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)
- 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
- 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.
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 –
- Higher PE multiple than 12x
- Growth of 15% is conservative – last 3 years PAT CAGR is 83% (from lower base)
- Better than expected performance of healthcare business
- Future demerger of healthcare business
Please let me know if I missed anything.
Discl. Invested, adding to my position.