Virinchi... A bet not to be missed


#193

Comments by Vishal Ranjan (CEO, KSoft. Head – New Business)

Who is Virinchi?

  • Technology company. Business solutions which are technology backed
  • Growth verticals – Fintech & Healthcare (both powered by IT knowhow)

QFund Product

  • Global leader in software for micro lending industry.
  • Serving 20 of 25 top players in US. Capturing 90% of their IT spend.
  • We work with NBFCs and run the ERP/loan management system beginning to end.
  • Caters to subprime citizens, people who have exhausted all options like credit cards, family & friends etc. These customers have FICO score of 400-500. Conventional banking options not available.
  • We look at the bank accounts, see 12 months of cash flows, look at into his address, check blacklisted zip codes, utility payments, what kind of car he is driving? Checks 30-35 different data sources are integrated – decision is made in real time.
  • Loan decision made in 2-3 minutes.
  • Typical loans - 15-30 days loan. $500-$1000 loan size. 30-35% loan default rates. 300%-350% APR
  • 25 mn citizens have gone through our product. Created huge database of customer data, goes into machine learning tool. Gives us 90% confidence on loan decision. Nobody other than us has this data to serve this segment
  • Industry has a lot of regulatory oversight due to very high APRs. We get a customization income every time there is regulatory change. Each loan has to be reported to 18-20 agencies on daily / monthly basis for which we get another fee.

Customer Stickiness in QFund

  • Huge amount of stickiness to our customers because of our knowledge expertise. We handle the whole journey, integrations. We are the SAP for these customers.
  • Did first contract with Advance America 11 years ago. Not lost any customer in last 5 years
  • Clients have tried to do in house but have not been able to meet challenges of this industries.

Market share & Competition

  • 20-25% of all such subprime loans go through QFUND.
  • Monthly 500,000 loans. Will grow higher with Advance America.
  • Next competition is 40% of our size. Very tough for them to compete on cost with us.
  • Infosys etc. – this is too niche, and domain is too deep to match our service. They can go to a Wells Fargo / BAML and make the entire revenue of QFund through one engagement.
  • Consolidated, cash cow position.
  • Geographical diversification of QFund to other markets – nothing concrete currently

Advance America contract

  • We were negotiating with them for 7-8 months. Got a 5-year contract
  • Revenue from this contract will be 250 cr - 280 cr fixed over 5 years. Lot of it is front loaded at this stage.
  • Virinchi Product revenue segment – FY 2017 – 92 cr. FY 2018, annualized 126 cr.
  • Incremental revenue from this contract for next year FY 2019 will be this year’s run rate (126 cr, minimum) + ~20 cr year. Hugely EBITDA accretive with 75%+ margin. Cost associated with this contract will be only 3-4 cr for initial investment. Should add 13-15 cr ebitda / year for this business (pretax)
  • Additionally, will also earn a significant amount of implementation and service income

Healthcare Business

  • Huge synergy in technology experience. Democratizing technology in other hospitals.
  • At this point see the businesses together. Could demerge in future
  • Overall utilization ~30%
  • First 3 quarters 14-15cr EBITDA. Improving day by day. Cash flows are breakeven here. (8 cr interest + 4 cr principal per year)
  • Apollo’s add capacities. Virinchi wants to touch a billion patients
  • See the best model as Business solutions and not a directory service (e.g. Practo). Feel that healthcare a touch and feel business.
  • Currently touching 6 cr patients in UP.
  • Don’t see IT business subsidizing Healthcare anymore
  • Next 12 months – hospital stand on its feet, paying cash flows. Want to run this business better.
  • Balance 50 beds completed in this quarter. Waiting for occupancy for expansion for next 100 beds.

Analysis:

Overall, he sounded very bullish about the business. My reading of their comments on healthcare vertical is that they are still figuring out the best model for expansion and the growth has been slower than expected. He mentioned more than once that healthcare business has reached breakeven and will not be subsidized by the core business. Many of the callers were focused on the healthcare vertical because it is new and sexy, but my key takeaway was that the core IT business is significantly undervalued at current price.

Based on back of the envelope calculations:
FY 2018 estimated PAT – 30 cr
Earnings growth rate for current business for next 2 years – 15%
FY 2020 estimated PAT for current business - 40 cr
Post tax incremental margin from Advance America contract is ~10 cr per year
FY 2020 estimated PAT – 40 + 10 = 50 cr
FY 2020 PE multiple – 12x
Valuation – 600 crore
Current market cap – 365 cr

Upside not captured –

  1. Higher PE multiple than 12x
  2. Growth of 15% is conservative – last 3 years PAT CAGR is 83% (from lower base)
  3. Better than expected performance of healthcare business
  4. Future demerger of healthcare business

Please let me know if I missed anything.

Discl. Invested, adding to my position.


(naruto) #194

Results are out - https://www.bseindia.com/xml-data/corpfiling/AttachLive/8a00e781-71d6-4b51-98cf-aba483291553.pdf

Key Takeaways -

  1. Jump in software product revenues (YoY - 39%).
  2. Improved Profit margins for Software products (12% to 19.8%)
  3. Health care revenue jump and profit jump. This can be due to acquisition (need to watch organic growth from now)
  4. Software services revenues are coming down (YoY - 20% down and QoQ 6% down)
  5. Interest cost went up by 56%

Attached the document in case anyone wants to review it and use it for next quarter:
Virinchi - Results FY17-18.xlsx (12.6 KB)


(naruto) #195

Here are the highlights of the conference call -

IT Products -

  • Added new client - Advanced America(Client for over 11 years) - which will create a 100 Cr revenue for next 5 years. This can create 20 Cr revenue every year and that’ll be 15 Cr addition to EBIT and 10 Cr addition to PAT. This is more of a license fee.
  • Growth forecast: QFund to grow by 8-10%, IT Products - 15-16%
  • Clients are very sticky in nature. Have been with the company over 10 years.
  • IT receivables on an average - 45 days

IT Services -

  • Moving out of SAP/Oracle Implementation.
  • Moving high into the value chain - Analytics, AI etc,. They have refused projects which are not resulting in profits.
  • Pipeline is healthy. Supported by good sales team in US. Sep/Dec would give much better visibility.
  • IT Attrition - 5-8%

Hospital

  • Occupancy - 20-22%
  • Capex: 5-7 Cr for adding new 50 beds; 40 Cr for oncology
  • From 70-80 doctors in Apr 17 to ~180 doctors now
  • Medical tourism from MENA is contributing to the revenues.
    • One doctor in specific is spending close to 20 days in a month in Nigeria.
    • They have a tie up with around 100 doctors in Nigeria to refer patients to here.
  • Overall Debt - 148 Cr (Interest rate - ~12.2%) {i am not sure if i got this number correctly over phone)
  • Company is planning to launch V23 app similar to Practo.
  • On growing receivables, they gave lot of details.
    • 10-15% of hospital revenue comes from corporates/insurance/govt.schemes.
    • For Govt. schemes, receivables will take 6 months.
    • Regular insurance - 45-60 days;
    • By next year, 25-30% contribution should come from these components.

Management is forthcoming to lot of questions.


(Amit Mehta) #196

Blended interest cost is 10.5%


(NamantS) #197

Valuations seem great right now. It’s been falling a lot, almost 25% fall in 4days. Is there any stock specific reason that I’m missing or just falling with the overall trend.

Dislcosure: haven’t invested yet.


(NamantS) #198

Had a look at June shareholding pattern. Promoter holding down to 44% from 50%.
What is the reason? Seems like a huge red flag if there’s no plausible explanation.
Would be helpful if anybody could give some insights.


#199

have promoters sold shares or this is dilution?


(PE_Ratio) #200

Promoters are holding the same number of shares in Q42018 and Q12019 - 1,34,25,300.
Directors of the company in their meeting held on 23rd April, 2018 approved the allotment of 18,58,284 Equity shares under Virinchi Employees Stock Option Scheme, 2016, who have exercised their options.

So, basically promoter holding % reduced due to the dilution that happened through the above ESOP.


(NamantS) #201

Okay so it’s just a dilution.
Rupee depreciation and also advance America deal will surely boost Q1 results.
Expecting around 25-30%improvement In bottom line atleast due to Advance America and improvement in margin by 2% or so atleast cause of exchange rate.
However uncertainty remains with regard to the occupancy rate at the hospital. Would be pleasing to see some postives from the Healthcare side.


(amolk) #202

ESOP allotement of 18.5 Cr rupees. Isn’t this big amount for company like Virinchi? Will this hit the P&L?


(NamantS) #203

The EPS will be impacted due to dilution. Increase in net profit won’t be consistent with increase in EPS due to higher equity base. This changes the projections for share price.


#204

Fortis deal completed at 170 / share which translates into an equity valuation of 1.88 crore per operational bed (assuming 4,685 operational beds as per http://cdn.fortishealthcare.com/FHL_Investor_Presentation_27032018.pdf).

Applying any 100% / 75% / 50% / 25% of the Fortis valuation multiple to Virinchi’s healthcare business (550 operational beds as of July 2018) we would get a value of 1,034 cr / 775 cr / 517 cr / 259 cr.

Another way to benchmark the valuation would be to look at EV / EBITDA multiple for listed comps in India. The average EV/EBITDA multiple for 16 listed hospital / healthcare center businesses in India is 17.89x currently. Applying this multiple to 20 crore EBITDA earned by Virinchi Healthcare segment in FY 2018, we would get an EV of 358 crore. Note that this EBITDA number is on the lower side as average capacity utilization for Virinchi was only 20-25% for FY 2018.

I continue to believe that at current market cap of ~300 crore the company is significantly undervalued. One concern is the delay in debt servicing for a few months earlier this year due to which their credit rating was downgraded. Management had clarified that this was a one-off event in the last con call and I have written to IR to check if there’s any update but still awaiting their reply.

Discl. Invested


(Vilas D'Souza) #205

Couple of observations:

  1. Reducing promoter stake and conversion into holdings by private entities.
  2. Pledging has begun now.
  3. Company is clearly getting into debt trap. I wonder if they’re capitalizing interest costs.
  4. IT is low margin business for them although he talk of niche products. So everyone’s pinning hopes on hospital business.
  5. From some scuttlebutting, I understand that currently the capacity utilization seems low.
  6. Porinju seems to hv exited.

Will watch for the upcoming quarterly numbers, especially the interest cost


#206

I received a reply from the company on the delay in debt servicing and credit rating downgrade. Reproducing their reply verbatim below:

The Project Loan in VHPL has come down from Rs. 68.75 Cr to Rs. 64.72 Cr as on June 30, 2018 (it is on a ballooning repayment structure, 10 year tenure).

As you may note from Fitch rating feedback, the delay in repayments was for a couple of days at the time of rating downgrade and not a default. The last four months all the repayments (interest+principal) have been on time.

We are in touch with Fitch people and our case should be up for discussion in the committee sometime in the next 10 days.


(NamantS) #207

Promoter stake has not decreased it has just diluted.
The IT business margins are improving constantly also revenue is growing.
Now with the Advance America deal their bottom line will increase by 25-30%. The contract is a 5year contract which helps in stability of topline.
They aren’t in a debt trap, the hospital business should stand on its own in this year.
This company has able to grow profits during tough times when they had just started with hospital business.
Also current exchange rates will help improve margins of IT business.
Dislcosure: Not invested yet. Planning to start investing below 80.


#210

unable to locate their Q1 ppt and concall transcript. Huge equity dilution has happened over the last 18 months taking away all EPS growth. Their communication with market has reduced after they secured pvt debt with Edelweiss taking care of their funding issues. Mr market is rightly ignoring this kind of story unless they start growing their EPS in line with PAT growth trend.


(paraa) #211

Their AGM is scheduled on 28th September.This should throw more information


(shikhar mundra) #212

My interaction on mail with the company management.

How are we planning to add 5000 beds? What will be the capital structure for the same?

The capital cost per bed on an asset light model (where we do not own the land and building) is Rs. 40 Lakhs/bed. We plan to do another 4200 beds at a capital cost of Rs. 1,680 Cr.

We plan to raise PE money and based on their comfort, do a 1:2 debt equity structure.

Whats is our ARPOB(Average revenue per operating bed)?

For the flagship hospital it is currently hovering around Rs. 26,000 to Rs. 28,000

What is the current occupancy rate? and what are we targetting?

Current occupancy is around 31% and we are targeting to reach at least 35% by the end of the year.

What is the contract duration for QFunds annuity payment?

Most of the contracts are 3 years with an auto renewal clause. The contract with QC Holdings is for 10 years. Our first client and our largest client Advance America has been with us for the last 14 years.

What is the lease amount for BCH and Virinchi Hospital at Banjara Hills per year?

How do we plan to compete with other players like Apollo?

We compete with established players like Apollo, Case, Yashoda etc., based on the following parameters:

Patient experience (deployment of information technology solutions facilitating booking appointments, video calls with doctors, eliminating the need to carry physical copies of old medical records, access to medical records through patient app and faster discharge of in-patients)

Deployment of Cutting edge medical technology

Making the latest developments in science across the world accessible to patients through the “Right to Science” initiative

Having good doctors

Pricing – our procedures are priced slightly lower than competition

Can you help us with revenue contribution from QFund? Any guidance for future?

FY 2017-18 the revenue from Qfund was Rs. 129 Cr and for FY 2018-19 it should be around Rs. 150 Cr on a conservative basis

Guidance for margins in IT , Healthcare?

The EBITDA margin would be like in FY 2017-18 i.e., of the order of 37% for IT product business, 20-25% for IT Services and around 20% for Healthcare business.

What is the cost structure of healthcare segment?

Salaries, Pharmacy cost, sales & marketing expenditure, rent and utilities account for 75 to 77% of the cost as a percentage of revenue

Disc - Invested


(NamantS) #213

Hi shikar, thanks for sharing the management response, it is helpful.
Has the management said anything about the hospital business being profitable this year post interest costs on the debt taken?
Also what is the Avg hospital occupancy rate in the country? Or rather what is considered as industry Avg?
Also are we expecting any new contracts on IT business front or more specific for Qfund?