Ksolves - a newage software development firm

iyeron · January 14, 2022, 10:19am

Overall macro trends in IT industry: -
Software development firms offering IT services while transitioning from old technologies to new technologies/offerings such as Big Data, AI/ML, Blockchain, Cloud, Edge computing, IOT, SaaS/PaaS/IaaS, RPA, BPM etc. All of which come under one big umbrella of digitization.

As per Gartner, " Digitalization is the use of digital technologies to change a business model and provide new revenue and value-producing opportunities; it is the process of moving to a digital business."

Traditionally, Indian pure play software services firms hold office spaces (real estate) on their books while MNC hold office spaces on lease basis that keeps them nimble. The advent of Covid
has only helped accelerate the trend towards being asset light if the transition from CAPEX to OPEX at customers end (due to cloud/saas) was not enough. While this transition in large IT firms will be a gradual shift, the hybrid model works best today for companies of all sizes.

Having said the above, there are companies today that truly operate with a global delivery model with no/very small office space (sales office). Needless to say that being asset light, helps companies command a higher OPM.

Ksolves seems to be just there offering services in software development and software products. Below in an excerpt from the annual report of FY21: -

While, at one hand, the company has partnered with some of the most prominent and largely used software products across the globe such as Salesforce CRM, Magento, Drupal CMS and Odoo that helps stay relevant and garner a constant source of income, on the other hand, it has its own product “Dashboard Ninja” and a few other products/themes on its webstore and on Odoo store that have earned good traction globally. Moreover, the company has also partnered with some of the prominent online marketplaces to attract talent. Furthermore, the projects/services offered to clients seems solely on T&M basis.

The main promoters of the company are Mr. Ratan Srivastava (around 15 years of IT experience) and Mrs. Deepali Verma (around 7 years of IT experience) with the board getting reconstituted in the last couple of years. The Chairman cum MD, Mr. Ratan seems to strive towards being industry relevant and nimble footed to the changing dynamics with underlying risk protection, which gets corroborated by the below details from the AR and investor presentation: -

Key risks: -

Client concentration - Top 5 clients contribute 45% of the revenue. Though the company claims 85% customer stickiness, loss of a single customer can cause a dent in revenue & earnings.
Intense competition - As with any other firm in the IT industry, this company is no different in terms of the intense competition faced. However, the opportunity size is equally huge, if not more, allowing multiple service vendors to co-exist.
Keeping pace with ever changing technology/digital solutions - To keep itself competitive, the firm has to constantly invest in personnel, training and development. It has to constantly keep abreast of the latest technologies and the developments therein (technology frameworks, tools etc) and effectively use them for its clients.
Forex risk - The company earns around 78 per cent of its revenue from outside India, predominantly from North America (69%), whereby it is exposed to foreign exchange-related risks.
Scalabilty of global delivery model – The company needs to mantain its edge over its competition as it grows leveraging the global delivery model (predominantly work from home with high dependence on software tools for communication, monitoring etc) that helps to offset a good portion of lease, infrastructure and business travel costs helping it maintain a higher OPM.

Corporate governance: -
No red flags so far except for some very low value loan transactions with the promoter and subisidary. The promoter, Mr. Ratan and Mrs. Deepali are related. The company is listed on NSE’s SME exchange and is aiming to get listed on the main board. It has earned the following accreditations from renowned institutions which increases its credibility in the global arena.

How the story unfolds and whether the management walks the talk is to be seen in the coming years.

Q3 FY22 results out: -

P.S. This is not to be treated/construed as buy/sell recommendation. Please do your own due deligence.

sanjeev_thakur · August 27, 2022, 4:28am

There is an existing thread on Ksolves. You may want to consider that than creating a new ones.

parthgoyal · September 10, 2022, 4:59am

Promoter selling stakes before mainboard migration. A concern?

iyeron · September 10, 2022, 6:03am

Valuations have run up although mgmt is only expecting linear growth here on. Company seems to have taken some additional office premises on lease that may impact margins in the coming quarters.

Promoter shareholding seems to have changed to around 57.97% from 62.45% in last couple of months. Seems a steady decrease from 68.01% since June 2021 although does not appear to be a concern.

gofinance31 · September 10, 2022, 12:13pm

Management has guided for 100cr topline per quarter with similar margin by '26…thats like 6-7X…
And yes, May be, selling is due to profit booking due to huge run!

gofinance31 · September 13, 2022, 4:16am

iyeron · September 13, 2022, 4:51am

Where is this guidance?

gofinance31 · September 13, 2022, 4:52am

" Our aspiration is to reach at QRR (quarterly recurring revenue) of INR 25 cr in next 2-3
quarters and INR 100 cr by end of FY 26."

iyeron · September 13, 2022, 5:19am

This is just a business aspiration to be taken with a pinch of salt and not a guidance.

Other excerpts to be seen in conjunction: -

Ksolves currently has one of the best profitability profiles in Industry and that is reflection of
our financial discipline on a very asset-light business model with zero debt. OPM may
moderate a bit as the base grows, but | expect it to remain at the leading end of Industry Profit
profiles.

The major Business strategy of Ksolves in the last one year has been to achieve non-Linear
Growth by increasing revenue per employee and where the employee base remained
stagnant but revenue increased by ~50% in the last 3 quarters. This was achieved by
increasing the billing rate and utilization percentage of the bench and picking complex
technology projects which give better rates. This phase is almost exhausted and hence a large
part of growth in the coming year will come with a similar increase in employee base.

To support the growth journey from here, we are focusing on a hybrid model of delivery. In
this model, we foresee around 25-35% employees working from offices across three locations
that are Noida, Indore and Pune while the rest will work from anywhere they desire to work
from.

Ksolves currently is a 100% offshore delivery model and we are working on creating onshore
development centers in coming years specially in the USA region.

gofinance31 · September 14, 2022, 4:15pm

Ksolve got the approval to list on main board

Pankit · September 22, 2022, 10:45am

There has been instances of promoter clarifying about stake sell recently. The reason mentioned is ‘Diversification’. I fail to understand why the promoter need to diversify if the company is growing so nicely and the goal is to reach 100CR quarterly run rate in next couple of years.

Also, does anyone know how to track the % stake sold by promoter. I could not find this details in regular company filings on screener.

Also while studying about management, I noticed regarding acquistion of US subsidiary - Ksolves LLC - at only 7.8Lac (which was the profit earned by that company previous year). This clearly shows promoter are minority shareholder friendly.

Also, debt free, asset light, regularly sharing dividends with shareholders, but at the same time, promoter is selling and reducing their stake. Has anyone thought about contradictory evidences?

Also, I could not find much details about one of the promoter company Ksolves Technology Private Limited. Has anyone checked about the same? Is it still in existence? and its revenue and profit history and promoter stake in it? and Related party transactions?

Studying currently. No position as of now.

Thanks,
Pankit

Chethan_Ck · October 1, 2022, 12:40am

Just considering bull and bear case scenario considering the management ‘Aspiration’ of achieving 100 cr quarterly revenue runrate by end of 2026.

Bull case:
Company achieves this aspiration and clock 400cr revenue by 2026.
As per their guidelines the margins might moderate a bit as base grows. So considering 37% OPM, and P/E of 30 (considering the good growth).
The market cap comes around 3300cr.

Normal case:
Assuming the company even clocks 80crs a quarter, and keeps OPM around 35%, with 320cr revenue, and P/E of 28 (around current TTM P/E).
The market cap comes around 2350cr.

Bear case:
Assuming the company only achieves 60crs a quarter, and OPM around 30%. With 240cr revenue and P/E of 25 (assuming a derating)
The market cap comes around 1350cr.

So there is a potential of getting a 3x-7x returns in next 4 years. Am I missing something out?

Disclaimer: Tracking position. This is not an investment advice. Please do your own diligence.

P.S: It all depends on execution. Also, promotors selling stake in the name of diversification is a concern.

iyeron · October 4, 2022, 4:44am

@Chethan_Ck

Have you considered any empirical data/analysis to arrive at the OPM figures for the different cases?

iyeron · October 4, 2022, 4:48am

@Pankit
Any details on the nature of diversification?

gofinance31 · October 5, 2022, 5:14pm

I too calculated approx similar figures. (Just back of the envelop calculations)

By 2026,
Rev =400 cr
NPM = 30 % (current NPM =33%)
PE = 30 **
Mcap 3600
current Mcap = 500
exp return from here - 7X

**(although if they achieve this growth there is a chance of stock rerating cause

Look at their past executions -

→ Compounded Sales Growth
5 Years: 93%
3 Years: 103%
TTM: 77%

→ Compounded Profit Growth
5 Years: 277%
3 Years: 357%
TTM: 51%

→ Return on Equity
5 Years: 110%
3 Years: 111%
Last Year: 106%

And future looks promising too -

→ ksolves is odo partner & their dashboard ninja is a superhit product. They are silver partner for salesforce…I feel salesforce itself is a huge opportunity size…look at infobeans- salesforce gold

→ Also it is transitioning from old technologies to new technologies/offerings such as Big Data, AI/ML, Blockchain, Cloud, Edge computing, IOT, SaaS/PaaS/IaaS, RPA, BPM etc

→ Management -

Did make mistake of selling in open market just before mainboard listing…could have brought a strategic investor instead
But they are very quick to explain it openly with regular filling to exchanges & shareholders…also management is very active on social media.
They were among very few who used to declare results on every quarter even when it was a SME stock

So in my view

Management has good execution skill which is visible by their excellent past performance
They have set very ambitious goal (10X topline in 4 years)
Made a mistake like all management does but openly communicated the reason
(but important point is there is no corporate governance issue yet)
Stock is in consolidation mode may be because of past run , recent management selling & current negative global sentiments for all Tech/IT stocks

Disc : Invested

Chethan_Ck · October 6, 2022, 4:20am

This is just my calculations on basis of numbers and management commentary. Please take it with a pinch of salt.

Disclaimer: Tracking position, biased

iyeron · October 6, 2022, 5:26am

Well, I would like to take it with a grain of salt

The last that I had seen there were no corporate governance issues.

Food for thought though:- of the narratives highlighted above the last three is more important than the first. Why would one look at opening development centres in US especially given the high inflationary trends?

Projections based on historical performance and guidelines is an easy one and good to have. However, it is more meaningful to get a pulse of the sustainable margin figures.

@ganeshrpl Any light you can shed here? Any asset light (no real estate) software development/services firm preferably of similar size that comes to your mind/you know which operates with development centres abroad? Thanks!

P.S. This is not to be construed as any buy/sell recommendation.

Pankit · October 6, 2022, 10:44am

Hi @iyeron,

I have not found any details of nature of diversification. But it seems they have substantially reduced their holding and at the same time mgmt have communicated that they intend to control majority holding so in future hopefully, the stake reduction would be lesser. Atleast they are not going to sell for one year as per recent filing.

Being a smallcap company and that too involved in service business, I believe quality of mgmt is very important.
Till now, I could not gather any evidence against promoters. Regarding corporate governance or any decision which could not be minority shareholder friendly. Am I missing something? Though this stake sell is something I did not expect and only worrying factor for me as of now.

Has anyone on this forum got a chance to visit their office in any of the location? Maybe some scuttlebutt could be helpful to increase the conviction.

Has anyone studied this company and decided not to invest due to any such problems? I am kind of trying to find out antithesis or what could go wrong?

Thanks,
Pankit

Deenar_Toraskar · October 6, 2022, 1:08pm

I am curious to know why would Ksolves grow faster than other listed IT players, other than starting from a small base.

Usually, a slowdown overseas and competition for talent locally affects a smaller company more than a larger player. The cloud and move to digital will still play out for a few years to come, but there are significant other tailwinds. Some of the growth last few years was covid induced and from Ksolves starting from a very low base.

Looking at their website they do not seem to have any unique offerings or specialisation in a specific vertical.

tamal.datta · October 6, 2022, 2:59pm