Infollion Research Services Ltd - Moated Microcap with Differentiated business?

[Ashar_Mann]

Infollion Research Services Ltd

The company was formed under the name “Infollion Research Services Private Limited” on September 9, 2009

Infollion research services is in the business of providing platform for contingent staffing.
What is contingent staffing? → Contingent staffing or Gig work is basically hiring the employees on temporary basis for which the work required
for the organisation is temporary in nature. The hiring is done on the contractual basis for a pre-determined amount of time.
Some of the examples which we see in daily life may be in Consultancy, Independent Contractors and freelancers in marketing, Hiring a project
based team, Hiring in hospitality (IRCTC ka Staff isn’t employed by IRCTC), Finance and accounting, Education, etc.

The amount of contract per project depends on the → 1. Remote or Hybrid work 2. Duration of the project (See the below Picture)

Understanding Gig economy
What is Gig Economy → in era of fast hiring (2021) to fast firing (2023) the company incurs cost to onboard employees such as signing bonus,
training cost, etc. and for firing giving severance getting Bad PR Etc.
Gig Economy comes to a save by providing contract-based solutions hiring only for temporary pre decided time period
Business Spent almost $4.4 Dollar on contingent labour and only 9% was through platform and majorly was through independent contractors
Now where does the platform come?

So platform enables the independent contractors as well as the company hiring the contractors to meet. It’s like fiverr. This part is termed as
human cloud
Human cloud Is one of the emerging part of the Gig economy. It has 2 Sub-Segments – B2B and B2C

1. B2B - let’s say a big company needs help designing a new logo. They can go to a B2B Human Cloud platform and find a graphic design
   company or a freelance designer who can create the logo for them. It’s all about businesses helping each other out and getting work done
   efficiently.
2. B2C - let’s say you need someone to help you clean your house or fix your bike. You can go to a B2C Human Cloud platform and find a
   cleaning service or a handyman who can help you out. It’s all about regular people finding help with everyday tasks or services they need.

• The company is Into B2B Platform provider
  
  

The market for B2B Gig economy is very tiny in comparison to B2C, Reasons for the same are → B2C hiring is mostly for the unskilled work such
as fixing the rough, editing a video but B2B is for very Skilled work required in corporate
If I were to dissect the market for B2B gig Economy in Human Cloud major of the hiring is done through the online platform rather than through
independent contractor (80% Source → RHP), reason is the credibility of the hire
India is the Hub of “Gig – Economy” India’s Gig Sector is expected to expand up to 455 Billion almost 10% of the World market and is expected
to grow at CAGR of 17% - Niti Ayog June 22, 2022.

So Summarizing above → B2C Platform like Fiverr are the one who are facing stiff competition from Individual contractors reasoning → they are less specialised and hence the hiring for the same can be done through offline mode

now for B2B and that too for expert field requirements the hiring is done through platform (80%) i.e. 80 B2B hire is through online out of every 100 hire making platform the king in B2B Space in Gig Economy

But major of the above is due to IT outsourcing in India, but what makes company interesting is that the company is into Niche space “Expert
Network

Expert Network industry –
In simple terms, the expert network industry is like a special club where companies can find experts with specific knowledge or skills to help them
with important decisions or projects

Some of the industry using the Expert network are Consultancy in Deal due diligence, Pharma in Specific drug discovery, Investment companies
issuing buy and sale report (Company’s website) etc.

So what does the company do?
The company arranges contractual work arrangements for clients by identifying, screening, vetting, and matching work requirements based on
various parameters such as the nature, duration, objective, location, and pricing.

Just like we have delivery partners for Zomato and swiggy there’s Network partner here which will be getting paid on the basis of the
engagement which will be employed by the company the 52% of the revenue is the cost for the network partner considering that the company’s
main asset is human itself. They are paid fixed hourly rate for the engagements. This results in more engagement over the platform for new
requests. Meaning if there’s no work then there will be no payments too.
So this also becomes a risk on other hand → Rajasthan recently classified as the member of platform to be the employee of the company meaning
giving them all the benefits of the employee there are total 57k+ contractors whose cost could become fix for the company out of no where
The IPO of the company was for the purpose of Fresh Investment in US Geography and OFS was very minute part of the IPO may be 10%

The established market of US is very tough to crack as they (US and Europe Regions and even India) already has such kind of business there, but if they do the company is sitting on the
huge amount of opportunity this reminds me of the post 2000 IT Outsourcing era and what did the same for Indian IT Companies
Certainly the same is very dreamy statement but that is the power of mega trend too
The company is trading at 24 -25x Annualised earnings

Views are more than welcomed
Not invested, Stuyding

[Niraj_Punjkaran]

Some recent developments…

9 monthly biz update INFOLLION_16012024132317_IntimationofbusinessupdatetillDEc2023.pdf (nseindia.com)

Incorporation of subsidiary INFOLLION_08022024114545_Outcomeofthemeeting08022024.pdf (nseindia.com)

2. The proposal of incorporation of a Wholly Owned Foreign Subsidiary:
   The Board has considered and approved to incorporate/set up a Foreign Subsidiary, and to invest and
   hold 100% shares in the proposed subsidiary in the State of Delaware, United States (“Local Authority”)
   with a name and title as approved by the Local Authority

Working on work flow/processes

The Company intends and desires to avail technical services for technology advancement in the business operations of the Company from Simplifii labs Private Limited, an IT Service Company specialises in workflow automation, Low Code Platform, Business Applications, Data Driven Applications, etc.

[kumar_m_kiran]

Challenges to name a few:

1. Company intends to grow in US market (which is the main reason for going to SME IPO), However not easy to crack US market

   • Timezone difference makes it challenging for active engagement
   • Any possible extenstion of it like in-person engagement would be extremely impossible (assuming the cost involved, turn around time for F2F etc), So it must be restricted to engagements which they are sure of 100% remote consultation with experts.
   • Very mature market with very well established players and space is very crowded. Difficult to standout in the crowd.

2. Extremely tied with economic activity (meaning cyclical), now the going is good - so enjoying. But during economic stagnation and/or recession, this business has to sit out for better days.

3. No exclusivity either with experts or the client. Hence there is really no moat - except the data (skill set of expert and requirement for client) acquisition and mapping between expert and clients.

4. Not sure, how they would be able to manage the inflation - i.e cost to experts and internal escalation of the cost - as it is very competitive market with no moat. So we should expect all the returns to normalize to around 15~20% in longer run - from current 40% (ROE and ROCE)

5. Though the company has tried to expand to multiple pillars of growth for now - only Expert Calls seems to be contributing majorly for both the topline and bottomline.

6. Any long duration engagement may mean that client can circumvent the company and have direct relation with the expert. Hence this would mean company focusing on short term duration project - which may also mean - not longer term visibility into revenue stream.

7. Top few clients gobble up major portion of revenue stream for the company - which may indicate inability of a deeper and wider penetration by the company.

[Meetkatrodiya]

Unlocking the Potential of the B2B Human Cloud Market Place: Infollion Research Services Limited

[harsh.beria93]

I was recently working on Infollion and found their business model quite niche with good unit economics and 40-50% CAGR growth.

Their margin structure has been stable. Their biggest cost item is consultancy (or expert calls), where they pay experts 50-55% of their revenues. They spend 20-25% on their employees and have been maintained 17-20% EBITDA margins over the past 4 years.

Additionally, there was an insightful note from Deltainvest explaining Infollion’s business model in detail. You can read the full note at the link below.

Infollion_vf.pdf

Writeup from Delta

• Incorporated in September 2009 by Gaurav Munjal (B.tech & M.tech IIT Mumbai)
• Marketplace in premium section of the gig economy, 100+ employees, 60,000 experts
• Does 400 projects/month
• IPO came at market cap of 80 cr. (IPO size ~21.45 cr., fresh issue ~18.2 cr., OFS ~3.2 cr. OFS was by Blume Ventures
• IPO done to expand business in USA & Western Europe
• Top 5 clients contribute ~80% of FY23 revenues (68% in FY22). 80-85% of their clients have been using their services for 5+ years
• Pre-Empaneled to Custom-Empaneled experts ratio: higher would imply higher gross margins

They have been scaling up their team as they keep growing, you can see how the number of employees have increased with time (scalup started happening from 2019).

• March 2017: 7
• March 2018: 6
• March 2019: 7
• March 2020: 11
• March 2021: 14
• March 2022: 35
• March 2023: 69
• March 2024: 90

They are now pivoting to the US, first to get more experts from USA and then to get customers from USA. Management has been sharing their scaleup plans at multiple avenues, I have captured these in my notes below.

AGM23

• Adding 1000-1200 experts monthly, one-third experts are from outside India (primarily US)

• Have a dedicated team for US

• Most clients are Indian requesting experts from US, want to build a larger clientele in US

FY24Q2

• Largest and oldest company in this segment in India

• Majority business comes from consultancy businesses, targeting private equity and tier II consulting

• Focus on engagements which are small, frequent and cross domain. Don’t engage experts with clients for longer term projects

• Expanding into US

• Competitors: Insights Alpha, Thirdbridge, GLG

• Not keen on increasing gross margins but on increasing volumes

FY24Q4

• 6th or 7th year where sales growth was 40±10%

• Added 50 employees which should benefit in FY25

• Visual mapping tools of different industry value chains are becoming their USP now

• Redesigned the entire tech backend which will help them expand globally

• Expansion in US – 3 independent teams based in India (total 25-30 employees). Have been increasing expert base in US. However, most of their clients are still in India who are taking a call with an expert in US. Have not yet managed to get clients from USA

• Trying to get into longer term engagements (Pex-panel): 2-3 months stints for existing clients offering private panels to senior executives, cohort-based/individual courses and L&D programs. Looking towards reselling expert-led courses online

• FY24 calls: 12,000

• Number of experts: 80,000 (adding 1,500 experts per month)

• Client concentration: top 10 is 80-85% of revenues

• Market size from Indian clients will be few 100 crores

• 90%+ of business comes from clients older than 2-3 years

• Ticket size per call has not increased in last 2-3 years, don’t want to increase it, rather focus on increasing volumes

• 70-80% of their business comes from consulting industries, trying to penetrate deeper into private and public market investors

• End-user industries: IT, Healthcare, consumer retail, BFSI

• How they recruit experts: monitor annual reports for exits, monitor senior guys who are moving roles and get them onboard when they become independent

Disclosure: Invested (bought shares in last-30 days; <1% position size)

[amangoklani]

I’ve recently entered the stock and I’m surprised that a platform based company which is poised to grow, is operating on an asset light business model and has the potential to develop a strong moat in the coming years is available at a TTM PE of ~29-30. I wonder why? Is it because,

1. It is an undiscovered gem?
2. Investors haven’t fully understood the company’s business model? (my assumption: it maybe the case)
3. I’m overestimating the company’s growth potential and its ability to build a moat?

I guess time will tell. For now, here is why I’ve taken a position in this wonderful company.

A. Company’s Biz Model & Opportunity Size:

I believe this was the first thing that drew me to the company, i.e. what it does. Very simply put they act as the facilitator (via their platform + their biz/account management team) between their clients (consultancy companies, PE/VC firms, asset managers, financial institutions etc.) and relevant experts in their domain. These types of companies are known as Expert Networks (ENs). And being a platform based “network”, there is a possibility it may develop a moat in the future in the form of a network effect. How so?

• Well, more experts on the platform will mean more demand from its clients, more demand from its clients and businesses will mean more experts will get listed, more experts will lead to more clients and so on. This virtuous cycle will continue till a strong network and thereby a network based moat is formed (very loosely think of how InfoEdge did this with Naukri.com).

Now if you are wondering, why do both these parties need a facilitator to make this happen? Can’t they connect directly via LinkedIn and/or social media? My simple take on this - these are vetted, verified and top-notch industry experts made available “on demand” to the company’s clients who are not running a mom and pop store (as a reminder they are offering services to consultancy companies, PE/VC firms, asset managers, financial institutions etc.). When you are making decisions that involve millions/billions of dollars and as a consultant when your neck/job is on the line, a small consultancy fee paid to verified/vetted expert(s) is pocket change in the larger scheme of things. Furthermore, it strengthens the external due diligence being done by them. Read this and this if you want to understand how investors/consultants use expert networks and why this service is important to them. If you want to further understand ENs better please read these wonderfully written blogs (source: Inex One).

1. How do expert networks operate?
2. How many expert networks are there?

On a side note, I guess it was happenstance that earlier this year I got an opportunity to interview for GLG (Infollion’s competitor). While the interview didn’t yield much, the preparation involved made me understand the business model of GLG better (and thus Infollion). As it happens, I was also approached by GLG (a few months after my interview) to be listed as an expert on their platform. This further made me understand how ENs operate.

B. Growth Opportunities

(i) Revenue growth

• As per management the company has been growing its sales at 40% (+/- 10%) over the last 5+ years including FY24. While the management hasn’t provided an explicit guidance for FY25, reading between the lines suggest that they should grow by 30-40% in FY25.

• What about long term growth rates? I’ll stick my neck out on this one and suggest that the company should continue to grow their topline 20%+ every year (very conservatively) for the next 10 years at least. Why so?

  • Management has suggested their Indian growth story is directly linked to the Indian economy. Now if you were to believe the govt, finance ministry, RBI and external agencies, India should be growing between 6-8% for the next 3-5 years, thus the company should continue to do well.
  • The EN market globally is ~$2.3 billion in size and growing at a decent clip depending on the economic environment globally (source: Inex One). Infollion is looking to enter the EN market of the US and Western Europe (both mature EN markets). However, the size of Infollion (FY24 revenue ~INR 50 cr) means any growth from these regions will increase their topline meaningfully over the years.
  • We are probably in the worst period of global economic growth in recent history due to inflation, interest rates etc. leading to a decline in VC/PE investments. When the economy turns around, Infollion will benefit further.
  • Overall, for me, Infollion is a small drop in the wide ocean of ENs and hence they should continue to grow nicely for a long time.

(ii) Margins

• As per the management,

  • Gross Margins: They are comfortable with the gross margins they are operating at as their number #1 priority is to grow the business further. So, no growth is expected here for the time being (note: a lot of the ENs work on GMs of 70-90%, so I guess over a longer time frame, the GMs may even go up for Infollion).

  • EBITDA Margins: Again, no expansion expected here. They’ll operate in the 18-20% range for the next few years.

  • Net Profit Margins: Derivative of the above margins. However, as per management this may grow more than GMs and EBITDA margins as they scale further and better use their tech platform to connect more experts with their clients (better mining and thus lower costs). This is expected to grow he bottomline more than the topline over the next few years.

C. Valuations:

• TTM PE 29-30: Seems reasonable to me considering the topline should grow by 40% (+/- 10%) over the next few years. If the bottomline grows further, the stock is even more reasonable. To me the stock is fairly valued at the least.

• PEG ratio: 30 PE / 40% growth = 0.75. Again reasonable.

• DCF value = 329 (source: morningstar). CMP of the stock is well below this.

• Rerating chance: High over time. I think the company should be trading between 50-70 PE considering the asset light model, good growth prospects, chance of a network based moat developing and a management team that is highly qualified, reputable and transparent.

• The above valuation metrics, opportunity size, growth potential, asset light model, possibility of a network based moat developing and a good management team make it a no brainer of a buy for me.

D. Operating metrics and other parameters:

• Despite its small size the company is a FCF generating business. And it will remain so going forward.

• ROCEs, ROEs, ROIs. ROAs etc etc are all extremely healthy.

• Debt free company with INR 30 crores of cash on books. Cash is ~12% of the market cap of the company currently. The company can use this as a war chest to expand into new geographies.

• Good FCFs means the company will always keep generating cash for future growth opportunities and eventually for dividends.

• Receivable days: ~60-90 days. I believe this is standard billing days in services oriented businesses in India. Also risk of default/bad debts is extremely low considering the quality of clients the company works with.

E. Stakeholders, the board and other investors:

• Mr. Gaurav Munjal is a first generation entrepreneur that has built the company from scratch. He currently owns ~52% of the company. With skin in the game and fire in his belly (hopefully!) he can take this company to great heights.

• Mr. Munjal and the rest of his team are highly experienced and have completed their education from decent/high profile colleges. The board is full of members from IIT. All of this as an individual investor gives me confidence

• Prominent investors (past/present) include some worthwhile names: Blume Ventures, India Equity Fund, Alternative Investment Fund and ITHOUGHT Financial (helmed by the super conservative investor: Shyam Sekhar)

F. Competitors and Risks:

(i) Competition:

• While the company is one of the leaders in India, it does face stiff competition from some notable global peers like: GLG, AlphaInsights, ThirdBridge etc. It is to be seen how the company grows and develops its moat with competition from deep pocketed and well entrenched global players like these.

• The above competitors plus some others is what the company will also have to face in the markets of North America and Western Europe.

(ii) Risks:

• Competition from well entrenched players doesn’t let them grow meaningfully beyond a point in the US and Western Europe.

• Bigger players in India undercut them on pricing or throw more money at the problem and stall/limit their growth.

• As an investor there is a risk that one of their bigger competitors may acquire them and that may bring this story to a premature end.

• Regulatory/Legal risk. For e.g. some experts end up providing info/an edge to analysts, traders etc. that leads to insider trading etc. Here is an example of how this happened with GLG.

• AI scraping expert transcripts that provide consultants with the info without having the need to engage with them.

• Economic slowdown in its main market of India and aspirational markets of US and Western Europe.

• Concentration risk: Top 10 clients contribute 80% of their overall revenues.

Disc: Invested and biased. Not a SEBI registered analyst/advisor. Please do your own due diligence.