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Saksoft Ltd - Value buy in an exploding mobile and tablet market

Saksoft Ltd - Chennai based Mobile technology company

  • Main business – in simple words - conversion and testing of compatibility of existing software of corporates to new age mobiles and tablets, big data analytic services and mobile app development. This business segment is exploding because of mobile and tablet devices becoming more and more advanced and prevalent with individuals as well as corporates.

  • More than 80% of their business is from US and UK

  • Last 5 years revenue CAGR 22% and profit CAGR 35%, first half of FY 2016 grown by 30%.

  • ROE – 15% (increasing YoY) and RoCE 19% (increasing YoY) – currently it is less because they have done many acquisitions in last few years and some of the impact has come in and some is yet to kick in

  • Even though they hv done 4 acquisitions their debt to equity is very comfortable at 0.27 and most of the acquisitions are funded through internal accruals. Infact the company has 22cr of cash on its books as on Sep2015 so debt to equity is infact 0.09 times. Company has spent about 100cr in acquisitions.

  • Promoter holding is 73.5% and about 9.5% is held by more than 1% shareholders, so very less float in the market. Promoter Mr. Aditya Krishna was one of the 4 team members who started citi bank credit card business in India in 90s.

  • Its 2014-15 annual report shows complete transformation and clarity in vision of promoters over earlier years.

  • Currently company is available at 200cr market cap and did 17.37 cr profits in 2015, hence available at 11.5 times 2015 earnings. In first half the company grew its profits by about 30% from 7.15cr to 9.4cr, so keeping the pace of growth at say 25%, the company is available at around 9.2 times 2016 profits. Hence great downside protection

  • It is not widely covered on media and blogs, so could be a great money making opportunity as it gets exposed over period of time.

  • On a negative side, many of its employees reviews on glassdoor r not encouraging, but numbers show a different story and margins r nt as high as what we expect from an IT company.

Disclosure - Have a starter position

Would like to know your views guys…

2 Likes

Nice writeup…can you please elobrate somewhat on the business segments…what exactly they do…

2 Likes

Hi Abhishek,

Thanks. In layman terms their main businesses r following (all heads r taken from their website):-

  1. Information management and application services - making mobile websites and apps for other businesses and corporates. Also conversion of their existing website so tht they r compatible to mobile phones and other such devices.

  2. Business Intelligence and Datawarehouse - Every corporate who gives them order fr making mobile application needs to process tht information intelligently and store the same information somewer. Take a simple example say a bank has given them an order to make an app which can help them transfer money etc thn all the transactions need to be stored somewer and user request of fund trf needs to be processed intelligently. Saksoft helps those banks make such programs which r compatible to mobiles and provides server where the data is stored. Like what infosys did with finnacle (which was a computer versio) in early 2000s.

  3. Business Analytics (or recently ppl hv started using words such as Big data analytics) - Right now what is happening is tht through any corporates internal servers and through external mediums like facebook, twitter, flipkart and other such websites A LOTTTT of data is being generated. Billions of ppl posting on fb,twitter, so many ppl doing transactions on ecommerce websites etc r potential target markets fr a lot of corporate. Say fr eg u came bk from a holiday to Mauritius and uploaded photos and wrote words “Mauritius” thn for a corporate selling any merchandise related to Mauritius u r a target customer. So Saksoft creates such programs which can analyse this large number of data and find relevant things which can help grow ur business. And this business of analytics is rapidly growing bcoz of mobile and tablet devices which r growing very fast.

  4. Software testing - Ppl use diff mobiles and tablets and each company manufacturing these devices use diff technologies. So if saksoft is making a mobile application thn it should work on all such devices irrespective of the make of the device. So saksoft has created a testing centre in Noida doing exactly this which can test upto 100 devices at a time. Again this is a huge market because number of mobile devices r just going to grow in foreseeable future.

Now these businesses r nt something which cannot be replicated by others. Entry barriers r few. But any mid sized corporate would want to give their order to an experienced player in this industry in order to avoid any future issues. And Saksoft being one of tht it is expected tht it will grow with this market growing in future. Ofcourse like any other business there r inherent risks of changing technology etc on which you will hv to take a conscious call and invest such proportion of ur capital which may be a risk capital fr u.

Also above examples r just simplified version of their businesses and they r into a lot more complicated stuff thn described above. Above description is just for non techno ppl like us to understand their business in simple terms.

All the best and happy investing…

5 Likes

Hi Guys would appreciate your views on the stock.

Thanks,
Abhishek

this stock run up too fast in last 7 trading session its all time low is 26 and operating margin is not promising compare to other company trading at very rich valuation i am tracking this co

1 Like

Hi Dhanvarsha,

Thank you for your observations. Even I am not sure why operating margins are low (I mentioned tht in my note). Regarding stock running up in last 7 sessions, it has nt much relevance to its business since even at this price the stock is available at reasonable PE of 10 times FY 2016.

Hi @onliabhishek company acquired ThreeSixtyLogica in Dec 2014. ThreeSixtyLogica earned revenue of INR 275.58mn during financial year 2014-15 compared to INR 147.02mn during financial year 2013-14, a growth of 87.44%. The PBT of ThreeSixtyLogica grew by 161% on consolidated basis and increased to INR 75.60mn during financial year 2014-15 compared to INR 28.92mn during financial year 2013-14. Of the above the proportionate amounts pertaining to the quarter ending March 2015 have been used for consolidation purposes.

Takeaway -

  1. ThreeSixtyLogica at no growth rate will safely contribute 7.5 crs. to PBT. So we are looking at ~INR 22crs FY2016E PAT
  2. SQS India BFSI - another listed IT company in testing is trading at ~38x P/E. Saksoft is very cheap in that regard

P.S. not yet invested. Evaluating between Allsec Technology, Kellton and Saksoft
Allsec and Saksoft have similar market cap. But growth of Allsec numbers will be stronger in case closure of Mortgage business.

1 Like

Thanks Pratik for your valuable reply. It is an interesting analysis. I had not analysed Allsec. Will do tht asap

All the business segments seem to be standard offerings from the major IT players. How would such a small company be able to fight the big IT companies? Do they have any differentiated service or product offering?

[quote=“onliabhishek, post:3, topic:3648”]
Now these businesses r nt something which cannot be replicated by others. Entry barriers r few. But any large corporate would want to give their order to an experienced player in this industry in order to avoid any future issues. And Saksoft being one of tht it is expected tht it will grow with this market growing in future.
[/quote] Saksoft is NOT a experienced player nor a market leader. They are a small and insignificant player in this market. Hence, my question.

1 Like

Hi Basumallick,

Agree with your view on its products being a standard offering by major IT players. Thats why I wrote that entry barriers r few. This is a sort of business like earlier what used to be making websites and its maintenance, which after some number of years many ppl/companies will start doing it. But only those survived who had long term contracts with many large and mid sized corporates and eventually they took away piece of larger pie.

In my view, the whole mobile related IT industry has started becoming advanced in last 5 years (Saksoft also changed its business model to mobile related IT company from 2011). Hence definition of “experienced player” might be a little different here because an experienced IT player might not be experienced in Mobile related IT technology and thus there is a space for companies like saksoft and kellton. Also my comparison was not with the large IT giants but with the fragmented market of mobile IT service providers. So for eg if a mid sized bank or for tht sake any corporate has to give its mobile technology contract than Saksoft fits the bill perfectly, because it has a complete infrastructure in place. I think I used words “large corporate” which was misleading, which I hv changed to mid sized now.

Anyways I think everyone will look at same company differently and thats y there will be a buyer and seller at the same time in the market. So lets see how the mobile story plays out with Saksoft.

All the major customers are actually already going to their SI vendors for work related to mobile, testing etc. Every large/mid sized customer already are engaged with some IT partner and they are typically the first people who get called for any new work. Unless there is a very specific product or service offering that the company offers, these type of small companies tend to remain small. They are typically started by an entrepreneur who has 1 or 2 customers and they struggle to get beyond that. So, one key monitor-able is the revenue as a % from top 5 clients.

I would request u to go thru the company’s annual report and also find out abt the promoters background. The promoters hv been in technology business since 1999. One of their major clients earlier ws citi bank. They were into similar business earlier bt on Web platform so assuming “every corporate r engaged with some IT partners” even they will hv a set of customers who will give them revenues. Their numbers growing at 35%p.a. tells us tht. Some part of it is attributable to acquisitions ofcourse. As per ur suggestions will try to find out what is unique abt the products (whether there is any) and revenue from top 5 clients as well. Good to know ur views. Thanks for ur assessment…

@onliabhishek,
Very good write up…
Couple of question from my side

  1. why the sales growth is subdued in last 1 n half year, it is more or less flat
  2. any guidance regarding sales or margin in future?

Regards,

Ateek

Disc- not invested

saksoft has a big run in the past one month. though the fundamentals dont speak a lot other than its low pe. looks to be built on a big story. got to see how the story unfolds

I work in the major mobile telecommunications company and have several friends in IT/Analytics industry.

Some questions/observations

  • Software Testing and QA is the most commonly outsourced work in companies. E.g. City, Intel, Apple, JP Morgan, Mayo Clinic etc. all of them outsource some portion of testing and QA work. And every major IT player does it e.g. Wipro does it, Infosys does it, SmartPlay does it, GlobalEdge does it (I have interfaced with these companies at one time or another from client side). Now these contracts are very lucrative due to low cost of employees and bonds to employees. Even roll-overs (moving from service providers to client) are also lucrative for service providers. So what is that 360logic does differently than rest of these players? Or was it just a good acquisition financially?
  • Analytics is the hot word today and all major technological companies are doing it. Facebook does it (Try creating ad on Facebook), Google does it, SalesForce does it. So these companies have infinitely more resources and talent pool than SakSoft. So what exactly SakSoft does in analytics space? Does it create “own” analytics software or it cuts through these various options and help customers get some actionable data? Either way SakSoft might end up on losing side, in former case it has very remote chance and in later case there will be no pricing power.

Also I find this company awfully similar to Sonata in terms of valuations. But Sonata has 4% dividend yield whereas SakSoft has less than 1%. So another question we should get answered is why should one invest in SakSoft over Sonata and vice-versa?

Thanks,
Rupesh

Disc: No position in SakSoft, Have position in Sonata from very low levels

A fwd, if its helpful…

Regards
Chandresh Shah

Saksoft’s result Press Release:

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/01606C19_7B62_4D85_8CB1_CF46BF39C759_153845.pdf

Stock either trades in upper circuit or lower; Q3 result is also good, what could be the reason that the stock is in lower circuit when the while market is in green?

Anyone following this company nowadays? How is this going to help?

saksoft posted very good numbers.

Sales at 89.15 Cr Vs 67.48 Cr (YoY), 82.54 Cr (QoQ).
Net Profit at 9.58 Cr vs 5.32 (YoY) Cr 7.74 Cr (QoQ)

Qurterly diluted EPS at 8.91.