MRSS - Niche Market Research play

Stock Opportunities Untested - but worth a good look
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MRSS India ( 539229 ), is a small company that is listed in the BSE SME exchange.

What attracted me to the company initially was the level of corporate information and disclosure they had put out, which was disproportionate to the market cap at which I entered the stock.

MRSS ( http://www.mrssindia.com/ ) is India’s only listed market research (MR) agency. What differentiates MRSS from the other MR agencies is the fact that they use the latest tech to conduct their surveys.
( http://www.mrssindia.com/about-mrss-india/leveraging-technology.aspx will give a better idea )

The company declared the following numbers for H2 ( quarterly numbers not disclosed by companies listed on SME platform )
http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/7A12BF9B_7398_42DB_919D_E83DD87E0D34_114541.pdf)

Digging deeper, I found the following information.

About the company

  • the only listed market research (MR) co
  • specialists in digital MR. Have introduced technology such as eye movement tracking, pulse tracking , webcam based face reading, etc.
  • top clients from across genres…including HUL, Voda , Cipla , Yamaha ,etc.
  • impressive management lineup. For example, the guy who heads the auto practice is the guy who founded tatamotors MR division and worked there for 35 years.
  • The MD Sarang Panchal used to head asia pacific region for AC Nielsen ( http://www.mrssindia.com/about-mrss-india/our-team.aspx )
  • total 47 employees across 3 cities. Looking to increase headcount with increase in business.
  • pure digital is currently 30% of rev…aim to take it to 60%
  • 65% operating margin on pure digital work…after tech/direct/incentive costs
  • 65% is repeat business. Look to maintain it at 65% despite aggressive client additions by increasing share of clients MR wallet.

About the numbers

About the OFS

  • 10 cr amount
  • ~18% dilution
  • promoter stake to come down to 61%
  • lot size to be reduced from 2500 to 1200
  • first ever follow on offer on bse sme platform
  • 8.5 cr to be used for working capital. Rest as down payment for purchase of office at Mumbai. Currently on rent which will be saved driving margins even higher by 2.5% on current revenue level.
  • OFS closed with 1.6 times oversubscription. Shares now listed

Areas for concern

  • no bad debts till now…may change as clients get broad based.
    - receivables are high. I guess as the company becomes larger , it will be able to command more stringent payment terms. As of now working cycles are long…typically 90 to 120 days after project finishes._
  • MD Sarang Panchal hardly owns any equity. is may get corrected when they issue ESOPs. Ideally I would like to see him pick up some shares from the open market
    - No dividend
  • No q1 and q3 results…so no way to know what’s happening for 6 months. Hopefully, the stock should get listed on main BSE platform soon…thus bringing about more transparency.
  • challenges are balancing growth and receivables, avoid complacency.
  • company still small in terms of revenue

Size of runway

  • Indian MR industry size only 4% of ad market compared to 11% in USA and 25% in UK
  • Co has the potential to grow revenues 100% CAGR for next 2/3 years due to small base, size of opportunity and niche product offering
  • recently added social research person…see huge upside

USP

  • pioneering implicit research in india…not asking direct Qs
  • huge demand for this service by clients which MRSS able to resolve thanks to technology…example : eye tracking glasses. Generates heat map of stimulus response.
  • getting good work from tv channels…send ads of forthcoming serials to 1000 respondents and tracked 7 muscular responses via webcam
  • best part is that the survey need not be done in a controlled environment…respondents can go about their lives as normal
  • attracting global tech enquiries since listing
  • aim to be a marketplace for MR tech
  • the moat is in the research design
  • deal only with large cos.
  • co is causing disruption in the MR field
  • barriers to entry is access to tech and contacts with clients
  • no significant competitor right now
  • key usp is fast TAT…typically takes 25% of time as compared to traditional methods

Disclosure : I own the company and applied in the FPO as well. Will look to add more as the story plays out.

MRSS aims To become the largest and most profitable Independent Asian MR agency by FY 2018.

I am betting on them to make it happen.

Mcap when posted : 70 cr ( post FPO )

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MRSS bagged order from MP tourism today.

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/5C2B8EEE_0294_4662_93F1_FBB907358212_153405.pdf

The company seems to have a good sales team. Or they are well connected.

Successful completion of this may open up other avenues with similar tourism depts.

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It has very high receivable days… almost 6 months delay in payments. Is it mainly catering to government requirements? And it has increased from 3 months to 6 months.
If the receivables are written off, the entire equity would be wiped off.

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@akbarkhan…excellent observation. If you see my initiation note, the one point that i have fully highlighted is the debtors amount.
So what prompts me to invest despite this ?

  1. they haven’t had any bad debts till now
  2. no single client dependency…so the chances of the entire receivables being written off is remote
  3. Clients are mostly blue chip / mnc …minimal govt. billing
  4. some of the newer contracts which they are signing are with 50% money upfront
  5. All incentives are paid not only when all the money comes in, but the client gives a satisfactory response to the project.
  6. The delayed payment seems to have been built-in in the quotation, evident from the margins
  7. Receivables is an industry phenomenon and not specific to MRSS.
  8. as a young company, they would have had to give extended payment deals to break into the industry. As they get more established and well known, they should be able to leverage some of that into better payment norms with their clients.

Having said that, the one thing I would track closely its the debtor column. It has the potential to derail the story…but if managed properly ( bringing it to within 90 days )…then we will get ownership in a wonderful business with niche offering, high ROCE and margins, and free cash flow.

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@thestocklady and @akbarkhan

The work and growth these guys are doing is really impressive…It is almost too good to be true kind. I have a few queries:

As i understand this is a subsidiary of larger MRSS (which claims to be amongst Asia’s largest on some accounts blah blah). I am unable to understand why would a promoter (which is corporate) instead of spending money and time in gestating the business comes out with an IPO and follows that with an FPO, just in less than two years. Would it not make sense for them to have spend some time and money in building this business before milking it.

Other part is executive comp. Ex P&G, MD Asia- AC Neilsen taking just 42 lakhs and now being increased to 84 as per 2016 annual report. This guy does fabulous work in terms of growth, doesnt get sweat equity and owns just 1 share in the company??

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Right… debtors is the figure to track. I would wait to see improvement. I can’t fathom why such blue chip clients would delay in paying few lakhs.
@narender The funds are needed only due to fund the working capital as receivables build up.

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I guess you are missing the point. If this is a subsidiary of a larger company (this is key, this is not owned by individual, barring what the CFO holds), and entering or playing a role in a new market; why would they come out with IPO this early and again an FPO, diluting their equity holdings (now just 60%).

Wound’t it make sense for them to fund the business in initial years and then come with IPO, increasing their financial rewards considerably. The other explanation could be that the Parent doesn’t have funds to fund this business. If this is the case, we might see further continuous dilution for growth or money being shipped to parent through loans etc, to help it tide over the crunch.

Lastly, its not atypical for a FMCG companies to demand long payment terms. Some just function this way.

I rest my thoughts on this company.

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The world wide leader in MR research is Neilsen.
I checked nielsen’s BS, they also have a receivable days as high as 76 days. Being leader having a t/o of $6B, still they have such a high receivable days. Hence at a small size they will definitely by having high receivable days.

I had an opportunity to meet the management, I asked why IPO and FPO.
They did an IPO just because BSE had approached them. Hence the issue size was also very small.
As far as FPO is concerned, they said they would have preferred a placement, but the advise for same latter when the proceeding for FPO was already started.

Parent company does only the field work, which has hardly 10% margin. I doubt they could have financed the company.

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http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/DFFFF7E1_5482_4901_B1D7_26B4D98A1FA1_133642.pdf

One more order win for MRSS in the tourism space

Mcap when posted : 77cr
Disclosure : increased position since last post, now 11% of portfolio

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this is listed only on SME platform right? can we buy the shares from our regular accounts? or does it need some min lot size ?

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The min lot is 1200 shres. U can buy it from your regular account.
Or you can wait for it to list on the main board if u want a smaller qty.

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MRSS India is a listed market research company.

Market Research (MR)
The MR industry has been around for years. The reason that most don’t take this as a serious industry is owing to the output quality. A lot of us would have experienced a paper pen questionnaire/interviews. Frankly such questionnaires/interviews can’t capture the real bias that customers hold. Hence the data output from such studies doesn’t hold great weight. Also there are cases of proxies who merely fill in anything

How Majestic MRSS began

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Source: Concall Transcript

So Sandeep & Raj started this asset light company with minimal investment. Simply put - Labour arbitrage for MR. Clever stuff. However they did this for the large MR companies like Nielson, Ipsos and the likes.

MRSS India

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Source: Concall Transcript

Problem area identified: As discussed above the biggest challenge that marketing heads would face with MR was validation and authenticity of the data.

Solution: Add technology to the old school MR. The fact that a senior industry veteran also became a part only lends further credibility to the original promoters.

By adding digital technology to the old school MR process, they are not only able to produce output faster but the quality of the output is far more reliable.

What does digital technology added to the old school MR mean?

MRSS has a strategic tie up with several tech partners:

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Source: Annual report 15-16

Example of the above technology in action:
Assume you are a shirt company and want to test the impact of your TV advertisement. You will spend money on the ad campaign and more money on getting it on TV. Is there any way to measure the effectiveness of how customers liked your ad?

Old school MR: Take a pen paper and ask questions to the audience.

What doesnt get captured through this method: bias the customers may have or the fact that the customer hasn’t yet figured it out or that depending upon his mood he/she may respond favourably or not. Many such things. Im sure you get the idea

Digital tech + old school MR: MRSS will make you wear spectacles while watching the TV ad. They wont ask you whether you liked the ad or not blah blah. Through IRIS tracking they will see how your pupil responded. Did it dilate, was it dry, where did it move, etc etc. - Hence they use technology to give an output.

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Screen Shot 2017-02-10 at 2.57.19 PM.png865×244 136 KB

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Source: Concall transcript

Technology partners are paid part licensee, part pay as you go, part % of revenue or a combination of all. Hardly doubt that this is exclusive with any of the technology partners though. I would certainly trust such data better over the old method.

Competition:

Screen Shot 2017-02-10 at 3.02.51 PM.png871×225 133 KB

Customers:

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Numbers:

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Few challenges:

  1. Receivable cycle will continue to be stretched until the company becomes a formidable player in the industry where it can start to command.
  2. Educating the market may take long. Currently they are creating a market
  3. Will large customers really provide a large wallet share of their spends in these activities is yet to be seen
  4. MRSS wants to acquire companies. Yet to see how they will pay for these acquisitions
  5. Will they seize the first mover advantage?
  6. Managing working capital prudently
  7. How do they prevent data leakage/fraud?
  8. Low experience in capital markets
  9. Model still being tested
  10. Min lot size 1200 shares

What i like about this business:

  1. Promoter team: Like the team composition. The way i see it - good combination of ambition, hustle and experience.
  2. Sector agnostic
  3. Asset light business model
  4. Operating leverage
  5. Scalable
  6. Profitable even at this size
  7. Has a sticky nature of services
  8. Industry hasnt changed in many years; these guys are trying to do something about it

Disclosure:
Tracking position; recently invested

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Surprised by Valuation numbers.

I work in market research. My company has 9 offices across globe. They specialize in implicit research using eye tracking and brain map. Revenues of company are 30 MN USD+ and profit around 3 MN. And a Japanese group bought our company last year at 25 MN USD… Given that, valuation seems very high

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the difference is in the margins.

MRSS is a 25% net margin business , with NPMs to grow with scale.

In India, if investors see a good story developing, they will price it beyond the reach of value investors. U will keep waiting for the correction which may not come. Eicher…tastybite…page…many examples where value guys missed out.

Having said that…would love to see it at 130 again so that I can add to my existing position

Disclosure : invested. mcap when posted 100cr

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i think you must map the lifecycle and stage of business with the receivables here. this is a new company and does not command a pricing power as yet. hence to get business they have to accept terms that customers would like to dictate. when MRSS becomes larger and the ‘bargaining power’ improves in their favour, we should see a reduction.

also receivables wiping out equity is unlikely given the pedigree of some customers. they cater to well established players instead of small clients.

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thanks for sharing this. very useful. how many years were they in business? were revenues from a single geography or diversified? what was the estimated staff strength for this 200cr topline. If you could pls share. thanks

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receivables has always been a problem in the market research profession esp in india. Indian clients (however blue chip they are , infact the more bluechip the worse) just dont pay up. All Indian customers of market research services treat their market research providers in a shabby manner. Overseas clients are slightly better ( in terms of payment) but on the other much more demanding. I really do not see this trend changing. Phokat ka research sab ko pasand hain. Its the sad truth :frowning:

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Before, the sad part of india is we like overseas brands, so we choose Nielsen, GFK, Hotspex & more, but that is grand mom theory. Good to see view from your side. More negatives welcome, so we may discuss more. phokat ka research reports abt shares may work. but PHOKAT ka industry research will not work for companies specially listed. if so why standard chartered gave order to MRSS.

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i am just pointing out the sad receivables situation in the MR industry. Be it MRSS or any other agency. Receivables have historically been an issue.

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I found this in one of their IR presentations

Although they take 50% payment upfront, they still have high levels of receivables. Sounds like they could be using aggressive revenue recognition technique to make their P&L look great.

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Operating cashflow is poor and although this is not a capital intensive business, their operating cashflow cannot meet their minimal investment needs requiring company to raise money from financing activity.

Promoter is choosing to dilute his stake in the company by selling shares to raise money rather than borrowing. This indicates they expect cashflow to be poor for a long time. Normally, for such a small company with growth potential, why would promoter dilute stake at an early stage just for funding working capital?

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