ABM Knowledgeware Ltd

Stock Opportunities
1

Last week I had an oppurtunity to visit a BMC office in Mumbai for the birth certificate of my son and marriage certificate for my sister. I was mentally prepared for a long day ahead given the track record of govt and semi govt organisations in rendering citizen services. But to be very honest, was pleasantly surprised at the service which was mainly due to computerisation. Everything was promptly feeded in, approved and certificates handed over after signature of appropriate authority. Co-incedently I had just finsihed the first read of One up on Wall street and it was time for some practical application of my readings.

Just checked who did the whole linking and computerisation process and the name of ABM Knowledgeware cropped up. Still in the midst of detailed research but would like to put out some findings straight away. Fellow members are requested to give their comments

ABM is a Mumbai based IT company specialising in e-governance.

After successful implementation of its solutions in Mumbai, Thane and Kalyan Dombivali municipality, its package is now approved to be implemented across all 231 municipal bodies in Maharashtra.

Its package is also shortlisted by Urban Development body of Central Government for recommendation to municipal bodies across all other states.

Debt free. Generating good free cash flow each year as expected with an IT company

Available at PE of 6 FY12 earnings

Promoter and group holdings at 82%

Such companies dealing with govt bodies enjoy business moat due to detailed understanding of govt processes and high switching costs for govt

Consistent dividend paying company which is being raised every year

Current market cap of Rs. 83 crores. Cash balance as on 31/03/11 Rs. 13 crores. This is after spending Rs. 16 crores on capital WIP. Still unclear what this WIP is since before this the gross block is only 3.60 crores.

Company is now in a position to replicate its success in other states.

Low instituional holdings. No coverage by analysts. Small local company but growing fast.

Company has already appointed executives to venture into other states. This is also reflected in payroll cost which doubled in FY11 and is showing an increasing trend in Q1FY12.

1 Like
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Hi Sandeep,

Some more discussion here

http://babypicks.wordpress.com/2010/12/27/babypicks-exclusive-abm-knowledgeware-–-a-strong-e-governance-play/

I went through the AR and was quite impressed. Adding a few more pointers

  1. Promoter shareholding is 60%…no pledge

  2. Extremely strong w.c cycle for a business with govt as a client. I went in expecting huge w.c requirements and found out that it actually requires negligible w.c (once u exclude cash from the current assets). Quite surprised by that!

  3. Return ratios are at the levels reported by Tier 1 IT Co’s!! EBITDA margins are close to 30%, RoE and RoCE are also close to 30% (remember that substantial cash in book reduces these matrics)

  4. Tax rate is at 33% and taxes paid in P&L and cashflow are roughly similar…reducing the likelihood of fake earnings!

  5. Promoter compensation is fair…last year total comp for the promoter was about 80 lakhs.

  6. As sandeep mentioned the increase in CWIP is puzzling and needs more digging. However, it may be equipment for some new large projects (Q1 12 revenues more than doubled y/y and is equivalent to 75% of FY 11 revenues…so that may be an explanation)

So far so good…but growth plans are not available especially as larger IT Co’s are increasingly bidding for govt projects

Finally, is there a political angle to the promoters? Key question!

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In July the promoter has pledged 60% of his holdings i.e around 30 lac shares. I presume they have taken some debt which will be more clear once Q2 results are announced.

There is nothing to suggest that there is a political angle to the promoters.

Q1 results included some Rs. 27 crores from a one time project. SO the same cannot be extrapolated.

Given the facts of CWIP, Likely debt as indicated by pledge, I am inclined to believe that the company is seriously looking at establishing itself outside Maharashtra. Q2 results are keenly awaited.

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We need to investigate this more…with no long w.c cycle i am surprised how that biz model survives when we see most Co’s which supply IT services to the govt are happy to have a 90-150 days of w.c cycle!

My gut feeling is a connection with NCP!!

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Ok. Lets presume that they have a connection with NCP. What’s the inference?

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No inference per se; may be a potential risk factor

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I was trying to dig up some -ves and their w.c efficiency caught my eye as govt’s (especially local govts) are notorious for delaying the payment cycle. Otherwise, on every parameter the Co seems to be great!

ps: the promoter pledge was also removed in september.

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What was the reason for the spurt in June qtr results, is that sustainable?

http://www.scribd.com/doc/48320992/ABM-Knowledge-Ware-Ltd-Code-531161-HBJ-Capital-s-MPS-Unit-Business-Insight-Penny-Stock-Reco-for-Aug-10

This stock makes to all list of future big cos from microcap segment which includes Forbes, ET, Capitalmarket etc. etc. so in that sense it is not purely an undiscovered story.

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http://www.slideshare.net/ekansh01/abm-knowledgeware-ltd-bse-code-531161-katalyst-wealth-alpha-recommendation-10602657

have a look at this analysis of ABM Knowledgeware

Kunal

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The problem with these type of companies is their ability to scale. They are not in a position to execute very complex systems integration type of projects, which ultimately goes to players like IBM,TCS etc. They are mainly into very small, vanilla projects, which is a non-sustainable model, in my opinion. Better to avoid these type of companies. If you are really interested in IT, and think large-cap IT companies are fairly or over priced, then look for niche players like eClerx, Subex etc. If I have to put my money on an IT company, I would put it in TCS. They have the best management amongst all the Indian players and very strong customer base.

1 Like
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Very interesting thread. I had a look at this company a year ago.

After some digging I decided against it.

They have political patronage which is a BIG risk factor. As Abhishek pointed out, scaling is not going to be easy for them. Even if they grow, I don’t see them growing beyond Maharashtra.

Regards,

Rahul

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fair obsevation Rahul.

Can you elaborate on the patronage bit if u’re comfortable ( ss/ncp etc).

also:

Do you mean without the political angle they wouldnt have got these municipal contracts as their products are not good enough

or

the products are good and the patronage bit got them the proverbial foot in the door.

thanks in advance.

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Jayendra please check your inbox.

Regards,

Rahul

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The company continues to report interesting numbers. Most of the quantitative checks look fine. I think the stock is losing because of perceived qualitative issues as mentioned above. Maybe there is an opportunity, but as the issues have not been unearthed yet, the market continues to not reward this company. From the face of it, doesn’t look like a multibagger, but that’s difficult to guess anyway in case of technology oriented companies. Don’t see any value unlocking unless issues are unearthed.

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Came across this company today. Quantitatively it seems fine.

But one major issue that I am confused is on similar lines discussed above…What did it purchase for 22 crores? For a company with book value of appx 50-60 crores, this is a big chunk of money!

Till 2012 it was on the books as “Other Assets” - specifically unsecured loan (AR 2012 mentions that). There is no further elaboration on who it has been given to and why is it unsecured?!

That chunk gets transferred to Fixed Assets (Office Premises) in 2013. Without a word! And no plans about it seem to be mentioned in AR 2012. So was it that the debtor couldn’t pay the loan? Who was the debtor by the way? And is the office space really worth 22 crores?

What has happened once can happen again!

Also, e-governance would pick up under the new Govt. Fine, but there are many players and many would join in the pie! ABM has been around but if business till date was due to political clout as has been discussed above, then that won’t continue now I guess.

Employees have mixed feelings about the company I guess. Just surfed the net for reviews and found some good and some nasty ones!

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This document has been removed.

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Posted excellent results.

Sales increased from 14cr to 28 cr

NP increased from 2.9cr to 4.35cr

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Last 5 years growth rates has been 10.87%. With the Digital India Campaign, this growth rate could be a thing of the past. The below is an excerpt from AR 2014. Need to watch out for this company and monitor quarterly results closely

MANAGEMENT DISCUSSION AND ANALYSIS REPORT :A. Industry Structure and Development :Business environment in last 2-3 years in this industry has been challenging.Several new initiatives as well as ongoing projects have been affected due to the anxiety in decision makers as a result of excessive public scrutiny of even bonafide decisions.This has affected sentiments of several e-Governance companies.The PPP projects have not met with unqualified success.The procurement processes have come under pressure due to complexity associated with knowledge based offerings.RANNUAL REPORT 2013-2014ST 217The new Government has laid substantial emphasis on Digital Nation and thereby opening of doors for renewed hopes.Various focus areas have been outlined by the new Government which, if indeed move from drawing table to execution stage, can help the e-Governance industry in a big way.Initiatives like “Smart City”can directly benefit your Company as we have a leadership position on space of e-Municipality in the country.B. Existing Opportunities and Outlook :It has been noticed that some IT companies which entered into this space without requisite commitment and competence could not sustain in the industry for long.That has helped to some extent as customers have started realizing the value of competent IT companies like ABM.The trend of unrealistically aggressive cost bidding may also slowly be arrested as the real efforts and costs associated with executing successful e-Governance projects are becoming evident to Buyers as well as Bidders.Your company is carefully analyzing the changing landscape of the industry and re-strategizing to ensure maximum returns on the investment made so far in this space

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Hello Rahul,

Could you please elaborate on the Political Connections? They seem to have done work in other states as well.