Expleo Solutions (Earlier: SQS India BFSI) - A niche Small Cap Value Pick

Hi All,

I found this stock quite interesting given its attractive valuations and presence in a niche segment of IT Assurance and Testing. The IT testing space which was earlier seen as sweat shop work is now becoming a critical part of IT services, where products, packages and systems have to be tested to check their validity and ability to meet requirements.

At current price of Rs.70.5 (May 31, 2013 closing) its available at 16.1x PE and 0.83 Price to book.

This seems attractive since book value is roughly about Rs.85 and the stock price is at a discount to the same.

The company is debt free, and the promoters are closely involved in managing the business. The company is in to testing and assurance

for banking, financial services and insurance sectors and has presence in US, UK, Euro, Asia and other markets and has some domestic oriented business too.

Unlike other tech players this company is fairly diversified geographically across markets (mostly outside US).

The profits and margins are pretty strong but it may get affected due to issues in Euro Zone.

The March 2013 quarterly results were not good - sales were down significantly but compared to last year it grew from 31.6 crore (march 2012) to 37.4 crore (march 2013), but profits were disappointing

)- profits declined from 24.4 crore (march 2012) to 19.4 crore. However, if we look at the full year 2012-13 the total net profits were Rs.69 crore against approx. Rs.60 crore last year, and EPS jumped to Rs.15.95 (2013) from 9.01 (2012). Looking at a longer term view, FY 13 has been a good year for the company. They also invested in new office premises in an SEZ which will also result in significant cost savings and operational efficiency.

I’m not claiming this to be the next Infosys or Mindtree, but Thinksoft is a leader in its own small turf. The stock has been in its fancy in the past, but now its reverting back to its fundamentals and we can expect a realistic and steady growth. With a turnover of roughly Rs.157 crores Thinksoft cannot be compared with other established names or mid caps. Probably it may emerge as a unique small cap growth story. Will this become a Multibagger? Difficult to say…probably we will get to know in a few year.

Please fee free to share your comments, views, arguments, suggestions, analysis, etc.

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Hi Sridhar,

In a market hungry for high quality growth stories, poor 3yr sales growth figure 10%, profit growth of 7%, and roe of 11% most likely is not going to develop market fancy any soon. Before investing in any such story I would ask few questions.

1> Besides there has to be some other factors which is causing thinksoft’s such poor valuation of ~3.5 pe and 7% dividend yield. What exactly is the factor (May be expected below average growth, corp gov issue, poor management quality, poor business metrices)

2> Can they sustain the old dividend payout rate in future. If not, than anchoring with old dividend yield is going to hurt you.

Before even thinking about the possibility of multibagger, one should rather think in steps.

1> Will this investment loose me money,

2> Will this investment loose me money when considering inflation

3> Will this investment result is lesser return than some other known investment story (say Astral/Cera/Ajanta)

4> If it is a under-valuation play, what exactly is the trigger which shall result in unlocking of value.


Hi Subash,

Thinksoft is an attractive value stock, but on the growth front its been a Roller-Coaster ride for several years since its IPO in 2009. In the early years the stock was hyped up and business growth did not match the stock price. But now things are changing.

  1. Yes there are issues with the company - too small, uncertain trends, smaller client base (which is now expanding and diversifying). As of now there is no corp. gov issue as its managed by experienced professionals with a strong commitment to the business as far as I know (you don’t have to believe me though).

  2. Good question. The payout may not be constant, as it depends on the availability of cash flows as they have other business cap-ex plans, acquisition plans, etc. I’m not relying on old dividend yield, but looking at past trend of dividend per share which has been growing slowly but consistently over the years, we can expect increase in dividends going forward.

I’m frankly not viewing this as a multibagger, but it could be a simple steady player in the mid-long run and you will not find it like a good text book value stock…its a patience tester. This is a new company, new sector (relatively) and once it attains critical mass you can see a steady growth graph - till then its going to be volatile, despite its positives.

Last 3 Q’s

  1. No, barring another 2008-like situation leading to panic selling. (I’m assuming ‘me’ to be myself - for you, you need to do your own analysis)

  2. No. Div Yield 4% (my purchase price is close to 75). So given this situation this is less likely. I’m not worried if I make less than inflation rate in the first year. Later on the valuation and dividends can increase.

  3. No sure…I’m not fully familiar with these stocks.

  4. Wont comment on this since this is highly subjective or difficult to predict.

Hi Sridhar,

I beg to differ with you here. It seems neither attractive nor a value stock to me. Low pe, stock available less than book value doesn’t automatically implies it is a value stock. Without a suitable trigger for value unlocking such type of stock have very high probability of turning into a value trap. Anything that is growing less than inflation figure (now 9-10%) is automatically loosing money for you. And when considering opportunity costs of not investing in good stock

A true value stock is a stock, which even bought at its pick valuation, gives exceptional return in long term (20% type return in say 20 yr time frame, i.e Nestle).

Everyone who consider himself a value investor should read prof Bakshi’s latest article in outlook magazine. It is a must must read. To him a perfect value stock is one which has a long lasting moat, and ability of generating excellent growth/cash flow for a very long time. Example he quoted are Nestle, Asian Paint, Pidilite, all of which have been huge wealth creator in the past.


Hi Sridhar,

We do have a thread on Thinksoft -http://www.valuepickr.com/forum/untested-worth-a-look/587982212#790118529 Link: …/…/587982212#790118529 . Would be great, if we do a search and continue discussions on existing threads. Perhaps the moderator can shift the discussion to relevant thread.

To add some of my thoughts on the discussion. I’m also quite intrigued by the undervaluation here and often it seems like a compelling opportunity as the stock is trading at a PE of just 4, div yield of close to 9%!! But after doing some work I noticed some negatives and exited:

1). The co’s earnings are quite volatile. Often the growth in profits have been due to other income - forex gains

2). The mgmt seems very poor allocator of capital. I don’t think they needed money at the time of IPO and the same was done to provide exit to some investors and hence the stock was also manipulated.

3). If you hear there concalls, the answers are always vague and confusing. Also, these guys have been sitting on cash for quite sometime and doing nothing. For cos of their size, they should be aggressive.

On the other hand, they are paying taxes and giving liberal dividend so one feels tempted :slight_smile:

Anyways, I have given it a go for now, as I’m concentrating more on MPS Ltd (another liberal dividend paying co)



Thanks for your response. I wasnt aware of the old thread, and moreover its more than a year old and the numbers and data points have changed.

I agree fully with you that they are not sure what they want to do with the cash. But in the con call (where you were also participating I think) they mentioned that the cash is kept aside for acquisition (inorganic) opportunities. And when they were questioned on why a loan was taken for purchase of a building when they had cash in the books, they said that the cash was kept aside for acquisition/inorganic opportunities. This is what I understood from the con. call.

Their answer was not vague, but their act of holding cash for long might be vague. The cash level is about Rs.38-40 crores roughly, which in my view is not too high. Their expenses in a year come up to this level. Their expenses in the recent quarter and year were 34 crores and 135 crores respectively. So keeping 40 crore cash for contingencies is not a bad idea. But one can argue how the company can talk about acquisitions of 40-50 crore size…there could be smaller or micro firms in related space - not fully sure about this. Given that the year 2013-14 is going to be challenging for IT sector in general, conserving Cash can be very important unless they find good business contracts available.

As long as they dont invest in unrelated ares or do some sloppy acquisition, its okay. But your question to management is apt, because if we question then the management will be quite responsible and vigilant about the fact that investors are monitoring the cash and they will be more rational. In future if this figure exceeds Rs.100 crore its more significant and they have to answer questions on use of cash.

**Growth in profits due to Other Income (forex gains) - **I have a different view on this.I find that other income is 2.43 crores and net sales/revenue is about 161 crores. Given this I think the other income is not influencing profits in a big way as you mentioned.

IPO: Any new issue is generally meant to be a good exit for existing investors and not in favor of new investors. So investing in IPO is not a good idea in general.

Going forward I’m expecting that Thinksoft could save some taxes given that they will have depreciation on the new building as well as the interest component on the loan taken.

Future use of Cash: They could consider one of the following: -

  1. Special or interim dividend

  2. Bonus

  3. Paying off the loan taken for property (fully or partially)

  4. Acquisition (if it materializes) or a JV/Alliance in a project

  5. Purchase a property for its Bangalore facility (if the property markets in 2013 are conducive). From what I know in commercial real estate, the rentals are down and if there is an inventory overhang it could be possible to buy at reasonable prices. The advantage is rental savings and depreciation benefit, but the depreciation charge may depress profits and EPS - we can be sure only after working with actual numbers.

  6. Set up new units or centers in new geographies (this looks probable to an extent)

  7. Announce a buy back of shares - looks unlikely unless they are planning a future delisting. This can reduce equity float and shares being in few hands, even institutions or funds considering a purchase will ignore it.

  8. Invest in FDs, liquid funds, etc which they must be doing already.

  9. Increase in salaries, benefits, etc. This wont be significant since the industry is seeing small hikes in recent times. Unless there is a big jump in senior mgmt compensation, nothing to worry as of now.

  10. Some local hiring may be required in US, and in case engineers are sent onsite the H1B visa costs have to be incurred. As long as its bringing business it shouldn’t hurt.

As of now and for a couple of quarters I dont think there is going to be significant excess cash. But we can wait and watch the Cash space to see if the company is generating sufficient free cash flow, which should boost its intrinsic value overtime.

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CFO i.e. Cash Flow from Operations is pathetic, what was the need of doing capex 2 years back? Sitting on cash, not distributing it, half of book value is in cash, i wont invest in it.

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Thanks everyone for sharing our views. Also appreciate the questions and arguments presented, which are valid. This is not a recommendation to buy or sell, hence all readers need to use their own analysis.

Thinksoft had an excellent upmove from its 60-80 levels and now has surpassed its 52-week high to reach around Rs.130. The recent positive momentum could be due to the favorable fundamentals in the IT business as well as high USD-INR rate (above Rs.60 levels). Now we need to see how to the results pan out.

Post the results and once the dollar-rupee rate stabilizes the focus will be on the company’s business strategy and growth in future. Whether the co. is able to increase its capacity utilization and drive more revenues while controlling its costs. The other question is whether Thinksoft has the ability to command higher margins and is able to sustain its cash flows. If the company is able to do well on these areas and brings more stability to its financials (i.e. being less erratic) it has the potential become a multi-bagger.

Hey Sridhar ,

The co promoter seems decent with IIT n IIM background n quite experienced having worked in reputed co though with age not on their side may sell out.

The ROCE is decent , recent results have been good with interim dividend of 5 Rs declared. Why top line growth is lukewarm but bottom line robust? Due to re depreciation?

Any instl coverage n triggers For the cou may be awaree of?

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Thanks to all for sharing your views and comments. The recent developments in Thinksoft were quite surprising to me. The open offer price (260) is also highly attractive and good enough to book profits partially or fully. The company is being acquired by SQS Systems Germany. Even the current market price is a good price to sell. The stock will remain listed even after this purchase.

I personally booked some profits but hold some quantity. I’m still trying to get more information on the future plans, new strategies, changes, etc. If someone about the future plans of Thinksoft please share them here…it would be helpful.

No Activity from so long on this thread, even after its acquisition after German bellwether SQS.

Anybody holding since 2012-13 would have got 10 baggers in it.

Disclosure: Have a significant holding & loading on every decline.

As per latest BSE Circular, Trading of this has been stopped from 08-aug…

Accordingly, securities mentioned in Annexure II shall be moving to GSM framework under Stage VI w.e.f. August 8, 2017. Therefore, as per the provisions of GSM framework, the securities shall not be available for trading from tomorrow. Trading in these securities shall be permitted once a month (First Monday of the month).


136 533121 INE201K01015 SQSBFSI VI

This space should be interesting over the next few weeks if it can be held for a while. It’s going to be one heck of a ride.
It’s been caught in the cross fire of shell companies. SAT has quashed the order of SEBI for this company today.From what happened to infra and parsvanath, this one will also likely have a sharp fall in prices over the next few days. There should be some great buying opportunities in the making.

Not sure how they got into this mess


Twin good news- SEBI removal from shell companies list and take over of the German parent as per the enclosed BSE filing. Dully supported by Technicals- it looks excellent buy.
disc; Bought last week

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The parent company has kept Rs 474 as open offer price.

Sqs has been offered nearly 2400 crores in all cash deal by Bidco a company of Assystems, Germany.

2016 revenue of parent SQS was 2450 crores having EBIT of 172 crores.
In 2017 SQS can generate net profit of nearly 120crores.
A net profit margin of 5%

Whereas SQS india has net profit margin of nearly 10%-12% for H1 fy 18.

30crores can be the annualised profit of SQS india for fy18.
Sqs india has nearly 75 crores of cash and market capitalisation of 580crores.

30 crores is nearly 25% of 120 and 600crores is 25% of 2400 crores. Hence, at CMP looks fairly valued. There is low down side and good upside possible.

Views invited.

Disclosure - Calculations are as per my interpretation and might be incorrect.
Keeping track of the developments and planning to invest

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The concern for SQS india is their profit growth. For last 2 - 3 yrs, there
is negative profit growth. But in latest Q, the company improved its profit
growth. What are the profit growth prospects going forward. Any views
pls…And any management guidance on the same…

I don’t think this is low risk high reward scenario , The german company thinks its worth Rs 474/ share its trading around Rs 560 / 0 per share 18% higher than the value they have calculated.
Should be fairly priced at current value.

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