MPS Ltd


(Raj) #506

Key takeaways from AGM:

There was a side talk which happened with Nisith Arora before AGM started. My key takeaway from AGM and that discussion are below:

1) On Mag+ Acquisition: MPS paid 23 crores for Mag+. They have been working with Mag+ team for last couple of months. There are plans to move work to India. Mag+ CEO is going to visit India soon and the process will start. Overall they seem to be confident on this acquisition.

2) On future Acquisition: Seems a bigger one is coming. Somebody asked if the the size will be related to QIP funds got a quick rebuttal that why not bigger. He indicated that he is open for taking debt as well if needed.

He also stated that missing dividend itself is an indication and investors need to interpret it. They are thinking of giving a final dividend only.

3) On GBP fall: He said these things balance out in time. His answer was not convincing rather it was evasive in my view.

In my view the growth for MPS is likely to come from acquisition only. The Industry growth is at best flat and the outsourcing trend has yet to pick up. Basically It’s an industry with a headwind currently

Regards,
Raj


(Mahesh Shah) #507

Concall today @ 4.00 p.m.

Dial-in nos. :

+91 22 3960 0670
+91 22 6746 5870


#508

My notes from Con-call -

  • Dividend cut is to conserve resources for inorganic growth in future as focused at the aspiration of 400 Crore Revenue by FY2018.
  • Mag+ : Current Employee strength is 20, CEO is in India, building an India based team dedicated for Mag+, real numbers would be shared only from upcoming quarter onward to avoid inaccuracy or speculations.
  • No impact seen from currency movement and Brexit.
  • No specific explanation for a Flat Quarter and mentioned to look MPS from YoY basis and not QoQ.
  • Key differentiators in publishing Industry : Wage Arbitrage, Technology and Publishing Domain capability.

(P Sharma) #509

Thanks for the brief summary.

Another reason for not sharing the Mag+ numbers according to Mr Nishith Arora is that it is a modified acquisition and they are still working through the details and numbers. The details would be shared with the Sep 16 quarter results which would be sometime in Oct 16.

Mr Arora also mentioned in passing that they acquired the company for a song. Mag+ according to him has invested more than $20 million in the company and MPS acquired it for a little more than $3 million. Would be interesting to see how things pan out. He sounded very confident about the acquisition.


(vaibhav) #510
  1. Magplus acquisition should be a positive and it should bring a lot of cross selling opportunities and some new customers as well.

  2. Valuation is somewhat expensive. Let us say they do achieve 400 cr revenue in 2 yrs and at 40% ebitba margins.

Let us say other income = 0 (since they will have to let go of the interest income) and let’s say depreciation = 0 as well.

So, PBT = 4000.4
Let’s say tax is 30%, PAT = 400
0.4*0.7 = 112 cr.

So, at 1280 cr Mcap, it is trading at 2-yr forward P/E of 11.4 which is not cheap imo.

Disc: I have bought today. (1.5% of PF)


(paresh.sarjani1) #511

Hi Vicky…
2 year forward P/E of 11 is not cheap? Are you sure?

Can you tell me with what you are comparing this to conclude ?


(vaibhav) #512

Because there are a lot of uncertainties. That 112 cr PAT figure is neither easy nor a sureshot imo. The co. would have to perform well ( organically, and with existing and possibly newer acquisitions and with synergies).

The thing to be positive abt is that the mobile publishing potential market is 5 times the current market size as told by the management in the concall.

Possibly the negative impact of pound currency fall will also be seen in next quarter (imo).


(Mahesh Shah) #513

Post Concall – My Understanding & Personal View :

Mag+ :

Whereas management preferred not to disclose any sort of financial details of Mag+, we got two confirmations from the management side with this regards :

(1) Mag+ had 20 employees.

(2) Bonnier has so far invested 20 mn. USD in Mag+.

Now, based on these two confirmations, the numbers we have from Mag+ AB Annual Report seem more or less correct and the actual numbers might not be much different than that. This is because :

(1) In Annual Report, employee strength of 18 is already mentioned.

(2) If we add the EBITDA losses posted by Mag+ since inception uptill now, they add up to ~15 mn. USD which again matches with the said 20 mn. investment of Bonnier in Mag+.

So, final updated INR converted (w.r.t. currency conversion rate SEK-INR of the respective year) Mag+ numbers since inception uptill CY15 (only one missing quarter of FY16 of MPS) are as stated below :

Regarding the point that MPS acquired only some parts of Mag+ — it seems quite impossible as far as Mag+ core business goes as its not a services business where you acquire some practices/centres and leave others…If we refer press release of MPS, and also refer Mag+ CEO’s communication in respective company’s blog, it is quite obvious that entire IPs/products are acquired by MPS. Yes, there could be some hard assets involved which Bonnier might have kept with itself or likes but otherwise this seems highly impossible. The numbers we have seems to be of core business of Mag+ where personnel costs account for ~76 % of the costs involved and employee count is already confirmed by the MPS management.


Few things require attention with regards to this acquisition :

With MPS acquisition from Macmillan in FY12 for a consideration of INR ~45 cr., the company got a readymade revenue stream (of 32 mn. USD) and it had to turn it around and improve on margins which went into negative over a five year period before acquisition. 5 Years before acquisition by Mr. Arora, MPS was already consistently operating at average 40 % PBT margin under Macmillan.

With Mag+, what MPS has got is – for a consideration of almost half the amount paid for MPS acquisition (INR 23.7 cr.), company has got a revenue more than 10 times less than that of MPS (at the time of acquisition from Macmillan) with no trackrecord of profitability.

– Another key difference is – when MPS was acquired by Mr. Arora, he was in a dominant position to take every decision as he understood the business exceptionally well because of his previous ventures (International Typesetting & Composition as well as ADI BPO). MPS was in the same field in which Mr. Arora had experience of more than one decade and he dealt with similar clients over these many years. To add, business model was also same.

With Mag+, it is Staffan Ekholm (the CEO of Mag+) who will call the shots and Mr. Nishith Arora’s role might be more of an advisor, mentor and facilitator. Majority of the client profile is completely different as also the field and business model and therefore the market understanding seems different. Mag+ focus is corporates and its target field is internal communication of corporates.

– Hence, with MPS, Mr. Arora was able to take the risk of cutting costs even by taking drastic steps such as completely putting to an end the existing sales channel of MPS at that time in Europe since he had good access to the key clientle and was a known figure amongst them. With Mag+, such drastic steps are impossible as otherwise they could severely backfire.

– Mag+ revenue needs to be built in order to turn it around and make it a robust profit-making entity ; and revenue-building needs investment, significant investment in Marketing & Support– a thing MPS has lacked so far. It is also not that MPS has such clients which offer a direct cross-selling opportunity for Mag+ — both’s clientle as also offering profile itself is quite different with Mag+ 65 % clientle being corporate entities who might not have anything to do with academic/educational publishing and MPS’s majority of clientle being academic/educational publishers who might not have anything to do with Mag+ offerings.

– Also, existing marketing personnel of MPS in NA might not be well equipped to effectively sell Mag+ offerings as majority of them come from educational publishing background with the experience to handle publishers.

– Hence, this is a reverse situation, wherein, after acquiring MPS in FY12 for 45 cr., management had to cut costs and resort to asset sale and all to make it profitable (and this it was able to do so even after haircut suffered in topline ; – post acquisition, MPS revenue declined by 7 %) whereas with Mag+, after acquiring it for 23.7 cr., management might have to incur further expenses to make it profitable and this it has to do by ensuring that it doesn’t suffer a haircut in topline right from the beginning.

– Management is right in its saying that Bonnier has so far invested almost 20 mn. USD in building Mag+, then, the question arises asto why Mag+ was sold in totality to MPS for ~3.5 mn. USD – its not that Mag+ didn’t fit its previous parent’s strategy and was non-core to it as Bonnier Growth Media is actually a VC arm of Bonnier and even today it is investing actively in many high potential ventures. Also, Bonnier was in no need of meagre ~3.5 mn. USD also as its a cash-rich entity.

– Then, why Bonnier incurred this significant loss on its investment if, by just tweaking of slight strategy (by appointing VARs, as is said), and without significant further investment, Mag+ can be made successful into a robust profit-making entity ?? Why Bonnier even didn’t keep a minority stake to ensure that its significant investment gets paid back to a certain extent (although such minority stake might not have appealed MPS as its not Mr. Arora’s style of acquisition) ??

Is Bonnier unwise enough to let go a venture which is on verge of turning profitable within 1 year and in which it has invested 20 mn. USD over last 5 years just as it is, by getting just ~3.5 mn. USD ?? Even Macmillan had enjoyed hefty dividends (and therefore cash generated) by MPS over more than 10 year period so the sell-off to Mr. Arora was just exit from a business for additional 45 cr…

I am just putting here the valid questions that are arising as its impossible to digest the saying that without any further significant investment, Mag+ could become a growing profitable entity.

Having said all these, I must admit that Mag+, prima-facie, seems to be the most interesting acquisition done by MPS so far with a great future prospect but if there is reluctance to invest significant further amount in the entity, it might very well go MPS Technologies way. Remember, MPS Technologies was one of the most innovative and high potential entity when it was launched but it somehow lost its way in the middle and never got its deserved success because of relatively more focus on services as also not able to capitalise on first-mover advantage it had.




Dividend Policy Change :

In my 22nd January 2016 post in this thread, in reply to a fellow member, I quoted following :


“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).”


Hence, the change in dividend policy was anticipated – the latest updated statistics on dividend (till FY16) in follow-up to my old posts are :

Total Amount spent by the company on Dividend payment post acquisition by Mr. Arora, including dividend tax) = 153.89 cr.

Promoters’ got total Dividend = 94.79 cr.

Government got Tax on Total Dividend Paid = 23.79 cr.

Minority Shareholder i.e. all of us, got total Dividend = 35.31 cr.



So, for a payment of 35.31 cr., we got a equity dilution of 10 % worth ~150 cr…

For a payment of 113.14 cr. (94.79 cr. as dividend + 18.35 cr. as salaries, rents, etc.,) promoters enabled an equity dilution worth 150 cr…

Who got a better deal ??



Promoters spent 45 cr. for acquiring MPS (50 % via external debt and 50 % via internal funds), so, a payback of 90 cr. – the double the amount they spent – is reasonable and so, it was widely anticipated, atleast by me, that dividend payment will be curtailed from now on. However, the straight effect of this will be on dividend yield of the stock.

Secondly, such dividend policy change has to be short-term and not long-term (unless management can consistently generate compensatory high ROCE) ; otherwise if it is for need of consistent further investment or if the cash is burnt (unintentionally ofcourse) in any way then it will be gross injustice done to minority long term shareholders wherein in the best cash generating period, promoters’ took maximum cash out of the company, then diluted equity and then because of persistent investment in business, cash distribution is curtailed. This is only a fear and with the way Mr. Arora had handled the company affairs post acquisition of MPS, this scenario is highly unlikely.




Likely Big Acquisition & post-acquisition Consolidated Margins :

Current Q2FY17 or Q3FY17-beginning might very well see the much awaited big acquisition finally taking place. This is because, current Q2 might very well prove to be one of the toughest quarter as far as organic growth goes. The reasons for this are :

– GBP has already depreciated by 12 % against INR this quarter if we take the base of average GBP of Q2FY16.

– USD has appreciated by only 2.5 % against INR over Q2FY16 and

– Europe’s 40 %+ contribution doesn’t augur well for the company.

– Also, dividend is curtailed and part of the bangalore asset is sold-off.

– To add, CEO is now putting a firm INR revenue figure of INR 400 cr. to achieve in coming two to three years.

– Lastly, Mag+ details are not disclosed with a promise to disclose them in October’16 (as it was actually not much to disclose in past financials of Mag+ which could have worked in a positive way for the company and it would be logical to club the figures of to-be-acquired entity and then disclose the combined numbers).

– Mag+ acquisition expense as also Mag+ operation loss might start hitting from Q2FY17 onwards. (although it might very well be taken care of at net level by exceptional gain from property sale).

All these point to the big acquisition finally taking place in next few months. However, I see that many are building expectations of 40 % EBITDA margins on a 400 cr. scale. I will also point out here that it is actually the MPS management which has given breeding ground to such expectations while stating that they want to optimise margins even from here on and have enough levers left.We need to be realistic in our assessment and think logical amidst all these hoo-ha.

– A company with a revenue of 100 cr. + which is operating at 20 % + margins and is not having significant debt on its books will never sell out so cheap at the level Mr. Arora might be comfortable with, evenif such company is not able to grow as a standalone entity. A normal minimum EV/EBITDA for such deal will be 9-10x provided growth scenario is as it seems currently for the industry.

– With Mr. Arora’s style of acquisitions, a 100 cr. + company which is facing growth and margin issues both might only get acquired.

– Even a company which has the visibility of operating at 8-10 % EBITDA with a (-1)-(-5) % p.a. topline degrowth and has certain debt on its books might only sell out at minimum 8x EV/EBITDA.

In first case, which is the best case of 20 % EBITDA margins with no significant debt, MPS will have to shell out minimum 180 cr. for acquiring the entity and still EBITDA margins of consolidated entity will come down to 29 % (assuming FY16 EBITDA margin level for existing business of MPS with no growth, 15 cr. topline contribution from Mag+ with 1 cr. loss and 20 cr. EBITDA of newly acquired entity).

In second case, which could be more realistic case of 8-10 % EBITDA margin with negative growth visibility and a certain debt on books (say 10 cr.), MPS will have to shell out minimum 80 cr. (70 cr. cash to sellers and 10 cr. debt repayment) for acquiring the entity and EBITDA margins of consolidated entity will come down to 26 % with likely cut in future topline or stagnant growth. (same assumptions as done in previous case except acquired entity’s 10 cr. EBITDA).

Here we have not considered any entity which is operating at 30 %+ EBITDA (as excpet few, all larger players are operating at sub-25 % if not at loss or single digit EBITDA) as also not considered any loss-making entity (which actually might be the case). Hence, we have considered here two best possible scenarios and still EBITDA margins of consolidated entity comes down to 26-29 %. Ofcourse, it could be possible that cost cutting exercises are undertaken and margins are improved of the acquired entity, but, realistically speaking, in the present sluggish industry scenario, it is highly unlikely that at closer to 400 cr. scale, MPS will keep operating at 30 % + margins even after all measures.

Also, I notice here that many are calculating P/E or EPS based on reported PAT numbers — if one needs to arrive at core business EPS, one has to deduct ‘Other Income’ from PBT and then apply tax rate of that year and arrive at PAT and then calculate EPS…Consolidated Core Business EPS for MPS in FY16 stands at INR 33.1 and even in the best possible above considered scenario (of 29 % EBITDA on 372 cr. topline), it comes to INR 39.4.




Concluding Remark :

In the same reply I cited above (in dividend section) to one of the fellow member on Jan’22 2016, I also quoted following thing :


_“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.”


The third pillar of the story i.e., ‘Generous Dividend’ payment seems to be shaking and if any of the other two pillars gets broken, the story stands a chance of breaking down. If proper support is not given in the form of great acquisition, story stands a chance of meeting an anticlimax. Don’t take me wrong in my saying as even I want this story to reach its deserved destination but there are few questions that continuously bother my mind :

– Why management is so reluctant to admit that there is problem in organic growth and is going to the extent of brushing aside most valid basic concerns too — “brexit and currency movement will not have any impact on the company” — with this saying of the management in concall, what should investors interpret :

  • is the demand scenario so strong in the industry that come what may it will not have any impact on the company then why other players in publishing outsourcing industry are facing pressure ??

  • or is it that company’s positioning in the industry is so strong that it will not impact the company even when most of the other Indian IT and other segment companies who are exposed to Europe are so apprehensive about ??

  • A company with 45 % exposure to Europe (as at FY16) is not feeling or is not fearing any likely impact of circumstances which have made UK’s currency fall 8 % QoQ and 12 % YoY even when the company itself has 27 % of its billing done in that currency ??

– If demand scenario is so powerful or company’s positioning in the industry is so powerful then why since last two fiscals, in company’s previously talked about largest quarter (Q3), management had to give the excuses like – first time – “base of last quarter was higher so we are seeing muted growth” and – second time, “the business has shifted to Q4”.

– Why even simple addition is not working wherein three companies were acquired which had combined topline of 8.7 mn. USD before acquisition (Element = USD 3.5 mn., EPS = USD 2.2 mn. TSI = USD 3.0 mn.) and still we have a shortfall of USD 1.6 mn. as at FY16 (MPS topline in FY11 before acquisition = USD 32.0 mn. + USD 8.7 mn. of acquired entities = USD 40.7 mn. ; MPS FY16 actual topline = USD 39.1 mn. with one acquired entiy having completed 3 fiscals, second acquired entity having completed 2 fiscals and third acquired entity having completed 1 fiscal under MPS).

Will the shocks in case of this company come with a prior warning like we had with many companies like KPIT, Infosys, etc. or is it that no guidance is given so whatever end-result comes is acceptable under norms. A 6.4 % cc standalone degrowth for the first time in last 3 fiscals and a 2.4 % cc consolidated degrowth for the first time since MPS started acquiring companies under Mr. Arora came without any warning (in Q1FY17) and infact is presented in the presentation by disappearance of USD figure of revenue which was otherwise provided in all presentations done post QIP-- is it the correct practice ?? Why investors are not given opportunity to see converted $ figures in a quarter when consolidated degrowth has happened whereas for each of the previous occasion when addition theory was working (with results having presence of newly acquired entity TSI), converted consolidated $ figures were provided (instead of separate standalone and consolidated $ figures even at that time) ??

With dividend payment most likely to be curtailed and simple addition theory also not working on inorganic route traversed so far, am I not betting too much on only one man, Mr. Arora’s, talent ??

– I am betting on Mr. Arora by looking at the history of the way he acquired MPS and turned it around exceptionally well, but when all the other acquisitions done post MPS by Mr. Arora himself are showing muted performance and Macros seem to be extremely difficult for the company, if the much awaited big acquired entity is a USA-based services entity (in the similar space as MPS) which is loss-making and there also addition theory doesn’t work as also significant margin improvement theory doesn’t work, what will happen ?? Is entire investment thesis on only inorganic growth (and that too falling inorganic growth where 1+1 is not equal to 2 but is equal to 1.6-1.7) is correct ??

– Should I turn a blind eye to the fact that post acquisition of MPS, Mr. Arora acquired companies carrying 27.2 % of the topline of standalone MPS and even after 3 complete fiscals, forget the topline growth but the EBITDA margin performance of MPS NA (under which all the acquired entities reside) has been Loss in first fiscal -FY14, 21.73 % in second fiscal-FY15 (in FY15 a company which was carrying 18.3 % PBT margin before acquisition was acquired) and 4.52 % in FY16.

– What if the acquisition is in unrelated area like, in one specific question on Q3FY16 concall, management replied that they are looking at only Academic/Educational Publishing segment for evaluating acquisition opportunities, but, we have had acquisition which is not related to academic/educational publishing ?? No doubt Mag+ acquisition is an interesting one but is it a play on the strengths of Mr. Arora on whom I am betting on ??

– If there are opportunistic acquisitions which are in allied areas where Mr. Arora doesn’t have experience or strength, are we betting on PE-, VC- type story ??

– What if tomorrow because of one big acquisition, company loses net cash status in anyway (as is indicated in AGM feedback), even for short-term ??

If inorganic growth is the only story left and, in all probability, we are likely to see consolidated EBITDA margins post acquisitions settling at where Indian IT-majors are working on and majority of the cash on BS getting used up for acquisitions, does the company working at miniscule scale compared to IT majors and exhibiting relatively inferior organic growth with leftover cash on BS, if measured w.r.t. Operating scale (even post acquisitions) at relatively miniscule levels post acquisitions and the current cash-level (of 180 odd cr.) only likely to build-up over atleast minimum three year period post all the acquisitions in absence of equity dilution (provided consolidated entity works consistently at 30 % EBITDA for three years), is the company justified in trading at the multiples assigned to IT majors and even at a premium to some of the IT majors ??


Here, this recent 21 July 2016 report by Emkay is a must read…

http://www.emkayglobal.com/Uploads/EmkayResearch/IT%20Services%20Sector%20Update_210716.pdf

Although I don’t give much credence to any brokerage report, but, we can’t deny the fact that Q1FY17 has been one of the first quarter where we have seen a generalised trend wherein almost all the IT companies (barring couple odd), whether big or small, facing pressure on both cc topline and margin growth. This is the same quarter where we have seen MPS exhibiting one of its historically highest cc degrowth.

– Now, if there is such deterioration in fundamentals of IT majors, can the company remain immune even after resorting to inorganic growth ??

– If there is such said valuation correction in IT majors as well as Tier-II IT companies, can the company remain immune with now dividend yield also likely to fall inline with IT majors as also cash levels on BS likely to be considerably reduced relative to IT majors ??

If one refers my posts in this thread, I have been consistently stating that absence of organic growth is a concern for this company and it has to start somewhere to let this story reach its deserved destination. However, Q1FY17 has seen one of the biggest organic degrowth as also consolidated degrowth in the history of the company. Although one quarter performance should not be taken as the direction and I concur with management in its saying that we need to check for YoY performance for the entire year. But, if that is going to mean that we again bring into work addition theory wherein Mag+ will add 15-20 cr., another big acquisition will add 100 odd cr. and then we say for the fiscal we have grown by 40-50 % YoY and you only look at consolidated results and not standalone numbers, this is a dangerous game wherein on one wrong step, entire calculation will fail one day. That one wrong step if comes with a warning sign like company losing its debt-free status (even for the short term) coupled with consolidated EBITDA margin fall to 25-28 % levels then it will be great for shareholders ; but, if it comes without any warning sign then its not good atall for investors.

There is difference between good oratorship and a real robust financials/story that every investor needs to understand. Whereas a good orator can, for the short-term, make the audience turn a blind eye towards apparent negatives, finally, the numbers need to catch-up otherwise such negatives will make their appearance with a pronounced effect. A management which frankly accepts the facts without worrying about its impact on its company’s share price makes shareholders far richer in the long run than managements who just say nothing will have impact on our business and margins (eventhough it is evident that they are unable to grow and infact are showing relative degrowth v/s others muted growth in the same quarter) and also indirectly make everyone believe that even at double the scale they will try to work on similar margins…in such companies, when shocks come, investors will never be prepared for that…one wrong step from the management and complete wealth of shareholders gets depreciated

Pardon me for my blunt writeup. If management would have accepted certain apparent facts then I would have not been this much harsh in my understanding. Brexit a non-event for the company, significant GBP depreciation no worry despite 27 % billing done in that currency, 45 % Europe business not a concern, a platform/product based acquisition with no common client profile unlikely to require significant investment to turn it profitable, Q1 cc degrowth, both at standalone and consolidated level, not a concern despite last year’s muted standalone growth with haircut in acquired entities, etc. seem good but seem too good to be true.

Having said all these, let me admit frankly that if MPS can enable a good big acquisition and make the consolidated entity work at even 30 % EBITDA margin consistently without having much suffering on consolidated topline, with no debt on books and WC cycle remaining as it is then it might become one of the only few companies to do so and therefore might deserve rich multiples. However, whereas I thoroughly enjoy watching Super-Hero Movies but my mind is not that great enough to let me believe that Super-Heroic stunts shown in the movie will have no impact on me if I attempt them.

I am talking these in general and not regarding any specific company as I hope and I am sure MPS will repeat its glory as it had done post change of management in FY12 and Mag+ acquisition is a real high-potential acquisition which if handled well can do good to the company.

Discl. - Negligible Holding

Note – This is part of a general discussion with presentation of facts and statistics as is available publicly via varied sources. This is not a Buy/Sell/Hold recommendation and should not be considered in that way by anyone reading this.


(paresh.sarjani1) #514

As usual … Brilliant work behind this… Kudos…


(Milan Shah) #515

Hi Mahesh,

Detailed analysis as usual - however there are two sides to the coin.
Firstly the point regarding MPS trading at a valuation higher than IT biggies like Infosys. The PE ratio is a function of many variables, one major being expected growth rate. MPS has projected a doubling of revenues in two years - is this something that Infosys is going to do as well? It is well established fact that as companies become huge, growth rates decline, so in my mind a comparison between a minnow like MPS and a giant like Infosys has no relevance. If you analyse the market, there are scores of companies trading at higher valuations than the IT majors.

Secondly, about the acquisitions so far not delivering value. Well to my mind, it is due to the nature of the publishing industry. As explained in previous concalls one major reason for acquisitions is the acquisition of large clients - as you know the publishing industry has only limited number of large players. Once the client becomes comfortable, MPS starts adding more services. This process is going to be time consuming.

Thirdly, questions about the lack of appropriate responses from the management regarding Brexit etc, lack of dollar numbers etc., Well I guess there will be minor issues with every management - however, if you look at the overall transparency and pedigree of the management, consider the following factors - how many companies of similar size have a quarterly concall, how many of these are audited by a Big 4 Auditor, a number of clients have asked for MPS to acquire certain entities so obviously the industry has faith in Mr. Arora, how many companies have Goldman and HDFC as investors?

While you have mentioned several times the bloodbath in the publishing industry, have you looked at how tiny the percentage of outsourcing is in that industry? MPS is looking at a massive opportunity ahead of it.

Sometimes too much detail leads to missing the big picture. Anyway, we all enjoy reading your posts so best wishes…


(Milan Shah) #516

Sorry, disclosure is that MPS is a significant part of my portfolio, has given tremendous returns already and looking to add whenever possible.


(Neerav Paliwal) #517

As always excellent post @Mahesh.


(Mahesh Shah) #518

@milan_j_shah

You seem to have completely misinterpreted the essence of my writeup. Let me first take your points and then come to that :

Since you have talked specifically regarding Infosys, let me first give you some data, one example and then come to what I mean to say. As you know, Mr. Arora acquired MPS in FY12…Now :

Infosys 5 Years’ consolidated cc topline CAGR (FY11-FY16) comes to 9.56 % and that for MPS (consolidated, including effect of all acquisitions) comes to 4.08 %.

Now, if one says that MPS was only just acquired by Mr. Arora and therefore needed time for adjustment – so if we give 2 complete fiscals, FY12 and FY13 – in which in FY12 it grew its cc consolidated topline by meagre 1.25 % (v/s Infosys’ 15.33 %) and in FY13 it degrew its cc consolidated topline by -(7.09) % [v/s Infosys positive growth of + 6.63 %) and now take the base of FY13, the lowest base year for MPS and again calculate 3 Years’ CAGR which will give Mr. Arora the advantage of all the three acquisitions since it is from FY14 that acquisitions started :

Infosys 3 Years’ consolidated cc topline CAGR (FY13-FY16) comes to 8.68 % v/s MPS’s 9.11 %. — A difference of just 0.43 %.



Now, let’s look at another angle asto ‘Cash on Books’ which is the most important aspect for future growth, especially for MPS since it has to acquire to grow.

– In FY11, MPS’s ‘Cash on Books’ w.r.t. its then topline was 12 %. To compare, Infosys’s ‘Cash on Books’ w.r.t. its then topline was 60 %.

Now, over FY12 till FY16, both the companies paid dividends as we all know. MPS dividend statistics are provided in detail in my earlier post (before two days) ; for Infosys, providing the similar statistics below :

So, for Infosys :

Total Amount spent by the company on Dividend payment from FY12 till FY16 (including dividend tax) = 23,034 cr.

Promoters’ got total Dividend = 3136 cr.

Government got Tax on Total Dividend Paid = 3624 cr.

Minority Shareholder i.e. all of us, got total Dividend = 16,274 cr.



Hence, if we make a comparison :

With respect to FY16 topline – MPS, in total spent 60 % on dividend payment from FY12 till FY16 whereas Infosys spent 37 %. However, the striking difference is that out of the total dividend paid by MPS, minority shareholders got only 23 % whereas in case of Infosys, minority shareholders got 71 %.

Also, MPS resorted to a 10 % equity dilution during the said period (FY12-FY16) for a consideration of 150 cr. whereas Infosys didn’t dilute any equity for fund raising during the said period.

Now, we will come to cash position of both the companies as at FY16.

MPS’s ‘Cash on Books’ w.r.t. its FY16 topline is at 71 % after taking into account the QIP funds of 150 cr. and ‘Other Income’ generated out of them. Now, if we deduct 150 cr. worth of funds raised, then ‘Cash on Books’ w.r.t. FY16 topline comes down to 13 % – a level similar to FY11 before acquisition.

In contrast, Infosys ‘Cash on Books’ w.r.t. its FY16 topline is at 55 % without any sort of equity dilution.

So after looking at historical data finally, as on date figures we have is :


Infosys, in FY16 posted cc topline growth of 13 % with EBITDA margin of 27.40 % and Cash on Books worth 55 % w.r.t. consolidated sales figure posted in FY16.

MPS, in FY16, posted a cc topline growth of 6.83 % (after giving effect to all acquisitions done) with EBITDA margin of 35.38 % and Cash on Books worth 71 % (including 150 cr. QIP Funds) w.r.t. consolidated sales figure posted in FY16.




Now, I will give you an example — forget regarding current scale of both the companies and take both’s topline base at 100 cr…

Now, for a company which is not able to post any sort of organic growth or a muted organic growth and is likely to face haircut on acquired entities, what will happen after 5 years :

We will take here the same example I gave in my last post of MPS acquiring a company worth 100 cr. topline with 8-10 % EBITDA margins and a visibility of topline degrowth of -(1)–(5) %. Mag+ is already acquired which is carrying revenues worth 16-17 cr. with loss at EBITDA level. So, w.r.t. FY16 topline we have MPS acquiring 46 % revenues by paying 57 % of the existing cash (23.72 cr. for Mag+ and 80 cr. for the 100 cr. entity). Hence, cash levels w.r.t. FY16 topline comes down to 31 % from 71 % post such acquisitions.

So, if we take the FY16 base revenue of MPS at 100 cr., then as at FY17, its topline will be 146 cr. with EBITDA of 38 cr. (26 % as discussed in last post before two days). In FY18, the newly acquired entity might face a haircut of ~10 % as its contracts will be restructured, whereas we assume that consolidated EBITDA margin will improve to 28 %. SO, in FY18, MPS topline will be 142 cr. (assuming no organic growth) with EBITDA of 40 cr… Now, in third year, assume that consolidated entity is able to grow by 2 % with a 30 % EBITDA margin. SO, for FY19, we have 145 cr. topline with 43 cr. EBITDA. Now, for FY20, let’s assume that again it is able to grow 2 % with similar EBITDA. So, for FY20 we have 148 cr. topline with 44 cr. EBITDA. Now, finally in 5th year let’s assume that it is able to grow by 5 % with similar 30 % EBITDA. So, for FY21 we have 155 cr. topline with 46 cr. EBITDA

Now, let’s look at the cash position of MPS at 100 cr. base. As explained before, cash position post acquisitions comes down to 31 % w.r.t. FY16 topline. So, it has 31 cr. cash on 100 cr. FY16 topline. Assuming 50 % EBITDA-to-Cash conversion ratio, at the end of FY21, company will have cash of 139 cr. on books which is 90 % of FY21 topline.

Now, take the case of Infosys which has given cc FY17 topline growth guidance of 10.5-12 %. Assume the same base of 100 cr. of FY16 for Infosys. So, if we assume that it grows 10 % in FY17 with a 27 % EBITDA, so at the end of FY17, its topline will be 110 cr. with EBITDA of 30 cr. Now, for FY18, FY19, FY20 and FY21 we assume the same growth statistics of 10 % p.a. growth with 27 % EBITDA margin then at the end of FY21, Infosys topline becomes 161 cr. with EBITDA of 43 cr…

Now, let’s look at the cash position of Infosys at 100 cr. base. As explained before, cash position of Infosys is 55 % w.r.t. FY16 topline. So, it has 55 cr. cash on 100 cr. FY16 topline. Assuming the same 50 % EBITDA-to-Cash conversion ratio, at the end of FY21, company will have cash of 146 cr. on books which is 91 % of FY21 topline.

So, at the end of FY21, even after all the acquisitions, Infosys will have higher topline than MPS (with both’s base assumed similar at 100 cr.) as also its EBITDA will be similar to MPS eventhough MPS’s margin might be slightly superior with Cash on Books w.r.t. FY21 topline higher with Infosys. This is the beauty of business based on organic growth v/s only inorganic growth.




I cited here this example to make you understand the reason of why I am consistently stressing that organic growth is of prime importance than only inorganic growth. I have taken the same base at 100 cr. for both the companies to make you understand that never get deterred by scale, look at the story in totality. We are attracted towards 50 % growth possibility in MPS even with inferior organic growth, whereas, with 250 times the size of MPS, if Infosys tomorrow decides to travel inorganic route by compromising on dividend payment, it will also grow by 50 % since it has similar % amount of cash on books with no equity dilution history and track-record of substantial dividend payment to minority shareholders and not promoters. To add, because of growing organic pie, over medium term, Infosys will become far more larger (I am talking about % and not absolute value as in absolute value it is already far larger) than MPS can.

Now, when measured on both, present and future financials, a 250x larger company is trading at certain multiples, then, on only inorganic hope, can a 250x smaller company trade at similar multiples ??

With regards to valuation multiples which you were talking about, I 100 % agree with you that markets give multiples based on future financials and not present financials, but, any way you look at it, if MPS organic growth doesn’t start then at one point either its valuations might have to correct or Infosys will have to go up to correct the anomaly that’s what I personally feel and I can be wrong.



– One basic thing we need to understand here, a company resorts to aggressive inorganic moves only when organic growth is absent.

– A big inorganic move like 50 % of existing topline brings with itself many difficult issues which if not properly managed could backfire.

– With only inorganic growth and no organic growth, a company will always lag behind all its organically growing specific- as well as broad – peers. This is because, even with a similar existing topline, an organically growing peer will in the medium-term move ahead of you even after you enable aggressive inorganic moves.

– If inorganic growth is the only way for the long term sustenance, one day there will be dearth of good targets and that will mark the end of the journey for that company.



There has to be something special in a company, especially if its small, to command richer multiples when entire industry is facing headwinds.

If a company’s cash position w.r.t. existing topline is similar,

if company’s organic growth is inferior,

if company’s dividend yield is likely to fall inline with others,

on what basis it will command richer multiples than a 250x larger company ??




Now, to focus on your second, third and last points,…you might say here that I am not comparing apples-to-apples by comparing Infosys with MPS. So, now let’s do that exercise also :

Above, we have considered available USD growth rates of specific MPS peers who have similar business model. These growth rates are without any acquisitions and are purely standalone. Now, when we have given four complete fiscals under the new management for MPS to deliver, isn’t the above picture disturbing ???

Is the same ‘nature of publishing industry’ that we are talking doesn’t apply to other peers ?? I think everyone is forgetting here the legacy of Macmillan from which MPS has come. Elsevier was MPS’s biggest client even under Macmillan era and is still the largest client of MPS. Its not that post acquisition by Mr. Arora the client profile seems to have changed significantly. Where the problem lies that I am unable to understand and that’s why I am fearful.

– And, to add to that if you hear the concalls from FY12 onwards, you see management saying that MPS’s growth is superior relative to its peers. Will we benchmark ourselves on inferior peers and then say our growth is superior ?? When these things get combined with brushing aside valid concerns I talked in my last post, it worries me.

– I completely agree with you that MPS management has been one of the most IR-active management we have seen amongst mid cap companies. But, regarding transparency, they are one of the unique managements we have seen who seem ‘opaquely transparent’ wherein they will talk at length everything except those factual matters which can paint the company in relatively inferior picture. Most of the managements are like that I agree but MPS has been one of the unique ones because it is absolutely transparent and proactive in other matters. It seems to be the case of a good management trapped in a bad business environment.

– Regarding investment by HDFC & Goldman, does it really matter in making a company good or bad ??? Still, to take your point forward, they invested in the company post QIP roadshows when management guided for doubling of topline by FY17-FY18 and reaching USD 200 mn. revenue figure by FY20. Have they added to their position significantly post 20 % correction in stock price w.r.t. their cost price ???



Well, such arguments can go on and on and there could be no end to it. However, coming back to my first sentence asto you not properly interpreting the essence of my writeup before two days —

– While writing that, I did assess both the sides of coin but the side which is getting heavier is unfortunately not the brighter side. Also, while writing the said writeup, I am very well aware that if Mr. Arora can clinch a great big acquisition and turn out again 35 %+ margins within two years, this story could be a great story (this I very well said in my last para in the said writeup). But, the story is getting minimised to only one man and one act of that one man with other elements of the story slowly getting eliminated or not evolving as anticipated.

– As you must have noted in the beginning (~2 years before in 2014), when I started digging deeper into this story, I gathered data of 46 companies – big and small-- of the industry and read varied articles. The growth which Indian peers were exhibiting pointed that post stabilisation after acquisition, MPS will be able to post such growth. If you note in my post at that time, I had said at that time too that average EBITDA margin range seems to be 20-25 % which is great for this industry if topline can exhibit anticipated growth. However, story didn’t evolve as anticipated and disconnects between management words and reported numbers widened every passing day. Management never explained what is the problem instead put up a brave face stating that it is satisfied in the way it is growing. QIP funds were raised ahead of time, no acquisition done even in the worst global period (remember, today if acquisition is done, this will be one of the best global liquidity periods where funds are not hard to come by and therefore valuation might be an issue) and now dividend also likely to be curtailed. Brighter side of the coin so far hinges on only one act and that is the big acquisition that is to be done.

We as investors are on the same page so please don’t take me wrong. As management they are doing what is right for the company and as investors our job is to analyse the numbers reported and not trust (as well as distrust) management blindly.

Rgds…


(saurabh shankar) #519

Hi Mahesh/ Minal,

Great discussion. My thoughts on this have evolved over a period of last 3 years. From being my largest holding to a smaller allocation now.

The story for me had 2 components, 1) Turnaround of MPS 2) Acquisition driven growth

If one looks at the base rates of success for both scenarios both are actually quite low. Knowing that i still invested at turn around period due to valuation comfort and dividend yield.

For the second phase of acquisition driven growth, i remained invested for a long period as the valuation comfort and dividend yield cushioned you against the low success rates of acquisition.

But, if we look at present now valuation comfort is gone. To me that+ low acquisition success probability make it not such a compelling bet.

Having said that i could be completely wrong in my interpretation of acquisition success rates and nishit arora’s capability keep turning around acquisitions non-stop


#520

Found this excellent synopsis (below attached image) about Mag+ on their Facebook Page which really helped me to understand about Mag+.As more and more content is getting digitized and consumed via mobile platform, Mag+ seems to be a niche business. Keeping fingers crossed in anticipation that Mr Arora does an MPS(transforms\turnarounds) to Mag+.

.


(Mehnazfatima) #521

It may not be as simplistic as the chart seems to suggest…but it need not be soooo complicated as some of us make it to be… sometimes a picture is worth more than a thousand words…


(Growth_without Debt) #522

(1) Cheaper accessibility of high speed data to users, (2) competition which forces publishers to improve operation efficiency and more drive on digitization, MPS is the best placed to take benefits of both opportunities to translate it into earnings especially after acquisitions of Mag+.
MPS is presently in consolidation stage but will give good return over few years.
Disc - Not invested but eager to buy


(zygo23554) #523

Had looked at this a couple of years and decided not to invest since the nature of this business falls into an area that is susceptible to rapid technology obsolescence and disruption.

MPS is an outsourcing player for publishers but their customers (publishers themselves) will be threatened by the digital theme at some point of time in addition to self publishing platforms. How and when this will play out I obviously do not have an answer, this reason by itself is sufficient for me to stay away from this.

I’d rather look at businesses where technology led disruption can play as limited a role as possible. That has been my thought process for the past 3-4 years and I don’t see any reason to change that yet


(A. King) #524

Is anyone actively tracking this company? I find it frustrating that even google search does not yield much of news on this company.

Off late it appears to have gone dormant. South american adventures playing adversely?


(Mahesh Shah) #525

@ausking

Dormant stage is the best stage an investor can look for ; provided future is certain and bright for the company ; only the much awaited big acquisition can provide some clue for that.

Q2FY17 results are due next week and I will be surprised if some sort of meaningful acquisition is not announced alongwith that…this is because second time interim dividend is skipped which means most probably we will have only one dividend and that is with Q4 and it will be significantly lower than previous ones.

Secondly, Q2 might prove to be a tough quarter with current Q3 getting even tougher because of significant depreciation of GBP against INR and 25 %+ of company’s contracts getting billed in GBP.

To give a brief background w.r.t. awaited Q2FY17 results :

Avg. USD/INR rate for Q2FY17 = 66.93 v/s Q2FY16’s = 65.22.

Avg. GBP/INR rate for Q2FY17 = 87.86 v/s Q2FY16’s = 100.62.

Q2FY16 GBP billing = 30 % v/s entire FY16 GBP billing = 27 %.



Hence, if we assume 0 % organic constant currency growth, and 27 % billing in GBP for Q2FY17 – then, based on respective currency realisation rate, Consolidated INR revenue has to be at Rs. 61.75 cr…

Add to this Magplus revenue which was acquired in Q2FY17 beginning so will have complete one quarter booked under MPS…based on yearly run-rate of Magplus, ~INR converted revenue of Magplus should be Rs. 4.80 cr…

So, on a 0 % cc growth basis, MPS Q2FY17 consolidated topline should come at Rs. 66.55 cr.

Now, if we assume a meagre 5 % cc growth [because Q1 was a disaster with -(2.4) % cc degrowth so building case for spillover into Q2] then Q2FY17 consolidated topline for MPS should come at 69.50 cr.



Looking into Q3FY17, although we are into quite early of Q3, but as on date, average October’2016 GBP/INR = 82.90 which is a further depreciation of 5.6 % over Q2FY17 and a 17 % depreciation over Q3FY16 average rate.

All and all, Q2FY17 again will be interesting to watch.

Rgds.

Discl.- No Holdings.