My take - MPS timed QIP at an opportune time for the company at 836 per share. Companies raise money when money is easily available. They probably thought they would manage a quick good acquisition then but haven’t found good opportunities other than MagPlus (MagPlus too was pretty small sized).
Their cash balance is ~300 cr on which they are already earning ~9-10% pretax return today (25 cr).
Their overall EBITDA margin is ~30-35%.
Hunting for a good acquisition target which is better yielding than the current cash yield, and which at the same time fits the overall work theme of MPS is probably turning out to be a big challenge. Rahul Arora said they are trying to hunt for something that is a mix of content and platform, or a pure platform. They don’t want to add pure play content as it is difficult to grow. Instead, they might go for some similar verticals where their existing knowledge-base can be of assistance.
I feel it is good that they are just not splurging out money on any ‘unworthy opportunity’. They keep saying that they are proud of their capital allocation track record and would like to maintain a clean slate there. They said they will try do MPS part 2 i.e. acquiring something and turning it around big time like they did with MPS. They are trying to have a EPS accretive acquisition of decent size, though don’t want to limit themselves to that. If an opportunity presents itself where they feel despite it being a loss making business, if they can turn it around, they might go for it. Critical thing will be the valuation they will be getting the business for. I think they are taking time as they want the acquisition to be min. 15-20% EBITDA accretive, which they can take up to 25-30% (close to overall company profitability levels). They said they are looking for a meaty company with revenue base of 10-30 million USD (60-180 cr).
I just hope they start paying dividends back again… as the cash they now got is already enough for a decent sized profitable acquisition. No point accumulating more money when they can be generous.
One worry is the decline in their content base revenue. I am not sure if they have lost any clients. They did say that they are taking a bit of hit to board clients with huge potential. So initial price points are lower which they will trade-off with better volumes. But volumes have not come back. Some client side slowdown is one of the causes the mentioned.
Good point - Platform based revenue and profitability is improving and is now close to content based EBITDA%. There is further room for improvement here. This is pretty good.
Q4FY18 is going to be sluggish in terms of revenue (similar to Q3). Expecting to acquire a new company in Q1/Q2 in FY19.
Regarding 400 cr guidance for year end, they shifted the goal post further by 2 qtrs.
Content solutions are forming a baseline this year and will grow around 5-7% from next year. Platform business will grow in double digits.
Disclaimer: Invested. Added more in last 3 months.