Agree. However, now that they have said that the Rs 800 cr capex guidance was a misunderstanding, we have to go back and rework the FY 25E numbers.
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True. Iâve complained on this forum of vague number provided in concalls before. I hope Dua learns that number uttered, even in the most hypothetical scenarios, will be quoted back.
800cr. did seem like surreal and actually got my heart racing due to the below calculation:
If we look at it from an annual asset turn perspective where capex this year, gives revenue next year, these are the numbers we get:
Assets: 800 (this year) + ~200 (existing 210 - 12 intangible assets ) = ~1000 cr. This will be in FY24-25
Revenue in 25-26 from above at 1.5x asset turn = 1000 X 1.5 = 1500 cr.
Assume, PAT margin is 15% (24% now - 9% debt interest assumed) = 1500 * 0.15 = 225 cr.
EPS = 225 /1.45 = 155 Rs/ share
PE (in todays price) = 1818 (CMP) / 155 = ~11.7
Now these are quite conservative assumptions. It does not assume capex will give returns within the same year. PAT is assumed low. No new CAPEX and returns in FY25-26.
I have not accounted for mounting depreciation but the point is that the dream of these numbers go my heart rate up and that does not happen often.
With the 800cr. assumption gone, letâs see where this goes. Will have better idea in H2.
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The management has set an asset turnover guidance of 0.5 to 0.6. They may be taking a conservative approach, but assumption of a 1.5x asset turnover seems aggressive in comparison.
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Youâre right. I should have clarified. As shown in my numbers, my assumption is that this yearâs assets give return next year. If we take the asset turn the typical defined way it will indeed be much lower as you pointed out. I calculated taking in a lag of 1 year (as shown in my rough calculations). Kind of a forward looking asset turn as I think asset turn during the time period of heavy investment will give quite low asset turn for the period as the infra is being purchase, delivered, installed and commissioned.
Thanks for pointing it out. I hope this clarifies it.
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Management provided guidance about asset turnover during the conference call
Pankaj Shah: Okay, got it. And sir how should one look at the asset turn, so earlier we used to get a 0.7x over a year. So does this increase with time or how should we look at?
Tarun Dua: See, itâs very, very difficult to kind of, these are all averages, in the sense that like the asset turn also relies on a number of things, the period for which the customers are using the services,so, then there is more scarcity in the market, people want like longer contract period, when there are less scarcity, then obviously people want like shorter periods, but that doesnât mean that they are going away tomorrow, day after or next month. But they also tend to end up paying a certain percentage more for shorter periods. Now, that being said, like there is also the nature of SKUs, so for the same underlying hardware, assets, like there are a number of
ways in which the assets get monetized due to the nature of the software capabilities as well.
So over there, for each different SKU, the asset terms could vary from all the way from point
0.5 to even like 2. So what is the final blend we are able to achieve like, is again something w
can look back into the past and say that, okay this was what was achieved but, there is a lower bound for that which we can predict, which is like somewhere, anywhere between say 0.55 to 0.6. But thatâs the lower bound. But, on the other hand, like there is no upper bound in a software driven cloud, like where, what sort of capability you can bring to the table to achieve like an asset turn. So normally, if you ask me, that was not how we look at our business, we look at our business as a technology business, very focused on figuring out the various industry solutions. And over there eventually like, the asset turn doesnât matter, because itâs like, very,very capability and technology and software driven business and itâs not about being the cheapest on the market. Itâs about creating enough value for the customers.
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Couple of interesting snippets from the transcript:
Operating leverage and the scope for margin expansion:
"
So, only one question I have, so the margins have really improved the EBITDA margin, is it
something that is sustainable in future quarters or in upcoming years?
Tarun Dua: Ours is a platform business so, the overall team size, the platform size doesnât need to really
increase with the amount of cloud business that we do. So, we can potentially scale up the
business 10x where the platform remains practically the same in terms of the size of the dev
team and the size of the operations team, it needs to grow very organically compared to,
whatever the growth on the side of the content revenue. So that way, there is always any
platform business, the scope for growth of margins is always there
"
On what they perceive as their USP:
"
Aman: My question is, what is our USP over the, if we are in a competition with the largest player or
an emerging domestic player, somewhere what we see the competition that makes us different
from the competitor, which is infrastructure heavy player and what add onâs we provide in
terms of cloud services to our clients?
Tarun Dua: So there is a long list of cloud services that we have been providing from last many years. And
typically, what happens with software usage is that software usage is a habits, so whether itâs
a larger player with like a bigger piece of software, whether it is like a player which is more
infra heavy, less software, ultimately the differentiator would become the stickiness of the
software that we eventually produced, with the help of like understanding from our customers,
that we build from our customers. So ultimately the differentiator is going to be the software
platform that we are building.
Aman: So are you trying to convince me that we are.
Tarun Dua: I am not trying to convince you of anything.
Aman: No, are we at better.
*Tarun Dua: I only want to convince our customers to use our product, I donât need to convince anyone *
else.
"
Management sees Op margins over the medium term to be around 60%:
"
Pankaj Kumar: Okay. So, can we say that we have moved from +50 percent kind of margin to +60 percent kind
of margins, is that a reasonable estimate or reasonable understanding?
Tarun Dua: I already answered this question, in the medium term and the long term the trend should
sustain.
"
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I got the sense that this time, Management was treading the waters carefully regarding not being perceived as giving any numbers as guidance, after the 800 cr. So they were going out of their way to clear any guidance being implied from their statements.
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