at least 9.5 cr. topline from TSI in fy16-- a 50 % reduction in cc terms of its cy14 usd revenues – and so in 2h I expected TSI to post at least INR 6.6 cr. in revenues out of which was expecting at least 3.5-4 cr. revenue in q3…when the results came at around 69 cr. topline it was at least disappointing for me as it surpassed even my conservative estimates.

As investors we are actually on the same page…even I am feeling the pain as after holding for more than one year I am selling majority of my concentrated holding at negligible profit if not at cost price…but when things don’t matchup consistently in terms of numbers we are helpless…so please don’t use my data points which are extracted from lot of efforts to convince yourself regarding anything…just use them as a tool to gauge whether they point to anything in your own analysis of thIngs…if factual data points are not taken in that way all discussions will loose their purpose and we won’t be able to analyse the things correctly…point the holes in data points, extract your own data points with efforts as there are varied resources available today like company ARs, peer data from mca, concall transcripts from RB, etc…just to point to an example, I have verbal transcripts of each MPS concall right from when Mr. Arora initiated concalls, on my desktop and all data points pointed in each concall by the management are noted down by me and saved…this is the reason why I had employee data ready…like this way I make a point to check whether a particular concall commentary matches with the previous one or not in case of any company I track…remember, managements are on one side and we as investors are on other side…they are doing good for their business and we need to do good for our business which is investing by keeping a tight check on them.

My apologies if you or anyone else have felt hurt because of my any post or my any other doing.

Rgds.

.

[hitesh2710]

No offence Mahesh,

We might be co investors with different view points and different ways to look at company.

[cool_aksh]

Thanks Mahesh for the lucid writeup.

I also believe that MPS is struggling to grow organically even under the able leadership of current mgmt which speaks volumes about the industry dynamics and best days of MPS seems to be behind us.

If the bet is all about the mgmt capability to acquire a good target, turn it around and make it profitable than i would be very much wary of such bets as I don’t think good, cheap, synergistic acquisition targets come by that easily esp. in the same industry and going after them actively will be much of a help. Also if one were to find a good distressed target, doesn’t it speak a lot about the industry dynamics? and if so, would it not be akin to Winner’s curse? OK. You got a good target, turned it around and made it profitable and then what? Again look out for a good target?

And thinking deep about all these, I also tend to think as to what is the need of acquiring other companies? Is it to grow as organic growth is not coming by or your own survival is in doubt unless you reach a particular scale? or both? And how would you manage to grow when your top clients are struggling? Even I don’t find justifiable answers to all these questions.

Apart from this,I think after recent meltdown lots of good opportunities seem to be emerging at reasonable valuations and considering its high valuations and no growth I partially offloaded my stake before Q2 and fully exited before Q3 so my views are biased. I’ll continue to track though.

Regards,
Aksh