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Sankhya Infotech - Rising Defence and eLearning Phoenix

I am starting a thread on Sankhya Infotech and to save my time and energy I am taking data from a 4-5 days old interview of the chairman where he has detailed good background and future plans of the company.

Sridhar N, Chairman and Managing Director, Sankhya Infotech Limited,
is a graduate in Computer Science and has nearly 30 years of experience
of providing leadership direction for the growth of the company.
Starting with a mere Rs 20,000 investment, he has spearheaded the rise
of Sankhya as a global name in the field of simulation and training.

Sankhya Infotech Limited is a leading cloud based
learning and training management solution provider across nine domains
that has empowered over 1.5 million users across 50 global locations
spread in four continents. The company has a unique distinction of
offering the complete range of technology-based solutions for eLearning,
simulation and training management system that includes learning
management and online assessment systems. Sankhya has strong Aerospace
& Defense focus and caters to Energy, BFSI, Medical and
Manufacturing domains.

Sankhya is set to launch two technological breakthroughs that would
herald a new dimension in the way professional training is imparted and
we strongly believe that we ride on the strong surge of Internet of
Things.

Give us a brief overview of the training and education solutions industry?
Globally, self-paced training and education has become the key to
success of any industry. To address the four goals of improving
competency, rapid scalability, reducing cost and improving compliance,
industry has adapted eLearning and other training and simulation
solutions. Simulation and technology-based training have cut the
barriers of high tech aerospace industry and they are getting adopted in
Medical, Manufacturing, Energy and even Education sectors at a rapid
pace.
Many corporations report that e-Learning is their most valuable
training method which they use. This is no surprise, given that
businesses save at least 50% when they replace traditional instructor
based training with e-Learning. Not to mention that there is a 60% cut
down on instruction time.

Market size of self-paced learning is US $ 56 billion, and is seeing
23.5% CAGR. Market size of modeling and simulation industry is US $ 9.6
billion and it is moving at a 29% CAGR. The military simulation market
will continue to be led by the US and major European states, however,
their position as leading national markets will be challenged by
emerging powers in the Middle East and Asia in the years to come.

What are the trends in this industry and how are you poised to capture the benefits?

Technology is profoundly influencing the way people educate and train.
Further, concepts of just-in-time learning are enabling creative
solutions for trainees and trainers. Sankhya is the only company in
India that has solutions that address the four goals through eLearning,
Simulation, Learning & Training Management System platforms. We are
at a stage to launch two technological breakthroughs that would herald a
new dimension in the way professional training is imparted and we
strongly believe that we ride on the strong surge of Internet of Things.
Therefore, we strongly believe that the timing to reach out to
investment community at large is right.

Sankhya is different in many ways in comparison to its domestic and
international competitors. The fact that the company happens to be the
only one to offer an entire range of products and services makes it
unique. The company is working very hard to keep the gap of technology
and features of its offering so large that none of its competitors can
replicate its strategy within a three to five year horizon.

What are the opportunities and challenges being faced?
Sankhya’s philosophy has been to provide comprehensive cutting edge
technology based training solution to its customers in diverse sectors.
The company has earned marquee Fortune 500 customers from diverse
sectors of industry by successfully implementing this philosophy.
Opportunities are abounding for Sankhya as it offers a blend of
products and services that fulfill the end to end requirements of
customers. New and unexplored sectors beckon at the company creating a
unique market place for Sankhya.
As the company charts to grow, presence of marketing and sales in
multiple geographies is a one of the challenge, however, the company is
planning to expand its foot print by appointing resellers rather than
having direct presence.

Artificial intelligence (AI) is gaining prominence. Are your courses providing any inputs to update skill sets to deal with such changes?
Two areas are emerging to disrupt the technology market space.
Analytics and Artificial Intelligence. These two areas offer to bridge
the space of reactive technology to predictive and going forward
proactive or adaptive technologies.

In 2003, Sankhya earned Emirates as its customer, and in April 9, 2004
there was an incident to one of Emirates aircraft. Way then Sankhya’s
flagship product “Training Management System” had an analytics tool that
helped the airline to understand the key cause of the incident.
Therefore, the company had the clairvoyance to identify Analytics as a
key to success in future nearly 14 years ago.
Similarly, over the years the company worked hard to adopt Artificial Intelligence in the simulators that we have built.
Till now, the company provided Analytics and AI through its software
products, now the company is seeing the immense scope in providing
services in Analytics and AI in a big way

What is the revenue break-up from various segments?
The company has three business models under the B2B Category, they are
product license, Master Services Agreement, and Annual maintenance
services. Master Services Agreement contributes to 70% followed by 20%
in product license and 10% in Annual maintenance services of overall
business.

What would be the triggers for growth in this industry?
Gartner identifies simulation based learning as the Top 10 Strategic
Technologies. Over 41.7% of global Fortune 500 companies now use some
form of educational technology to instruct employees during formal
learning hours, and that figure is only going to steadily increase in
future years.
Global trends indicate that learner patterns are more demanding than
the past, appetite to learn is seen to grow as technological
advancements are rapid. To stay ahead of the curve, people would demand
more predictive and adaptive learning.
This surge is what companies such as Sankhya have as the biggest opportunity for growth.

**What kind of expertise have you acquired to design the course material and keep it updated with the **
**changing times and requirements. How many hours of training material do **
you have?
We are in the business of enabling organization to achieve that goal by
keeping its associates well-trained and skilled using technology and
ingenuity of simulation and virtual training. Sankhya has a unique
distinction of offering the complete range of technology-based solutions
for eLearning, simulation, and training management system that includes
learning management and online assessment systems.

We have developed high fidelity courses of over 14,000 hours for
diverse fields, we developed over 20 different types of defense
simulators; our virtual reality lab has developed four products in
immersive simulation technology.
The best of Sankhya is yet to be unveiled in the area of Analytics and
Artificial Intelligence based immersive simulation technology.

Which are the verticals you cater to? How is the course structure? Does it differ drastically across verticals?
Sankhya has strong aerospace, defense focus, and caters to energy,
BFSI, medical and manufacturing domains serving Fortune 500 customers in
over 50 locations, spread in four continents. We take pride in serving
the Indian Army and Indian Navy by providing training solutions.
The company also serves the defense forces of three large nations and
some of the best defense organizations in the world. Our training
technology covers energy, medical, aerospace, defense, banking,
education, and such diverse domains.
The company’s training technology is being used by every airframe
manufacturer in the world, large defense organizations, ultra large
energy companies, medical companies and over 53% of all Bank employees
in India use the company’s solutions.

Share some anecdotes on the work you have done with International and domestic customers?
When Etihad Airways had to adhere to the strict regulatory compliance
requirement of “Evidence Based Training” across nine of its partner
airlines covering nearly 50,000 crew, we solved the challenge with our
TMS (Training Management Solution). Emirates was able to conduct blended
training and do extensive training data analysis. TMS was able to show
the highest ROI against all other products considered by Emirates. TMS
was selected against products like ORACLE HRMS.
The State Bank Group’s challenge in transition of nearly 400,000
employees to digital learning was a complex task as a single system
covering five banks and twelve subsidiaries was to be set up and
executed. Sankhya solved the challenge with its online learning and
assessment systems by offering a world class solution that is installed
on an IBM Z10 main frame and can handle over 25,000 concurrent and
375,000 registered users.

Who are your top 5 clients? How much do they contribute to the revenue?
For nearly past two decades, Sankhya has won and maintained enduring
relationships with some of the Fortune 500 companies such as Airbus,
Boeing, Emirates Airlines, Etihad Airways, Embraer by providing
admirable technology based training and simulation services through
repetitive contracts and renewal of Master Agreements. They contribute
to almost 80% of the topline

Brief us on your financials. What is the outlook?
In fiscal year ended March 2016, Sankhya witnessed a topline of Rs
152.93 crore with EBITDA Margin of 7.02% and PAT margin of 4.53%.
Whereas, in 9 months period ended December 2016, Sankhya’s revenue is Rs
116.08 crore with EBITDA margin of 10.70% and PAT margin of 3.37%. We
are expecting better growth in terms of revenue from here and expect our
EBITDA margins to improve to at least 15% to 17% by FY18.

You have a host of offerings via simulations. Could you briefly touch upon the same?
Sankhya offers three categories of Simulation solutions, and they are
covered in three industrial areas. The first set is desktop based
simulation solutions these are essentially called as procedural
trainers. The second set is a full motion platform based training
simulations, these are used both as a procedural trainer and for
experimentation of several real-life scenarios. The third category is
Immersive VR simulations, these are asset light, but highly immersive
and provide tremendous user experience.

What are your capex plans and how would they be funded?
We are preparing a Capex / Opex plan for raising US $ 10 million.

What is the shareholding pattern of the company? Any plans to sell stake?
The promoter holding is 24.12% as on Dec 2016. Promoters would be keen to increase their stake in a number of ways.

I am personally very excited about the technicals of the company which has given a breakout after 9 yrs of consolidation on back of huge volumes.

I also think the last two answers in the above interview suggests a potential upside in the business cycle.

screenr link.

Disc: Invested from significantly lower market cap.

2 Likes

such a low promoter holding in a very small company that has high growth prospects seems odd, any reasons that you may know for the same?

the low promoter holding at the moment is obviously a concern but as the man himself is saying that promoters would be looking to increase their stake, this should be positive for the stock. The promoter holding of more than 37%, went down from because of the pledged shares being invoked. The promoters have bought a few shares from the open market in last two quarters, but i think they would be looking at increasing their stake more substantially.

Another interesting point to note is the breaver engineering is now out of company and their 13.7% stake was completely absorbed by the market and more importantly last 4-5% was bought by someone in off-market transaction and therefore, next quarter’s shareholding would give us better indications of any interesting names coming in the shareholding list.

And in case what the chairman is saying about EBITA margins improving becomes a reality, i think the stock should get further re-rated.

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Promoter holding is also low partly due to share pledge invoke by the banks. @j2eeprofession_ I have a few questions though -

  1. While the sales have been increasing continuously the margins have reduced significantly . What is the reason for that?
  2. Professional/consultancy charges have increased from 4cr to 21 cr in 4 years. What are these and what is the reason for such increase?
  3. The company makes big claims about its softwares and solutions in every annual report. Why is it that despite all of this the numbers look so poor? It claims that more than 50% of bank employees use it elearning solution all over India!!

What went wrong here?
5. Employees are the bread and butter especially for a R&D driven company like Sankhya. How will the company innovate when its employees have nothing good to say about it.
https://www.glassdoor.com/Reviews/Employee-Review-Sankhya-Infotech-RVW2810683.htm
https://www.indeed.co.in/cmp/Sankhya-Infotech-Ltd/reviews
6. Why does the company have 3 subsidiaries abroad even though they make no revenues and only add losses to the consolidated statement?
7. How does the company plan to increase its margins to double digits in FY 18?

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The reason for decline in margins seems to be the increase in employee costs. There is a material increase post 2010 as the company started focusing more on services rather than products. Seems like the company laid off a few people in 2016 which increased the margins. Does anyone have an update on whats happening here?

  1. as someone was pointing out, main reason has been increase in employee expenses. A lot of jobs went onshore in FY12-13 which was a particular problem period for the company. This is one of the biggest reason of lower OPM for the company and company has taken a strong case to improve upon this since last 6 quarters (internally).
  2. Dont know - didnt dig on this one as I am not really concerned about it. But yes, you are right, we should try to dig on this one.
  3. These solutions were delivered a few years back. I do not have a reason to doubt this one, any reason you are doubting it.
  4. Nothing happened because indeed the business visibility went sour in FY12-13. On-shoring was used to save a few accounts which created quite of few issues for the company as well.
  5. I am “never” bothered what employees have said online. When i was junior have seen how digruntled employees used to lie and now as i am in top management i understand how it affects prospective employees, but cant really do much. anyways, its subjective, one may wish to go about it but not me.
  6. well, not on the operating level but on net level yes.
  7. biggest push is taking care of expenses that i know of. that itself can “significantly” aid the margins. This is mainly done by offshoring and going after offshored annunity accounts.

If the OPMs keep increasing like this, i see a good story here. Let’s continue to dig pls. I hope someday these people come out with investor presentation or something.

dear vp seniors and retail investors once i was interested and did a real ground work of even visiting there office spoke to one so called client. i can tell from my experience and IMHO it is better to excise caution and dig deeply before investing. this is only my opinion pl.
disl. not invested sold the holdings

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which client did you visit. As my work requires, i know the company quite a bit in terms of their executives and especially clients. My interaction didnt give any foul smell. Please do explain.

Mr jee since you the company so well I would humbly request you to list some of there clients then I will tell you where the foul smell is coming from secondly do take some time and find out why the bankers sold of the hedged shares. Dig just little deeply into there cas flow statement for the last three years.
I have clearly stated that it’s only IMHO if you find the going good pl proceed.

3 Likes

i was hoping for a healthly fact finding, but your rhetorical comment has put to rest that possibility. Anyways, let’s put faith to our own research and let time prove me right/wrong. As far as i know, i believe the stock is turning and thankfully, the charts are colluding with this view. Let’s see now.

Sankhya Infotech Launches B2C Skills Training with TSSC. Press release

Any idea on what kind of revenue growth we can expect from here on ??

in last ten years the revenue has grown 10 times, with last year being a de-growth and the only year of de-growth by the way. i dont know about the next year’s growth but i know if some sort of mean reversion happens with improving EBITA margins, then it is an exciting story.

Yes the story does look exciting …if the company starts to pay dividends then hopefully rerating will be faster

Here’s my analysis for Sankhya :

What’s the business? Sankhya Infotech is in the business of providing defense simulation software and training solution to firms/educational institutions. It operates broadly in two segments, defense and non-defense, with 38% of revenues coming from defense and the rest 62% from non-defense. It is a leading player in the space of Defense and Aerospace and also has solutions catering to BFSI and Education. It boasts of some of the biggest defense clients including US Navy, Indian Navy, Indian Army and Airforce to whom it provides simulation software. It also has airlines clients such as Emirates, Air India as well both airline manufacturers: Boeing and Airbus. Revenue for last 4 years has grown at c19%, while PAT and EPS have grown at c53% during the same period. Return on capital employed is on uptrend and is currently at 10.2% compared to c5% in FY12.
What went wrong? The company has a roller coaster history with it PAT margin crashing from c12% in FY11 to c1% in FY12 and is now on recovery mode with PAT climbing steadily back to 2.6%. The good thing is topline growth has never wavered and with the services experiment(They got into services and invested heavily for hiring as they had to opt for near-shore and on-shore development which resulted in drastic margin erosion) well past it, the margins are expected to climb back to pre FY12 margins. The EPS, which fell to Rs.05 in FY13 has now increased to Rs3.52 in FY16 and is currently Rs.2.20 for 1HFY17 for a full year expected EPS of at least Rs.4.00. Another major reason for their downturn was their reliance on Kingfisher Airlines which dragged them down.
What did they do right then? The previous services strategy was dropped in FY14 and the turnaround has started from FY14 itself, with sharp improvement in PAT and EPS y-y. They are now focusing on high margin business of providing simulations to airlines and providing training software to educational institutions and firms.
What makes this company worth our money now? The company has been a direct beneficiary of Make in India drive in defense space and education space. ď‚· IN FY14, it had won the CBSE online education project that aims to provide online education to over 11.5 million students. ď‚· It has signed multimillion dollar contract (Amount not yet disclosed) with Etihad airways for 5 years which will provide consistent stream of revenues for next 5 years. ď‚· It is confident of signing long term contracts with more airlines and has recently opened office in Singapore.

Why do I like it?

-Moat in terms of high switching cost – The kind of company and organizations it deals with generaly tend to be sticky with the software they use. Indian Air force, for example, is not going to change the simulation software it trains its pilot on! Just a look at a list of their clients and one thing stands out: They are not going through the pain of Re-training their employees even if they get cheaper simulation/training software. Just look at how sticky banks are with TCS software and you get the point. RBI and other banks use its e-learning portal. The company’s e-learning product is used by more than 50% of all bank employees in India.

  • More on Moats – Sankhya has successfully completed the execution of the prestigious Mumbai Rail Vikas Corporation Simulation project in FY15. Dubbed as the most complex rail network in the world, Sankhya successfully completed the simulation project for MRVC that would help the corporation prepare train schedules for improved productivity and efficiency of rail assets utilization. With increasing thrust on infrastructure, more such orders can be expected given its track record.
    -Topline growth combined with even better bottom-line growth - For the past 4 years, revenue has grown at a CAGR of c19%, while profits has grown at a CAGR of c52%, implying consistently improving profitability. An increasing RoCE points at management’s ability to generate higher returns on increasingly higher amount of money.
    -Untapped market size – Combined with high growth and a market cap of just Rs.50 Cr and revenue of cRs.155 cr, we see a huge market in terms on educational institutions, firms, increasing growth in aviation industry, increasingly focus of Indian govt. on using indigenous tech for its own defense that is yet to be tapped. There’s no reason for Sankhya to not generate cRs.1500-2000 Cr revenue in next 5-8 years. A corresponding increase in profits and hence market cap is expected. Sankhya was the first company in the world to have launched the web based simulation for the Aviation Industry and has all major world airlines as its client. Orders are only going to get bigger and better.
    -Attractive valuations- Sankhya is currently available at cRs.51cr Mcap with revenue of Rs.152 Cr and PAT of cRs4 Cr. It is currently trading at trailing P/E of 13.35x, P/S of 0.33x, P/CF of 5.92x and P/B 0.8x. Compared to its peers such as Zen Technology which is trading at a trailing P/E of 428x, P/S of 12.1x and has negative cash flows, Sankhya is available at throwaway valuations. With much better cash generation capabilities, stable debts (c0.45x for last 5 years), the combined impact of rerating and EPS increase can easily turn this into a multi bagger.
    -Increased delivery hinting at accumulation going on - The last three months delivery volume at 89.43%, combined with c41% increase in volumes, suggests huge buying going on in the company with an intent of long term investment and bodes well for the investors
    -Increasing promoter holding - Promoter has been increasing stake and now holds 24.12% of company as on Dec-2016 compared to 23.5% in 23.9% in June-2016. Another 18.3% stake is held by the parent company of HBL Power (another major listed entity), thus taking the total promoter holding to 42.72%

What’s not so great, though?
-There has been conflicting news about salaries not being paid in early FY11-12, but it needs to be substantiated and given comfortable cash positions, looks like something which is not true.

  • C16% decline in topline in FY16 was first decline since FY10 and was on account of shelving off lower margin product. Need more clarity on this. PAT and OCF did increase though and points at better profitability.
    -More clarity on current biddings and orderbook breakdown of Rs.1,100 worth of orders will provide revenue visibility. Need to contact management about this. -Sankhya benefits from currency depreciation. Need to know US exposure in light of protectionary measures by current US president.

PS: Invested from 35 levels, wrote this note for self when it was at 47 levels. Your inputs are welcome.

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From where did u get the info about ethiad deal and opening of new office in Singapore?

Hello there ,
Saw some info about Sankhya in the below blog. This is a new blog which has very aggressive target for Sankhya :slight_smile:
Target: Target 1 -Rs 101
Target 2 -Rs 140

Note: I am invested ! % invested in Sankhya of my overall portfolio at around 25 Rs.

Will send you the link. Read it in one of the news.

Please paste the link here

i think the targets given in the blog are based on technicals but probably he is being “too” conservative. This forum does not allow giving price targets or it would have been a great exercise to arrive at target for the stock based on charts.