@crazymama/ @sumitg04/ @ravimba31/ @rajpanda/ @rohitbalakrish_ / @sethufan - What a great thread guys..great discussion, thoroughly insightful. A great learning experience!
Vishnu bhai - Your ability to connect the dots is amazing (as to what path TSL was probably going to take post EA acquisition). Though, i am not exactly clear as to how TSL is planning to use EA's assets to their advantage; they are giving contradictory signals. There can be two paths-
Boosting EA's CRO offering (clinical trials segment) by developing Data Analytics capabilities (No CTMS?Risk-based monitoring?) and integrating with their regulatory offerings, which they said they will do in your call with Take IR
Just focusing on integration of EA forte (biosimilars, stem cells therapy, imaging) to their existing Regulatory software.
In Q1 2017 concall they said -
Regarding office closures.. may be Take already has presence there and they don't want redundancy?
To improve sales, they are scaling their sales team.
In Q4 2016 concall, mgmt said -
Excerpt from one of Mr. Srinivasan's interviews (June 2016) -
So, this is the directional change? Development of support for regulatory filings for biosimilars, imaging and stem cell therapy? What is the progress made here in last 3 qtrs? How is EA helping them here (knowledge-base probably?)? When will they attain full functionality?
Some questions/observations -
So TSL, even with Ecron present, doesn't have good CTMS and Analytics platform at the moment. Whenever next acquisition happens, it should probably be to plug this gap? i.e. on the clinical trial execution/analytics side. As EA previously was using CTMS from some other vendors?
b. They have started publishing result of subsidiaries separately, but i see the results of foreign subsidiaries have been audited by the same Chennai auditor. Isn't that odd? What are the rules here in case of foreign subsidiaries?
c. Ecron margins are still struggling, even little less than what they originally were just post acquisition? How are they going to improve here?
What does this mean? I understand such strategic acquisitions takes time integrating into the overall culture of the acquirer, but still it has been around 5-6 qtrs since this acquisition. EA topline has slightly improved from 130 to 160 odd cr..so not much here!
d. Mgmt in Q4 2016 concall said -
An exceprt from 2015-16 Annual Report
Any development on this front? What's the opportunity size here? Quintiles already offers this feature.
e. Contribution from Europe is still not increasing is a big negative. Mgmt in last concall said it would take another 2 qtrs and said they have cracked significant deals in US and Europe. Any info about what the deal size here is?
f. How much working capital is tied up with SCM division. Were they not able to generate free cash flow due to SCM division (unlikely), or it was due to s/w development costs and acquisitions in LS division. Development cost is going to remain high in future as well, and so is amortization? Why don't companies like Take add s/w development cost to the expenses rather than capitalizing it? It's going to impact PAT either way. Is this to keep EBIDTA higher? or there is any other reason?
Any insight on the size? What is actually helping them win these large orders now? What has changed now? Are these deals coming from existing clients, or these are new client additions?
What are these costs for? For Europe expansion, or to merge Ecron properly, or generic to give direction to the overall business? For instance "Capacity cost (bench strength) isn't a one time cost, but is recurring, so why say this is one time expense?
i. In another interview in June 2016, mgmt said -
They stated this as well in the Annual Report (2016) regarding IDMP development.
They succeeded on point 1, failed on point 2, what is the status on point 3 i.e. IDMP product launch? Has any of Take's competitors already developed IDMP solution?
j. Goodwill is ~250 cr, (big % of net worth). Does it need to be amortized? What is the usual way IT companies deal with it (keep it forever)? I have gone through a recent concall where mgmt said this is usual industry practice. What i am trying to find out is if it is going to impact bottomline at some point in time and does market discount that. Or can the company keep this as such forever unless this is impaired? How about knocking off goodwill against security premium account/general reserve, which seem to be the best way for shareholders?
k. There cash and cash eq. shows a big number (in excess of 125 cr, but investments show a meager 17cr. This is odd. If there is no immediate use of cash (they said they want to remain liquid for sudden future acquisitions opportunity), why aren't they putting this cash in some better yielding asset class?
From Annual Report (2016),
INR Depreciation is hurting them on Forex front.
Also, in 2016 Annual report, they are counting "Deposits against Guarantees" as Cash eq.. Is this the normal practice? Also, where does remaining cash reside i.e. which bank, a/c, country? This is extremely important info for us to believe this cash is for real! -
l. Mr. Srinivasan doesn't draw any salary from the company? Is he taking salary from any of the subsidiaries? I know he is holding major stake in the holding company in Singapore. But why doesn't he draw salary directly from Take?
Overall i think the stock has not given any returns in the past 2 years, but it is much-much better placed in terms of performance and balance sheet than it was 2 years back.
- Much better TTM topline ~1300 cr ...against ~730 cr in March 2015,
- Much better TTM bottomline ~127 cr ...against ~70 cr in March 2015,
- Long term debt has been retired at the cost of around 9% equity dilution (i will take it, more so as dilution happened after 8 years),
- working capital debt is at very low rate (USD Libor + 2%), which i think is around 4-5% total,
- getting into bigger league with large order wins and a much better order book visibility (~129 mn) - double of march 2015..roughly ~55-60 mn),
- improved debt/equity
- QIP (in which marquee investors/PE funds like Apax Partners, NT asset mgmt, Sundaram MF and Max NY Life etc. participated) took place at 166. Stock currently trading at 136.
- Peak P/E 5 qtr back was ~23-24, which now is 14. Peak market cap was 2450 cr at that time, which now is 1800cr. EV/EBIDTA at that time ~13, which now is ~7.
Stock after a big rally from sub 40 levels to 200 is consolidating, which is normal after such breakthrough rally. Fundamentals have significantly improved, while valuation (mkt cap) remains stagnant (from March 2015), which makes me believe this is clear case of undervaluation (becomes big time undervaluation considering growth prospects for next 5 years).
TSL to me currently looks like at an inflection point due to the following -
SCM division divestment materializing in 2017 end (topline will take a hit due to this which is a negative obviously),
- Bigger opportunities opening up in form of eCTD/Track and Trace (what's the opportunity size?),
Ecron acquisition to reap benefits gradually,
Biosimilar filings (as their major revenue is coming from innovators, not generics),
Sparta partnership (How exactly this will contribute as Sparta being into QMS?),
Subsidiary structure improvement (how many will be gone with SCM?), as you said earlier, will be much cleaner post SCM sale,
tripling of sales force,
- Management getting more cash to deploy from SCM division sale (any estimates on the value of their SCM division at the moment?) for another good acquisition in Life Sciences space, if an opportunity presents itself at some point in future. Whole industry is consolidating and competitors are ramping up their capabilities.
Assuming bottom end i.e. 20% CAGR organic growth (mgmt are confident of 20-25% CAGR for next few years), they can attain close to 2700 cr topline in 4 years i.e. March 2021. They are growing their topline at more than 30% in last 2 years. Any acquisition in between, and they can topple this number.
Disclaimer: Not invested. Mulling entry!