TAKE SOLUTIONS LTD- will you take it?

esoteric · January 16, 2019, 1:02pm

I haven’t seen the finer details of acquisition made.But two of your assumptions are based on wrong premise.
The borrowings will be in US $ as the major revenue and profits of the co.is from it’s US subsidiary and the rate of interest will be 3-4 %.

Secondly the parent was looking at about 5 cos.for acquisition.They have announced two.Most likely there will be one or two more over the next 8- 16 months.
The acquisitions are being done to strategically fill the gaps in the life sciences business.These are being done to enhance net profit margin and hence to assume that NP margin of the acquiree cos. will be 6% is incorrect.
The NP Of the acquiree cos will be greater than the present NP margin of the parent as the purpose of acquisition is to increase margins.
They have a 100 odd bed facility hospital in various locations for clinical trials.This gives them flexibility to conduct trials in their own hospitals and very often speed up the clinical trials.So if they made x amount as fees for a clinical trial to be done over 12 months in outside hospitals, by carrying out trials in their hospitals they complete it in 9 months and get 1.2x ( these are examples and not exact figs)as fees as the client gets a chance for early launch and higher profits which he is willing to share.
The new acquisitions are being made to fill strategic gaps in trials and enhancing margins.
Subject to write off of legal/ travel/ consultant fees for acquisitions in the first year the margins will definitely be higher than what it is at present.

alterego · January 18, 2019, 11:53am

@Shreyas1705: TAKE has advised earlier in their Earnings Release about the intent of US acquisitions to address strategic gaps in their offerings. The latest announcement also mentions expanding CRO offerings to US, and something about DataSciences. As synergies, the company mentions strengthening of customer relationships and team strength. I believe we can expect to hear more details as the deals get closed.

shreyas1705 · February 18, 2019, 7:14am

The stock price has fallen c.35% since the announcement of the acquisitions was made reflecting that the news hasn’t gone down well with the investors. The management did indicate in the concall that the targets are operating at lower margins than Navitas and a lot of work needs to be done there to improve the margins.

This was further aggravated by the Q3 results which was mediocre in my view. The one-time exceptional costs pertaining to the transaction coupled with slower revenue growth (c.17% y-o-y dollar term in Life Science business) has made a dent. Also, Mr.Srinivasan hinted towards another exceptional cost of moving a part of the clinical trial value chain process in Europe to India in the next quarter.

So, a short term pain could be expected in the coming quarters. It’s only fair that the share price is trending downwards.

Well, the way I see the acquisition story unfolding is that it opens up their entry into the lucrative clinical trial vertical in the US, where the majority of their presence was in the regulatory business. If they succeed in cross selling their clinical trial business to their marquee clients from the regulatory, there will be a significant value addition. The company is rightly making investments towards bringing the best talent on board.

And, regarding the organic growth, I was personally disappointed with the Q3 performance. Although I can understand the one-time exceptional losses incurred towards the acquisitions (working for an investment bank I know how expensive these advisory services are), the missing of project deadlines which affected the Q3 business is a major concern.

But, I feel the story is intact and in fact, has become more exciting with the acquisitions. Let’s wait and see how the story pans out. The positive is that the MD and CFO have bought shares in November from the open market. After all, no one understands the business better than the management.

whipsaw · March 19, 2019, 5:50pm

One of the comments in Moneylife article

Adam Goldstein

3 months ago

I was connected with the CFO Subhasri Sriram and sent her the following email with what I believe were very legitimate questions. I received no response whatsoever, which I consider a very bad sign. Indicates to me that my questions made her uncomfortable. Here is my complete email, so anybody interested can decide for themselves if my questions deserved absolutely no reply whatsoever.

Subhasri,

Thanks for your reply.

I manage my own and some family/friends money in the USA. I’m a long-term value-oriented investor, and I’ve come across TAKE solutions in my search for undervalued stocks. I should also mention that I’m a member of an exclusive online investment website called “Value Investors Club” (https://www.valueinvestorsclub.com) which is populated by around 500 value-oriented hedge fund managers. So, if I end up investing in TAKE I’ll probably write up an investment pitch on the site which may lead to further institutional interest.

I’ve been doing this for quite a while, so I can tell you that it’s highly unusual to come across a stock trading at such a low P/E ratio when the company is growing so fast, has good EBIT margins and reasonable ROE, low financial leverage, and is in a specialized and fast growing field like life science services and software.

The main question marks in my mind are (1) disparity between earnings and cash flow, (2) corporate structure and low tax rate, and (3) auditors.

(1a) I can understand that a fast growing company with high DSO needs to invest EBITDA in working capital as the revenue grows. That results in a consistent cash drain due to increases in working capital. What concerns me, however, is that even in fiscal years FY2014 and FY2015, when revenue was declining, there was still cash drain due to increases in working capital. Can you help me understand why TAKE has consistently had a cash drain due to WC increase, even in years when revenue was declining?

(1b) On Page 8 of the H1 FY2019 MD&A titled “Fund Flow”: can you help me understand the line “Increase in other assets”? This is a large amount: 1,503M INR. What types of assets are these? Is it mainly “unbilled revenue” and other operating capital, or is it mainly mutual fund investments and other non-cash securities? Also, does “Capex” of 149M INR include both “Purchase of Fixed Assets” and “Product Development Expenses” line items in the Consolidated Statement of Cash Flows?

(2) TAKE’s corporate structure is quite complex, and the role of the private Singapore entity is a bit unclear to me. This complexity may be related to the company’s surprisingly low tax rate.

(2a) Does the public company have any operations and employees in Singapore, and does that contribute to the low consolidated tax rate? Is there any disclosure on percentage of revenue from each tax jurisdiction so investors can understand the low tax rate?

(2b) VC/MD HR Srinivasan and CEO Ram Yeleswarapu receive no cash salary from the public company, yet they provide key management services to the public company. This arrangement seems quite unusual, could you help me understand this? Do they receive a cash salary from the private Singapore entity?

(2c) In the IPO prospectus the indirect ownership stakes of Mr. Srinivasan and Mr. Yeleswarapu were disclosed, but I wasn’t able to find any updated disclosures on indirect ownership of key insiders after the IPO. Perhaps this is a significant difference between Indian and US securities laws; in the US, indirect ownership stakes must be publicly disclosed when there’s a change. Can you provide updates to indirect ownership stakes of key insiders? I’m also interested in the indirect ownership stake of the Shriram Group, can you provide this?

(3a) Given the corporate structure complexities and cash flow issues described above, it would probably give institutional investors more comfort if a major international accounting firm audited the company’s books. Has this been considered? This would probably improve the company’s stock market valuation considerably.

(3b) In the 2017-2018 Annual Report on Page 56 the auditor states the following:

“We did not audit the financial statements of subsidiaries as at and for the year ended March 31, 2018, whose financial statements reflect groups share in total assets of 1,24,143.15 lakhs as at March 31, 2018, total revenue of 1,32,558.65 lakhs and net cash outflow amounting to` 10,960.17 lakhs for the year ended on that date as considered in the consolidated financial statements. The financial statements of these subsidiaries have been audited by the other auditors whose reports have been furnished to us by the management, and our opinion in so far as it relates to the amounts and disclosures included in respect of these subsidiaries and our report in terms of sub section (3) of section 143 of the Act insofar as it relates to the aforesaid subsidiaries is based solely on the report of such other auditors.”

So, it sounds like GD Apte did not audit 132558.65/158724.3 = 84% of consolidated revenue. I tried looking through the subsidiary financials on the website, but even for subsidiaries GD Apte did audit it’s unclear whether they also audited the step-down subsidiaries. Basically, I’m having trouble reconciling this 84% number and understanding who audited all the revenue. Can you help me with this? Who audited the 84% of consolidated revenue not audited by GD Apte?

Thanks for your help,
Adam Goldstein

shreyas1705 · March 20, 2019, 4:38pm

I am trying to answer the first part of questions.

1a) The total revenues cannot be read in isolation. The company was transforming its business from SCM to Lifescience during the quoted years. Accordingly you will see a fall in revenues from SCM to the tune of 10% in 2014 and 30% in 2015 while the Lifescience business grew at c.4% and c.11%. We saw receivables increasing at a similar rate.

1b) Well, the management didn’t conduct conference call for 2019 q2 to clarify this. But, looking at the historical reports it can be reasonably assumed the “other assets” are mostly “Unbilled revenues”.

I am not trying to defend the management for its unresponsiveness. But, again an investor shouldn’t expect to be spoon fed too when you have data at your disposal.

vaibhav_choudhary · March 22, 2019, 6:26am

Hello,
i mailed some of my queries to IR at the company, but did not get any response after multiple followups.
Here are my queries.

If we look at our subsidiary, TAKE GLOBAL PTE LTD. from which we derive major portion of our revenues, the reported growth rate of Software, Consultancy and Services Cost is very high as compared to growth rate of revenues. I wanted to know what kinds of services or software the company pay for. Do we have to use IPs of other companies to provide our services? Are these costs sticky or can we substitute these costs with our own developed IPs?
Does our company subscribe for any other IPs of our competitors to become end-to-end integrated services provider?
Do we have SAP, OPENTEXT as our partner in developing any software? I could not find Navitas in their partners list. If yes, then by what co. Name are we registered as their partners?

shreyas1705 · August 8, 2019, 12:54pm

A mediocre quarter at best! Not sure why the stock is up. Low valuations?

Company hardly grew Q-o-Q if you exclude the acquisitions. This is further aggravated by a drag on the margins at the consolidated level from KAI and Dataceutics. And, based on the conference call, this is most likely the new norm. This is just after a quarter when the management guided for USD400m revenue and 20% EBITDA margin for FY2020. They are nowhere close to reaching the milestone.

Now, the two acquisitions cost Take Solutions USD72m. They are expected to generate c.USD4m yearly EBITDA on a run rate basis. That’s a whopping 18x EV/EBITDA valuation proffered. Hopefully, they start to grow from here at a much higher rate than 6% as announced on the call.

The only good thing about the quarterly presentation is the mention from Everest group about Navitas as a contender in CRO product vendor space amongst the likes of IQVIA, Parexel, Oracle, etc.

hershk · August 28, 2019, 5:01am

vnsarav · August 28, 2019, 6:31am

1000 crs of Goodwill and Intangible Assets; 500+ crs of Loans and advances including Rs.200 crs of Other Advances without any explanations. High receivables + Highly levered. Balance Sheet is very very scary.

vivek_mashrani · September 4, 2019, 2:30pm

I always keep wondering why this company keeps on doing acquisitions from its FCF. Some might seem relevant but not all seem to fit their overall business model and profile. This sometimes create doubts whether cashflows are real.

This kind of techniques have been historically used by many companies across the world to divert cashflows by inflated acquisitions as intangibles are very difficult to value and subjective. Any thoughts about this acquisition being value accretive for the company?

Disclosure: No position

alterego · September 6, 2019, 8:48am

Operating cash flows for last 5 yrs is +ve, which means no doubt it is cash generating business. Looks like company chose not to accumulate earnings as cash, rather invested in fixed assets and in acquiring other businesses. Not too much borrowing for entity of this size, only 130 crs new loan taken in 16 of which 100 crs was repaid in 17, another 100 crs taken now in 19 – indicates need based borrowing. For business acquisitions company has depended on capital issue, QIP for acquiring Ecron Acunova in 16 and preferential issue for buying US entities in 19.

Company pulled-off acquisition of 2 US entities in 19. Intangibles include goodwill taken-over from these entities (refer Annual Report) and also goodwill on acquisition (purchase consideration net of assets taken-over).

Other financial assets is inclusive of all current assets that came from the new entities. This explains the sudden surge in the line item. The P&L of the 2 businesses has not been included in 19 consolidated P&L, but only BS is absorbed, hence all current assets treated as financial assets.

Pretty straight-forward BS when read along with schedules and cash flow.

Receivables, in days’ terms, has remained at around 110 days average over last few years. Company has maintained this inspite of business growth, establishing that business is not secured by compromising on credit terms.
Do note that write-off of receivables is negligible, historically over last 5 yrs, typically less than quarter percent of receivables/0.1% of revenues-proof that receivables are stable. This is backed by big global client names given in Company’s website.”

@vivek_mashrani
M&A is a common trend in the Life Sciences industry today. Be it Covance taking over Chiltern, Pamplona Capital investing in Parexel, INC Research acquiring Inventive, Lotus Clinical Research being taken over by DFW Capital Partner or IQVIA acquiring Clintec, M&A is not new to the industry. M&A is the industry’s way to improve capabilities and scale-up.

Recall the company had announced, along with it’s Q3 FY 18 results, the preferential allotment and specifically indicated that the proceeds of the allotment are meant for M&A in US/Europe. This transaction looks to have materialized in Q4 FY 19.

Company has paid around 2.5 x revenue for the each of the target companies Dataceutics and KAI, which is the current US M&A market pricing. The recent acquisition of Lotus by DFW Capital was valued at around 2.5x Revenue, so nothing surprising about the valuation.

Both Dataceutics (data science co.) and KAI (CRO) are in the same line of business as TAKE and acquisition synergy should naturally flow over time.

vnsarav · September 13, 2019, 10:52am

Can’t agree more. Having been part of an audit team that reviewed the accounts of a Chennai based IT company (part of K-10 scandalous stocks), the typical modus operandi is to divert cashflows by inflated acquisitions / copyrights etc.

vivek_mashrani · September 17, 2019, 2:38pm

M&A decisions should be based on value accretion for the company. If we look at the trend of RoE and RoCE over period of time, this seems to be falling or almost flat since last 5-7 years. Also, these are sub 15% which suggests that they are not able to beat cost of capital (Cost of equity) to justify the acquisitons.

I have not studied similar life sciences companies, neither I am expert in the space. But it will be good to see how other companies created value by acquisitions.

Disclosure: No position

sumgame · March 21, 2020, 7:05pm

Hey @crazymama, they have started releasing numbers based on competitors in the global market and how they stand.

Looks very good. https://www.takesolutions.com/images/financial/take_solutions_q3_FY20_earnings_release.pdf

Would love to know your thoughts ? Seems like a steal at 40

disc : Slowly building up a position

rajeshaaidu · July 28, 2020, 7:38pm

Dear Sir,
As per my experience, it is not good idea to doubt the motive of Basu and moneylife here because they are running a paid service and they are not forcing us to believe them. They can be wrong but in market it is better to fall on the side of caution because gossip is the most correct form of news in the market, even better than TV news reports. And other thing, by giving it a pass, I am not loosing anything but by catching it, maybe I will loose real money.

I think, there is some conflict going on among the co-founders. So we need to dig deeper on this line because it is now available at mouth watering valuation. Problem here is not business risk but internal fight and window dressing. I am trying to call some of my friends working in this field and get some information.
Thanks!

rajeshaaidu · July 28, 2020, 7:50pm

It’s looking not only they are doing lot of window dressing by inflating goodwill and intangible assets but also they are transferring money through merger and acquisitions.
In this type of asset light model ROE and ROCE should be upward of 25 and 35 % respectively after breaking even but the poor ROE and ROCE and lot of acquisition is sure sign of money being flicked. However, it is really now available at great valuation but poor ROE and ROCE coupled with lot of pointless acquisitions creat doubt.
If anybody knows history of management please post about them.
Thanks!

camadhav · March 14, 2021, 8:41am

Is there some fundamental change in the business viability due to covid? Or is it something to do with any suspected foulplay from management? Con someone throw some light as to why this stock is not moving up in spite of the huge bull run in broader market.

sujay85 · March 17, 2021, 6:38pm

aditya29 · March 29, 2021, 10:25am

Take Solution Ltd(CMP Rs 46) - Dark Horse - A multibagger in making - Business recovery to strengthen from the coming quarter

Company background

Take Solutions Ltd (NSE: TAKE & BSE:532890) offers domain-intensive and technology backed Life Science services with a unique combination of Clinical, Regulatory and Safety segments. The company derives 50% of its revenue from Clinical and remaining 50% from Regulatory & Pharmacovigilance (PV). The company’s clients include large and small innovator biopharmaceutical companies (approx. 90% of clients) as well as generics manufacturers (10%). According to geography-wise, 70-75% of the revenue is derived from US and 25-30% from Asia Pacific.

Investment Rationale:

1.) Liquidation & write-off in step-down EU subsidiary helped conserve cash: Navitas Life Sciences (subsidiary of Ecron Acunova Ltd) was bleeding cash on the back of events arising out of COVID-19. Management decided to liquidate the stepdown subsidiary in Q1FY21 and a loss of Rs 156.6 crore of net assets was written-off in Q1FY21. Also, closure of EU business helped the company in conserving cash and improving liquidity. Like for an example, loss in EU business was $2.3 mn in Q4FY20, which would have expanded to $7-8 mn in Q1FY21 and eventually would have turned into funding requirement in Q2FY21 if the management wouldn’t have liquidated the same.

2.) Exit of Supply Chain Management (SCM) business in Q1FY21 to focus completely on life-sciences business: The company sold its 58% stake in its subsidiary APA Engineering Pvt Ltd for Rs 17.4 crore in Q1FY21. As this would help the company to completely focus on its life sciences business portfolio.

3.) Sharp rationalizing employee costs to aid profitability: Management had reduced the employee headcount in western geographies where the wages were relatively higher for cost saving purposes. Also, many off-shoring initiatives were also taken up as a part of cost restructuring. In recent conference calls, management stated that the company had an employee cost run rate of $29 mn per quarter in pre-Covid times, it has come down to $18 mn in Q2FY21 and will further come down to $16 mn per quarter by Q3FY21 and then it will increase gradually as revenue expands in the life sciences portfolio.

4.) Reduction of debt to deleverage balance sheet augurs well: The management’s primary agenda is to reduce debt burden (approx. $71.9 mn as of Nov 2020) and improve cash flows through the combination of liquidation of Europe business, sale of stake in SCM business, headcount reduction, off-shoring of work and office footprint reduction. Management indicated that opening balance of debt in FY21 was $76 mn, of which the company has paid off $4.1 mn until Nov 2020. Also, rationalizations and restructurings have led to reduce employee expenses from approx. $29 mn to $18 mn and SGA expenses from $24 mn to $5 mn between pre-COVID to Q2FY21. Going ahead, one can expect management to sell off non-core assets (with minimal impact on revenue) to further reduce debt burden.The company had Monetized some real-estate to decrease the debt burden.

Going ahead, management has indicated that no further write-offs are expected and green shoots for business recovery would be visible from Q4FY21.

Conference call Q3FY21 highlights indicates business recovery to strengthen in the coming quarters

(i) Due to COVID in 1st quarter, capacity utilization had fallen to as low as 15-20% and clinical trials had come to a complete halt as patient recruitment had fallen by 95%. However, management has indicated that capacity utilization has now improved to 60% and RFP activity is now back to pre-COVID levels.

(ii) The rationalizations and restructurings in the business effectively mean that the normalized quarterly revenue run-rate has fallen to 60% of the original pre-COVID run-rate of Rs 600 crore per quarter. Therefore, at peak operating capacity, the company will do approximately Rs 360-370 crore of revenue per quarter.

(iii) The book-to-bill ratio which was deteriorated till the last quarter will gradually improve as activity returns to normal over the next 2-3 quarters.

(iv) 32 active trials are going on at the moment of which 25% is in Oncology, 19% in COVID and balance in CNS and Immunology.

(v) Current order book stands at $190 mn (vs. $280-290 mn in pre-COVID times) of which only $150 mn will be executable over the next 12 months. Management indicated orderbook at $220 mn for Q4FY21 which is approx. 16% growth QoQ basis.

Indicative Order Book Trend: $173 mn in Q1FY21, $185 mn in Q2FY21 and $190 in Q3FY21.

Financial Projections:

	Revenue	EBITDA	EBITDA Margin	PAT	PAT Margin	EPS	P/E
FY19	2039	384	19%	178	9%	12.2	3.9
FY20	2213	169	8%	-10.9	0%	-0.7	NA
FY21E	895	-45.1	-5%	-178	-20%	-12.0	NA
FY22E	1268	236	19%	75	6%	5.1	9.0
FY23E	1553	350	23%	171	11%	11.6	4.0

Valuation:

We feel that the worst is over for the company and improvement in numbers will be witnessed from Q4FY21. The stock currently trades at 4x FY23 EPS of Rs 11.6 which definitely appears bit undervalued.

From FY12-20, the cumulative sum of core operating cash flow stood at Rs 862 crore vs the current market cap of Rs 691 crore, indicating company generated strong cash flow but still current valuation does not factor in the numbers obvious reasons because of COVID-19 pandemic. Despite negative profits in FY20, operating cash flow remained the highest in last 8 years at Rs 170 crore. This indicates strong ability of cash generation. Also, cumulative Free cash flow from FY12-20 stood at Rs 187 crore.

Considering strong cash flow generation, management acting prudently in liquidating European subsidiary, selling off non-core SCM business and rationalizing costs through employee headcount reduction in order to reduce debt burden and improve cash flow in the near future.

A considerable multiple of 7x would give target price of Rs 81 per share (CMP Rs 46) (indicating 76% upside from current valuations).

HG_6470 · March 29, 2021, 3:13pm

Wow…do they still have that SCM business? For so many years they have been saying that they will get rid of it. Are they still trying to position themselves as a life sciences company stuck with a software/IT name? Used to have a position in this company some years back but got out as it turned out to be a value trap for me.