Business Model
The company implements ERP,CRM and other software for businesses as the channel partner for Microsoft. Most of their clients are medium sized companies and the typical ticket size of each engagement is Rs.1 crore or so. The company charges clients for each implementation that they do on a project basis. Other than this the company also charges an annual maintenance fee. The company is now trying to increase its product revenue (in addition to its services revenue) by writing their own software which works on top of the Microsoft technology stack.
Founder and Management
The company is 50% owned by the founder Mr.Ajay Man. Ajay started the company in his 40s in the year 2002. Ajay has a PhD in Physics and taught Physics for five years before he got really interested in computing. That is when Ajay decided to quit teaching and joined the corporate world as a TCS employee (or a company which was owned by the Tatas in similar business). After Tata he worked with a start up for five years and then finally started All E Technologies in 2002. He understands the whole lifetime requirement for any kind of business when it comes to their technology needs. He started early figuring out how the Microsoft tech stack can be used to make companies and their workflow completely digital. He is also adept at retaining key clients (Asian Paints has been with them for 15 years) and retaining key employees (attrition rate of 6% for overall workforce which has spent 1 year or more at the company). The top management is also a bunch of nerds who understand the Microsoft tech stack as well as the industry structure of their clients deeply. Top management also owns decent equity in the company. The management lacks branding and marketing expertise though.
Product
Till now this is primarily a services company. They meet potential clients, understand the need of the client for technology adoption. And then they recommend to the client which Microsoft tech products can help them achieve their goals. And then they put their own team on customised implementation of relevant Microsoft software for the client. Most of their revenue base was coming from India till a few years back. Now they derive majority of revenue from outside India. They are now trying to increase the share of revenue that they make from their own software products. They have a deep understanding of the industries that they serve. For example what kind of software is needed for digital transformation by the travel industry. Using this expertise they have written a few applications and listed those applications on the global Microsoft App Store for businesses. They are hoping that going ahead they will be able to convince clients to buy three things from them - Microsoft licenses, Alletec’s own software products, services to implement all of this, annual maintenance contract.
Distribution
The company has a sales and marketing team of about 16 people. They try and get leads via cold emails, industry events, digital marketing, hosting round tables, sponsorships. Other than this Microsoft also shares leads with them. The company also participates in Request for Proposal (RFPs) which are issued by potential clients globally. Other than this the company also upsells to its existing client base. More than 90% of their revenue is coming from their existing client base. This is because the existing client’s requirement regarding technology keep changing as technology trends change. And finally the company has partners of its own which pass on leads to the company. For example some company in North America which only sells Microsoft Office licenses(MS Word, MS Excel, etc) to businesses will recommend Alletec to its clients. And yes the company is now also looking at inorganic growth to get more clients as well as to get into adjacent line of business. For example they are trying to buy a data engineering and AI company which can give them the capability to be the AI partner of choice for their clients.
Brand
The company is trying to position itself as a digital transformation partner to businesses which have realised that scaling further without digitisation is impossible. Typically these would be the top 20% of SME businesses in any market. The company is not trying to compete with Infosys or Accenture where the deal size would be far higher. Instead the sweet spot of the company is between 1,00,000 USD to 1 million USD. Alletec has a very good brand in India when it comes to ERP and CRM implementation across a large number of industries. However this brand building is a result of the company being in the industry for more than 20 years. It is not because of deliberate brand building effort by the company. In fact in my opinion this company does not have the branding muscle. Their expertise and credentials are far better than their brand would appear to you.
The company is also positioning itself as someone who deeply understands what the Microsoft tech stack can do for any business. Recently, with the advances in AI, Microsoft has been the first one to diffuse AI into all its offerings. Alletec is trying to take this message to their potential clientele. They want the client to understand that AI is the future, Microsoft has the best AI-enabled tech stack for any business and Alletec is the best possible implementation partner for the Microsoft tech stack.
Financials
The company has more than 100 crores of cash on its balance sheet and the company is generating about 20 crores of free cash every year. EBITDA margins have gone up from 10% a few quarters back to 20% + in the latest quarter. Revenue growth is upwards of 30% y-o-y. I believe that is on the lower side and is being hurt by the conservative stance of the company. Receivables are under 13% of the overall revenue and are being paid on time.
Bull case
The company would realise that business software is at an inflection point right now. Every business would very soon realise that they need to generate as much data as possible about their business workflows. And the first step towards that is digitising all workflows by implementing ERP, CRM and cloud. Then business would realise that just having data is not enough and that AI can now be used to point new areas of efficiency for the business every day. And that is when businesses would scramble to get a technology partner who can do all of this for them. And Microsoft or Salesforce or Oracle don’t have the DNA of services. They will be able to come up with great tech products but those products by themselves are worthless for business clients because they need strong expertise in implementation. And that is where Alletec has a huge opportunity. Hopefully the management will realise that this is the time to hire a lot more people and put a lot more money behind sales and marketing globally. Also, the management may be able to figure out strong adjacent areas of expertise. As they implement more and more projects they have a deep institutional understanding of what kind of customisation is needed by clients. They can use AI to build good software products themselves and them implement a fusion of their own software and the Microsoft tech stack for businesses. May be over a period of time other Microsoft channel partners will also start selling Alletec developed products to businesses which are already on Microsoft. So Alletec may become a product company over time.
Another possible adjacency is that the company will start building expertise in other platforms and not just Microsoft. Think of how much more revenue they can generate if they also become the implementation partner for ServiceNow or Salesforce or Oracle or even Open AI Enterprise, etc. The world has been using an increasing amount of software over the past 40 years and that pace is going to increase exponentially now. Businesses would be the first to adopt and pay as this will become table stakes.
Bear case
The company will continue it’s conservative ways and grow it’s business 25-30% a year for the next few years when the promoter would become 70 years old and lose interest in the business. His son (who works at Microsoft in Seattle) may or may not want to take over the business. So the business would start behaving like a mature business in a few years instead of the growth business that it currently is. Also another risk is that the company pays too much for any inorganic growth opportunity and that acquisition doesn’t work out. One tail risk is that Microsoft stops being the tech stack of choice for businesses. And the company is unable to develop expertise in another tech stack quickly and thus loses clientele and revenue at a slow pace.
P.S. My internal blogs/drafts for this post are below.
Disclaimer: The views expressed in this blog are personal. I may or may not hold investments in the stocks mentioned.
Thursday, 22 February 2024 at 9:57:52 AM
So after a long time, I have come across a company where demand is not a problem at all. Only how quickly can the company hire people is a problem. But we are getting ahead of ourselves. First let me talk a bit about where the company is today and what is the problem that it is solving for. A few years back Marc Andreesen said that ‘Software is eating the world’. What does that mean? It means that everything around us which can be digitised is being digitised. But what does that mean? What does it mean to digitise something? It means taking a physical experience and then replicating all of it or some of it in the digital world. Let us take some basic examples to understand this better. 150 years back if I told you that someone sang beautifully. And you must hear them singing to experience it. What would it mean? It would mean that you would have to be physically in the same place where the singer is. So this was a completely physical experience. But then we discovered how to capture someone’s singing on a gramophone disk. We still have not entered the world of software. This capturing on the gramophone disk happened by mechanically engraving on a disk a representation of the sound wave captured. So there is a pen which moves to engrave on a physical disk the sound wave that it has received. This is a rough explanation. But the gist is that this is all happening in the physical world. There is no software involved till now.
Then later we figured out how to convert the sound wave into an electrical signal and then we entered the world of software. We now could tell a computer to capture the electrical signal. So computers have their own language. They capture everything in 0s and 1s. The advantage with computers is that once something is captured in 0s and 1s, it can be easily replicated. I mean it became a lot easier to produce CDs as compared to gramophone disks. So software started making it easier for us to move things around. But there was one problem. These 0s and 1s still needed a physical manifestation. I mean there was no digital network over which these 0s and 1s could travel easily. For example if someone sang a song in the US and it was captured on a computer, but you wanted to hear the song in India, how do you do it? You would have to physically get the CD to India. Obviously this took its own time. But then we figured out that we can just lay a pipe under the oceans which would connect US to India and then we could lay another pipe within India which would come till your home and then become a wire which would physically go into your computer. And thus we had internet. We had good fast movement of 0s and 1s through these pipes. This got so good that we could hear a song which was stored on a physical server in the US in India within microseconds. But then something more happened. Humans wondered if we can also send these 0s and 1s over the air. And that is when internet started coming to your mobile phone. So now we have no need for a physical wire to go into your phone or any of your devices. Instead your cell tower is helping you get connected to the worldwide internet network and you are able to access 0s and 1s easily.
So now the world is in a place where everyone is trying to understand how to convert more and more of the physical space around us to digital. And the biggest motivation to do this is the power to manipulate. In a physical world manipulating information or objects is time taking and also requires a lot more energy. Think about files. Or better think about books. Let’s say you have a 100 books. You need to move them physically from Delhi to Bengaluru because now you have a new job. How much energy and physical effort is needed? Compare this to a scenario where all these books are digital files on a kindle. Do you now understand how much more efficient it is to manipulate anything in the digital world as compared to the physical? In our everyday life we are not obsessed with efficiency. So we take our time in adopting digital technologies. We are happy with physical books because we are in love with the touch and smell of paper. Or because we like how the book feels in our hand. Or because we already are spending so much time while watching screens (be it TV or laptop or phone). But businesses are obsessed with efficiency. They have to be. They will lose customers as soon as they become inefficient as compared to their competitors. So that is why businesses will rush to adopt any technology as soon as possible. Everyone starts a business because they want to grow it. They don’t want to be in a situation where they are fighting very hard every day just to retain the business that they already have. So anyone who comes and tells them ways to improve their efficiency will get a patient hearing from the top management. And increasingly this advisor has some digital angle to his idea.
And that is where Alletec comes in. They have been doing digital business transformation for over 20 years. What does that mean? It means that they have been explaining to businesses for 20 years now how they can digitise a portion of their business and then how can they increase efficiency of the business with the help of that digitisation. How do they do it? Basically they understood very quickly that the biggest competitive advantage that they have is their brain and access to cheap talent in India. The founder is a PhD in Physics so we know he is a nerd. He understands abstract worlds and can think through how things will move in that abstract world. Let me write a bit more on this. What is abstraction and how is it relevant to our study of this business? Whatever you can see or feel or hear is not abstract. Abstract is something which you can’t explain to a kid by showing the kid something around him. May be feelings are abstract. But not a glass bottle. Can you teach a child what is a glass bottle by making him touch it? Can you teach him that glass is brittle and steel is not by making him throw a glass bottle and then a steel bottle to the ground? But can you teach a child how to get the square root of something in the physical world? May be you can. But you would have to have a lot of props and then design a number of experiments. But even then the overall idea of a square root remains abstract. And therefore we come to maths. Maths is an abstract science. Alphabets are not. You can teach an alphabet to a child by showing him how to draw a shape and by teaching him how does that shape sound and then putting together some alphabets like B, A, T and then demonstrating the sound of the word BAT. But maths is not that simple. You can teach him the basic numbers. Like you can demonstrate to him how 2 cows are different from 1 cow. But as you get into more complicated maths you start running out of examples in the physical world which can teach a maths concept to the child. So some children take to maths. For them abstraction comes easy. They enjoy maths. Some like me realise much later in life that something as abstract as maths is the key to unlocking the secrets of the universe. Any real world phenomenon is a mystery to us till the time we cant convert in into maths. The moment we convert it into maths it becomes a science and then can be used to achieve things in both the physical and the digital world. For example if you want to go from your home to the nearest police station maths can help you. Even if you have never gone to the police station, you will still find your way to the police station on your first try if you use Google Maps. That is because google maps is using your current coordinated to figure out where you are in the world and then where is the police station and then it is showing you an your phone the next turn you take. All this needs clever use of maths by google. Because google knows that your coordinates are changing every second , it can also figure out the appropriate speed you are going at and then it also knows how is the traffic in the area and then it takes that into account and is giving you an estimate of the time it would take you to reach the police station. So there are two kinds of people in the world. One who enjoy maths and appreciate how maths is a language through which you can unlock the secrets of the universe. And then there are others who are more comfortable with ignoring maths and just depend on their feelings and other people. And India has the most people in the world of both kinds. And that is what we are now exporting to the world. We are exporting our brain power. Both maths and non-maths. And this company is in the maths business of it. And on top of it ever since computers came in, humanity realised that we dont need human brains anymore to do hard maths. Instead we can teach a computer to do maths on our behalf and then give us a result of that computation when we want. So people who run computer related companies realise that a computer is just like a brain which can do very hard maths very easily. It is like a human being with only the capability to do maths and nothing else. And therefore the more of our world we can convert to maths, the more of it can be handled by computers. And that is how software is right now eating the world.
So the kind of entrepreneur we have here is an adherent to maths. But in addition to that he also wants to build a business. So he tried to marry the two and started a company which would help businesses to benefit from digitisation. Alletec goes to businesses and understands from them their workflow and then Alletec recommends how using technology businesses can digitise those workflows. Once that part is done Alletec also helps businesses to benefit from that digitisation by improving the overall efficiency of the workflow. Alletec though is a conservative company. How will they know how much time it would take them to develop the right technology for the business? Instead of trying to figure this out, the company is instead partnered with companies which make software products. Their biggest partner in this today is Microsoft. So Microsoft has been making business software for more than 40 years. They were sort of the first ones in the world (or amongst the first ones) to understand that how computation can really help in digitising the physical world. And Microsoft chose to build software products for businesses as businesses would be the first ones to adopt new technology and to pay for it also. So this is the DNA of Microsoft. The problem they faced was selling. They had built something which was useful to every business in the world. But not every entrepreneur in the world loves maths. Or even if they do they dont understand how they can leverage compute to introduce more maths in their respective business. And this is where Microsoft figured out that every business needs hand holding. Every business needs someone (a person) who can guide them through this digitisation journey. And then Microsoft realised that this meant that they needed to have salespeople and developers and support staff in every country across the world. And not just in every country but in every city or town or village. They had to be wherever business was. And business was everywhere. And obviously Microsoft had competition. The rest of the world was not going to sit idly by and let Microsoft go and sell to every business in the world. And so Microsoft had limited time in which they had to reach a majority marketshare. So Microsoft took a decision that instead of trying to do everything itself, Microsoft would just do the part which has the most operating leverage. Microsoft would stick to writing code because that code can easily be replicated and that code can easily be monitored. Let’s just think a bit more about this. What does it mean that code can be easily monitored?
There is something great about code. It allows you to put a digital checkpoint anywhere and everywhere. It is like putting a security guard and then that security guard would check whatever you want it to for 24 hours a day. So therefore if you write code, you have so much control over the product. At any time you can change the product and put up more digital checks in the product. Now with AI, this process will become even faster because now AI will figure out looking at your code and how it is being used whether more digital checkpoints are needed and what do they need to check and then you can just allow the AI to improve the code in real time. So Microsoft decided that they build a digital empire where they will put their own digital checkpoints. And Microsoft collected a bunch of maths nerds to write and maintain this code. But just writing code will not get you customers. The problem remained that who will go out to businesses and evangelise Microsoft. And Microsoft decided that it needed agents or partners to whom Microsoft can pay a commission for doing this. And that is when Microsoft started its channel program. And that is what Alletec is. It is a channel partner to Microsoft. But it just doesn’t do sales on behalf of Microsoft.
Actually let us look at another dimension. So when the promoter here decided that he would help businesses with their digital transformation, he looked at the Microsoft channel partner program. And then became a channel partner. Now he soon realised that he himself is not great at sales. This is a usual problem with maths nerds. They love numbers and their abstract world a lot. Because in this world once you do write some code and set up some rules, then the same process will repeat every time without fail. Sales is the polar opposite of it. You need to focus on every human interaction that you have. And you need to really listen when you are sitting face to face with someone. And you dont just need to hear his words, you need to study his body language, you need to read between the lines, you need to see what his eyes are doing, you need to understand the tone of his voice. And so on. So he reconciled to the fact that since he is not great at sales, so therefore this business would grow slowly. And also he would try him maximum to do a great job for any customers that he does acquire so that he can continue to get more and more work from his existing clients. And that is how the business was run for a long time.
But still running the business takes up a lot of your time on non-core work. You need to look at administrative and HR issues. You need to manage finance. You need to run after customers to recover your money. So the business kept growing slowly as the founder tried to do all of this himself. Then in 2006 enters Rajiv Tyagi. He currently owns about 3% of the company and he is even more of a maths nerd as compared to the founder. But with Rajiv coming at least the founder could start withdrawing from the day to day a bit and focus on how to grow the company more strategically. And therefore the founder started spending less time on coding and more time on other stuff. And Rajiv took over the coding bit. Rajiv really understands the Microsoft ecosystem. So the lowers hanging fruit that this company picked up early on was ERP. An ERP is basically some software which would allow an organisation to get all of its resources in one place. For example your sales team can raise a request in the software for a new invoice to be raised. And your finance team can use the same software to raise the invoice and then also mark in the same software once the money is received. As a business, till you hit a certain scale you can try to manage this offline or via google sheets, etc. But then things start falling apart. And that is where ERP would save you. And that is what the company started pitching to potential customers. After a few years of doing this company realised that the same customer now needs more software. For example once this customer realises the efficiency that digitisation can bring in, he tries to bring the same efficiency not only to his back office but also to his manufacturing shop floor. So again you have inventory management piece and bill of material etc for which you need software. Now if you are already using Microsoft and you already have a relationship with Alletec you would just ask them to take care of more software implementation. And this implementation is where the company now makes the most of its reputation. Instead of just being a salesperson of Microsoft and earning a reseller commission, they actually have expertise to figure out what to do with that software. And that is what is their biggest USP. When they go to a customer, they not just recommend how exactly Microsoft software can help the customer. But in addition to that they also take away all the pain from implementing that software for the customer. And thus they make service revenue from this customer.
So our founder figured out that in addition to being the salesperson he would also be the implementer. And therefore he would earn a lot of money for implementing the project but in addition to that he will also get an annual maintenance contract from the customer. Look, the customer does not really understand how the software works. All that is an abstraction for the customer. Alletec does everything. They come in and understand the current technology being used by the customer. They then slowly transition the customer to Microsoft products. And then they also give peace of mind to the customer by maintaining that software. And they do it ethically. Why do I say so? They have more than 250 active clients and do you know how many support staff they have? Less than 10. How can 10 people support 250 active businesses? That is only possible if the initial implementation is as per the needs of the client. And therefore you don’t have a situation where the software is breaking down everyday and therefore support is needed.
Now the founder did not just stop here. After a while he figured out that when he implements microsoft software for a travel company, it becomes easier for him to now convince another travel company to implement the same software. Basically competing travel companies realise that for their own business growth they need to digitise their business. And they especially move fast on this when their competitor has that digitisation already. So without needing a lot of sales skills, you can just go to a travel company and say hey look your competition is using it, do you want me to come and help you have the same software? So the founder realise that this is a pattern. Once they break into an industry and establish their reputation, they will get more business from the same industry. But the founder now again hit the problem of scale. After all this would mean that he would have to hire more salespeople and more implementers. But instead of doing that he decide why dont I write some code myself. This is the beauty of software. You can just write some code on top of some existing code and massively increase the usefulness of both pieces of code. So our founder started making his own applications and started selling these applications to customers along with the base software from Microsoft. This is the IP that our company has. So suddenly from just a services business, we become a product company. And Microsoft has its own App Store globally. Businesses which already use Microsoft products can go to this App Store and buy more software which would work in conjunction with their existing Microsoft software. So this is the route that our company has taken. They have started writing software programs or applications which are now listed on the Microsoft App Store and any business can buy this application. So a travel company sitting in Morocco which has not heard about Alletec ever can discover the app on the Microsoft app store and start using it and if they need any help implementing it, they can contact Alletec and Alletec will send someone to them who would implement it.
So this company has now started its journey where one day majority of the revenue will start coming not from their services business, but from their own IP. They are still very early in this journey. And fingers crossed that they get more aggressive about it.
Though no company comes without risks. Let us talk about a few of them here. One is that the founder is already 64. I am not sure how much drive he has. So even though the opportunity out there is huge all over the world. But the founder (who owns about 50% of the company) is too conservative. And this is a surprise to me. In his lifetime he has acquired three companies (before IPO). So he understands how to acquire companies and how to integrate the workforce such that growth picks up. But that was 10 years earlier. I don’t know if he still has the energy for it. He has a son who works as an employee for Microsoft in Seattle but I am not sure if he would come back to guide this business. So that is the obvious challenge I see. May be Rajiv can pick up the mantle. But he himself is a programmer. Not sure if he has the aggressiveness of an entrepreneur.
Another is that the company starts poor allocation of capital. Right now the company is sitting on 100 crores of cash and they are generating about 40 crore of free cash every year. And they say they want to increase their international business via acquisitions. But I am unsure about this on two counts. One is why do they need to acquire at all? They already understand the Microsoft ecosystem very well. All they need is sales. Why don’t they just hire 5 sales people in North America and pay for their co working space and salary? In their RHP they mentioned that they have one sales person in Texas and they are looking to hire more. In the next 9 months they only hired one additional person in Canada. I am not sure if they are really serious about sales. I think they are just happy with 30% growth as that can be easily managed and they get that much business from any new leads that Microsoft passes on to them. So instead of building this sales muscle, are they trying to hire another microsoft channel partner in North America? But then what would be the value of this acquisition. I mean they can only afford to buy a company for a maximum of 8 million or so. But any decent Microsoft channel partners in the US who already has a long list of active clients would already be generating tons of profitability (let’s say 3 million USD a year). Why would he sell at such a small sum of 8 million? He would have 5 small PE guys coming to him and offering him 20 million or 30 million. Everyone in the world can realise that business software is in a gold rush right now. Every business wants the latest cutting edge AI to look at all the data that the business is generating and then rattle off insights and also help them act on those insights. And that is why there is a mad rush for AI. There is one company which is miles ahead of the rest when it comes to AI chips and that is NVIDIA. And there is one company which is miles ahead of everyone else when it comes to infusing business software with AI and that is Microsoft. So everyone is trying to get a piece of the whole Microsoft value chain. And channel partners are a big part of this chain. Therefore how will our company get an acquisition target for so cheap is beyond me. Either they leverage up and take a big bet of 25 million or 50 million. I do not think the promoter has the stomach for it. Or they just try to grow organically. Hire more salespeople. Invest a lot more in branding. Just look at any YouTube video on their website wherein they are putting their solutions to businesses. And compare this to official Microsoft YouTube videos on their business applications platform called Dynamics 365. Our company does not get branding. It does not get marketing. It does not get sales.
So with that let me stop for now. I am still studying the company and I will update this thread in due time.
