MD says Q4 results are good, though not blockbuster.
MD anticipates around 15 percent growth in Q1 ,in revenue & expects this double digit growth to continue,in the course of the year
in US , marketing team is in place, now executing orders for 2 clients , more orders awaited
company hopes to double revenues over coming 3 years . Rajesh krishnamoorty group head of Infosys fame is over seeing & executing this transformation
MD in response to queries, says that , due to covid scenario, company will take a decision on usage of cash for Acquisition, buyback or dividend, over the coming 2 Quarters,in the best interest of investors. Bear with us , for coming 2 quarters on this he says.
order pipeline is robust , with double digit growth ahead .
Since the promoters are now a private equity group, IMO, theyāre not inclined towards a dividend payout. They may rather use the accumulated cash for an acquisition and are maybe waiting for the right opportunity. This move can fetch them better appreciation rather than cash payout. And as shareholders our interests are aligned with theirs in getting capital appreciation. So dividend expectations should be forgone for now.
Expleo is at mercy of the parent who drive the strategy. There has been few management changes in last few years. The new indian management looks better than previous one who looked unmotivated.
It is safe stock, low valuation, cash generating; but main catalyst to change and taking it to other orbit will be driven by parent and willingness to spread it into different areas and geographies.
I am invested cause there is low risk and cash generation; but real fun will begin if it has focused strategy which takes out current saturation level. So philosophy is not to lose much but gain if they are able to focus and execute.
helping them to create, test, and scale digital solutions and operationalise them at a rapid pace.
Market Cap 630 crs, debt free, EV - 490 crs
#Thesis
Company available at a PE <15 times, to double headcount and grow revenues at >50% in next 2 years
#PotentialTriggers
Entry into North American mkts with the help of parent
Addition of new verticals like ecommerce, edtech etc,
More offshoring from parentās deals,
Upside from high-growth in testing (testing performs with a lag from mainstream IT)
Buyback or acquisition from cash surplus (135cr+)
#Optionalities
Merger of unlisted india entity into listed entity
#Concall
#Q4FY20
We have hired over 250 resources (including some on contract) in the last 2 quarters and looking to hire a similar number in the next two quarters on the back of increased offshore demand and also due to the increased levels of attrition
Cash position continued to be positive with Rs.141 crores
Dso around 70
100 mn order book
Indian at helm of Parent & Major Focus on India
Rajesh Krishnamurthy, Ex-Infosys, an Indian has become parent CEO in June end 2020, India is the key focus, so February is month seven for him and he has already traveled to India twice despite the pandemic
Objective for Rajesh is to double the India business in the next two years, both from a capability and from a scale perspective, because he is looking at India to be the digital transformation hub for the group. Doubling India business means basically doubling the size of the team. Revenues should go up also big time though not in similar proportion
More offshoring work to come from parent, it is to build the capabilities here, which will actually help us to grow in Europe
The growth opportunity is for the India business as a whole, right now we are almost 50:50 between what we do and what the other entities do, so, even the growth will probably be almost the same.
Last three years, the top 10 client contribution has come down from 61% to close to 53% now
#Q2FY20
Most of our clients have been there with us for a long time. But the projects keep changing because it is the same customer who comes and gives us new projects. So, if we look at our client list at this particular point of time, we have almost 4 customers who have been there
with us for more than 10 years, there are close to 16 customers who have been there with us for more than 5 years
we at chennai manage the banking and financial services business and the other units in Pune and Bangalore manage the engineering side of the business across automotive, aerospace and transportation industry
deal consolidation, what is it trends? Is small firm such as ours is losing business or gaining traction?
Balaji Viswanathan: I donāt see of losing business and to be honest with you, I donāt think we are a small company. Maybe the listed entity is small, but since we are part of the larger group, whenever we go to any deals we go as a $1.2 billion company rather than $35 million company or $40 million company
Group business
I take two parts to this, one is directly coming from the group and the other one is
where it is our customers but managed by the group. If I put together these two, it is the range of around 56% to 60% is what the group revenues out of which directly coming from the group, where we are only a delivery center is approximately 20%
Expleo was recognized as a āLeaderā in the overall market segment for next generation software testing services in the Nelson Hallās April, 2019 report.
Additionally, we were also positioned as a āLeaderā in mobile testing, AI-based automation and
other cognitive & testing capabilities.
Sales Breakup Geographically
India, the Middle East, Asia and Australia 35%, Europe was 62% and 3% from US
new client acquisitions contributed to 5% of revenue from operations
Last buyback done at 550 Rs in 2019 for 25 crs Rs
Though UK and Western Europe will continue to be our focus markets, we will invest in building profitable growth in Asian which is showing significant potential. The US, which is the largest market, continues to be a challenge requiring significant investment & waiting period
#Management
BALAJI VISWANATHAN, Balaji is the Managing Director and CEO of Expleo Solutions Limited.
Balaji comes with over 26 years of professional experience in the financial services and ITES domain of which 16 years have been in the Financial Services Industry and 8 years in the Outsourcing/Offshoring of Financial Services. His last assignment was as Senior Director in charge of Global Delivery for BFSI services at Concentrix which is the outsourced business division of SYNNEX Corporation, a Fortune 500 company listed on the NYSE
French PE investor Ardian , founded 25 years ago,manages funds over 100 billion USD & is one of the leading PE investment firm in Europe. It manages various funds ,real estate & fund of funds.It also manages airports as well as holds & runs a portfolio of 150 companies. Expleo is one of them. Therefore I presume, that Ardian has done due diligence & Risk Rewad Ratio , before buying out SQS Germany & creating the Expleo brand umbrella
@Balki What is your rationale behind estimations of EPS of 72 and 125 over coming 2 years. In the latest concall Q4FY21 they guided a revenue growth around 10% and trying to double revenues in 3 to 5 years. On margins they said they will maintain between 18-20% at optimum level of onshore-offshore mix. This year margins are high because of higher offshore work percentage due to pandemic which has higher margins. So with these moderate revenue guidance and margins how can EPS jump approx 46% (72) next year and another 70% (125) year after that?
Disc - Invested. Bought in last 30 days. I am not a SEBI register advisor. The above note is not an investment advice but an educational post to discuss a business model.
IT sector is on upswing, & is on the cusp of growth , over the coming 5 years , riding on digitalization, Agile, Devops , cloud computing, QA, security surveillance, RPA ,Data analytics etc , which should benefit Expleo.
Zero debt MNC with cash in hand of ā¹140 crore , which I presume will be used for acquisition.
Role of Rajesh Krishnamurthy of Infosys fame ,as group CEO is to bolster growth.
MD has given guidance of double digit growth around 10 percent Q on Q for the current year, & he also says 2023 will be far better than 2022.
MD is cautious & gives around 10 percent Q on Q growth, while I have assumed 14 to 15 percent Q on Q growth with surge in orders & with a small equity base , above estimated EPS is a possibility, provided there is surge in orders & profitability.
in this Q4 , EBIDTA is 24 percent & I anticipate this at this rate going forward & with a 15 percent Q on Q growth in Q1 & Q2 & provided there are no forex losses ( this Q4 forex loss of ā¹2.6 crore is the culprit) , good days are ahead.
Now I have only given my personal views, learner boarders on this forum , can give their valuable views & opinions. I have taken a liberal view of growth & profitability due to upswing in IT sector,wherein digitalization is a necessity & no more an option.
You have done a splendid job of compiling data .I have to point out that 1) Expleo group works as a single entity with annual turnover of 2 billion USD
There is no possibility of merging the unlisted entity into the listed entity, it can happen only with the delisting of the listed entity.
Q4 was unfortunate. With EBIDTA of 24 percent, a forex loss of ā¹ 2.6 crore , pulled down the consolidated EPS to ā¹10.80 . Otherwise the EPS would have been substantially higher .
In December 2007 , Assystem technology took over SqS Germany at a 60 percent premium to the traded price on the bourses at that point of time, for an amount of 282 million pounds.
Consequently Sqs bfsi india came as a free gift to Assystems technology. Later Expleo brand umbrella was created & Worldwide , Expleo group works as a single entity using same office, infrastructure & personnel, though revenue is shared.
Already the parent holds 56.7 percent in Expleo solutions. The MD in last concall , also said that there arenāt any thoughts on merger for the moment. If at all a merger takes place, in future, it makes more sense to delist the only listed entity Expleo solutions & merge it with the unlisted entity.
Post amalgamation, Annual turnover, as of now will be 572 crore, with EPS around ā¹150 ( my assumptions since data on private group companies are not available,). The parents stake will go up to 71.05 , however I forsee a buy back, taking it to 75 percent.
With synergies of scale, Expleo should attain double digit growth, with IT sector in cusp of growth. All private group entities of Expleo group will remain fully owned subsidiaries of Expleo solutions.
Expleo will continue to remain a zero debt company.
In my opinion, Expleo solutions should be a ā¹1000 crore plus,turnover company in 2 years , from now post amalgamation, with EPS in the vicinity of ā¹150 levels. Certain assumptions have been made coz financials of private entities are not available.
Other boarders are welcome to contribute their views.
For the amalgamated entity, the total net worth is going from 160cr to about 420cr, asset base going from 230cr to 570cr and sales going from 306cr to 574cr.
Public shareholding going from 43.83% to 28.95%. So weāre getting 2.5x net worth, 2.5x asset base, and 1.9x sales for 33% dilution.
Margins may decline initially, but should improve with economies of scale. From a corporate governance point of view this should be very good too as there is no more speculation of whether business is going to listed or unlisted entities. Hope for more information to be furnished about the unlisted entities soon.
All in all looks like a very good deal for minority shareholders IMO. Probably explains the volume led exuberance in the stock price over the past couple of weeks.
So all the buying in the last two weeks were based on insider information. India thrives on insider trading and hope SEBI gets to get the crooks punished.
The management didnt declare dividend for last two years because they were waiting to increase their stake and now after the merger of subsidiaries they will declare a hefty dividend. This explains the consternation of management in concall saying the dividend policy will be formed by June end. The dividend policy was nothing but merger policy to be completed.
The management has lost a lot of respect for depriving shareholders of dividend and increasing their stake on the sly of a dividend policy.
Agree with the analysis. It looks like good deal. Considering the Ceo is Indian guy, need to check how the Indian arm plays role in global operations; currently it was more backend role.
Also, not sure if it is listed abroad. Delisting, is.also an option though as long term investor, donāt like to see it.
I am unable to conclude if it is a good deal for two reasons.Based on networth looks reasonable but based on turnover it doesnt. Given that the management didnt declare dividend for 2 years to get this merger done, what is the guarantee that the subsidiaries were not dressed up in the last two years get a favourable merger ratio.We need to see the turnover and profitability of last 5 years to draw some inference on the subsidiaries and also see if dressing up of financials was done in the last 24 months.Fact that IDBI capital was second valuer itself speaks of how āvaluer huntingā was done by the co.
Unlikely they will merge unlisted biz into listed and then de-list. European software is hungry for outsourcing, somewhat starved of immigrant talent for various reasons such as language and integration issues for the workforce. Size of the parent entity offers big comfort. ESOPs are standard and that requires listing, better to be publicly traded, offers confidence to minority.
You canāt say that, because almost all small & midcap IT shares like Newgen software, saksoft ,kpit , first source, Mindtree, Eclerx & several IT firms have gone up ,in anticipation of Robust Q1 results.
In general Q1 results are likely to be subdued due to a month of lock down but IT firms are immune due to work from home effect.
I donāt think the MNC management will ever leak out such sensitive news & it seems unlikely.
MNCs usually donāt dress up accounts & my view is that the private entities of Expleo group to be amalgated are immensely cash & asset rich. Several parameters including EPS are 2.5 X that of the listed entity .
The only reason they have gone for amalgamation is to create a powerful entity with synergy for double digit growth as well as to increase parents stake in Expleo solutions to 71.05 percent.
I believe that another buyback is on the way,in 1 or2 tranches to increase parents stake to 75 percent.
