Have you considered Cigniti as well. It’s a similar company that is mainly into testing that’s also at single digit PE. I think the market has some apprehensions about the sustainability of a business that is purely into testing. There is a fear that the testing and development will get merged at some point and remove the need for such companies. What are your thoughts on that?
Cigniti has other issues for its undervaluation including write off of assets, low promoter holding(and rumors of further exit). They themselves said recently that they want to concentrate on bfsi since they see growth there. Their operating margins have been languishing near 15 to 16 for a while now and doesn’t seem to be improving. Their cash flows have been erratic over the past decade.
I like Expleo since it’s adapting it’s testing capabilities to future trends and are concentrated on bfsi with no issues like cigniti(promoters and MNC parent, margins, net cash+cashflow, just bfsi niche, market leader for specialised testing) so their valuations aren’t a direct comparison and shouldn’t reflect on the industry as a whole.
Software testing especially regards next gen ie rpa/auto etc based on what I’ve understood seems to have a big runway. Next year or two should give a clear answer. Either way based on what I’ve understood developing should be left to the developers and testing to the professional testers . Either way more than anything the low valuations and high upside tempted me at current price. Im interested to see where the story goes over the next few years but won’t hesitate to run if it breaks down.
And even though it’s Quora it gave me some good insights lol
https://www.quora.com/Is-software-testing-gradually-dying
Note: I do have a friend who worked for cognizant, info and Accenture who confirmed the same and took a position alongside me today. The use of RPA, IOT, Big data etc for testers will be in demand according to him too and especially for critical industries like banking and insurance. Also confirmed that while we look at it as a small microcap in the industry they are a big trusted name and the big mnc group name is what can get the bfsi team through many doors
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Apart from Testing they just started Development as well. I am sure about any Development Project but team grew very fast from starting to a size of 40 persons.
Thanks @ankit_tripathi …
Development is in the nascent phase and there don’t seem to be any projects yet but could be another avenue to keep track off and that’s What’s exciting about expleo.
They have now racked up 140 crores in cash which effectively means the company is priced under 7 times earnings. A few tailwinds plus once receivables improve post covid and they could be at 200 to 250 crores of net cash in a year.
All that’s left is for the new management to allocate it well. Under previous management the only ideas they had were dividend and Buybacks and overall their capital allocation was poor.
New management has put dividend policy on hold and seem to be looking for better opportunities for the cash (bad for investors last 2 years but good for someone getting in now).
If they allocate it well ie to get into development/open new branches/consolidating their position in next gen testing etc then who knows what will happen from here.
It reminds me a bit of sonata at the start of the last decade ie a company with poor management and a lot of cash in hand and all it took was a change in management to make full use of its potential.
Betting on the management with expleo atm since They seem to be (Mr Balaji in particular) very focused on the long term and are honest about the short term and are doing a lot of restructuring behind the scenes regards hiring and upskilling.
In a few years the company may be a very different company than what it is today. Hopefully the next few quarters gives a clear indication of where they want to head.
Disc: invested. Not a sebi advisor. Willing to exit even at a loss in a few quarters if the new management prove themselves incapable of turning the ship around.
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Hi malkd i have read quite a lot Pharma threads at first i was skeptical to hold to much and didn’t believe when you said pharma will have a multi year bull run as they had already rallied to much.
A wise friend once told me listen to understand, Don’t listen to respond .Good thing i did this .Luckily for me pharma sector has been in consolidation zone for the past few months and i feel it will soon get over as we are in a bull market ,sectors with bad or no sign of growth are surging with just on expectation of revenue growth which might or might not come and a sector which is sure short thing will soon get rerated and I feel good pharma companies will demand similar or slightly lower Pe as fmcg sectors.plus big names in this thread with excelent track record still hold despite the run up gives me confidence.
Currently 20%(intend to make it 25 to 30% with buy on dips specially on granuels and ipca labs) of my portfolio is pharma with names like Alembic,laurus,granuels,ipca labs also some small caps kopran and everest organics (ratio is 80:20 would love your view on this ?Feel the same way as you the bull run can lead to lower returns in the small cap space specially in everest but i look at cash flows promoter ,buying,capex alll the green flags and more just makes me greedy and need your advice what would be you do if you were there instead of me.
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Hey @raku
I am very bullish on pharma but very mindful about the risks too even though I have nearly 70 percent of my portfolio in it. I’ve set up with Laurus, granules and alembic for very specific reasons which lets me take full advantage of a pharma bull run
- Laurus for me is probably the best bet in the stock market and gives me exposure to high margin synthesis, formulations and soon biologics
- Granules is purely a manufacturing play in the API space
- Alembic is a complex generics play
They all have APIs in common too which even though the prices are softening I am very bullish long term when China+1 plays out.
They all have fantastic promoters and long term vision which I can easily align to and track along with a clean history with the usfda.
In this space for a company to trade at rich valuations compliance and capital allocation needs to be a priority and I am very bullish on the pharma cycle for the next decade and know that it’s only a matter of time before a fantastic story plays out here in the pharma sector and these 3 companies will play a pivotal role in it.
Personally, I was very interested in Kopran but decided not to take a position. Neither did I with Everest. They both look fantastic(Kopran more than Everest for me)… but with smaller pharma companies the risks of regulatory issues(already seeing them with Everest) seem too high … and the worst thing would be if pharma does go on a bull run and im stuck on the sidelines due to holding a company that gets stuck due to red tape and compliance.
I have no issues holding micro cap companies but prefer betting on them in other spaces.
Since your portfolio is spread out well over other sectors and not too exposed to pharma like mine is taking a punt on Kopran looks like a fantastic option and I’d keep a close eye on regulatory issues regards everest… but due to the way I’m setup I’m forced to look away from pharma for my microcaps 
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Regards Expleo
@raku . You are correct. It looks like a perfect heads I win tails I don’t lose much bet. Since you’ve taken a position track the following carefully though
- Where the management spends their money. The old management were bad capital allocators. I’m betting on the new management being better. What they do with that cash is important. They do come with some pedigree so there is a sonata in 2014 story that could play out here
- Check their performance over FY22. If they do not grow by more than 10 percent consider exiting even at a minor loss.
If they do hit double digit growth you’d have got a margin of safety and management who look capable and who can walk the talk. But the risk is that they fail to do so.
It’s just a matter of holding for approx 5 quarters and checking if the ship can be turned around. If it can be turned around this is the cheapest MNC in IT/Tech. If it fails it’s probably a loss of 10 percent or so.
Even though it seems a risky bet Considering valuations it’s probably the safest company in my portfolio lol. But if FY22 does end up being flat it’ll be time to look elsewhere.
I won’t lie… greed Is playing a part here… At 20 percent margins, no debt, huge net cash, MNC parent, in a sector with huge scope for re ratings and euphoria… all that’s left is for management to do their part regards growth and allocation… and there’s a part of me hoping that in FY 23 there’s a tanla type rise here for me to cash out at crazy high levels lol.
Even if they grow at low double digits ie 10 to 12 percent for the next 2 years(which is what management has promised as a bare minimum) the scope for re rating is big(relatively speaking) from current levels considering its priced at 7 times earnings (minus cash). So unless there’s some corporate governance issues or the entire testing sector disappears overnight I really can’t fathom the downside at this price lol. Let’s see what happens
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I think you mentioned somewhere that expleo may play a story like tanla in 2014… but it seems it already did that with a huge peak in 2016 and then a big downfall…do you know what caused this huge swing in last 6 years and also what kept tanla going? Thanks
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@Investor_No_1
I honestly know nothing about tanla. Just mentioned the name regards mad euphoria for a tech/IT stocks. Expleo had a good business model with bad capital allocators as promoters. Reached its peak a few years ago and crashed once it was apparent promoters dint know where to take the company. Under their new management I’m hoping the story continues from 2016 and they break their glass ceiling of 76 crores per quarter. Again, I know nothing about tanla … could’ve thrown any it/tech name in there … I don’t usually understand valuations or even fundamentals of tech/it companies. With expleo it just clicked since it’s in a niche I understand and with valuations that made sense and balance sheet that makes sense too(high margins, high roce, fcf most years and huge net cash). Hopefully once things click under the new regime the general market prices it at valuations I don’t understand again lol. These changes take a while to bear fruit and management is showing they are trying to move forward via upskilling of employees, new hirings, a good CEO, a vision of how to move forward via next gen testing/development and while this slow change has led to 2 years of pain im Hoping the inflection point is over the next year or two. I wish I’d heard about it in march 2020 since the business was available for free since it was priced less than net cash available lol so even though it’s run up since then I still think there’s a nice MOS at cmp
Edit: I think what you are referring to is when I mentioned a story like sonata in 2014 ie a good business with bad promoters who had a full structural and management change and then moved forward. Tanla was just a metaphor for euphoria regards the sector recently
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Malkd,
I have a small position in Laurus. The stock ran up prior to increasing my position. Since then I have been contemplating, Do you think there is margin of safety in increasing exposure to Laurus?
Hey @Shankar
I started buying(considering post split prices) at 100. Then again at 180. Then at 320. Then at 260 and most recently at 334 post latest results. Basically don’t get anchored to your entry point. I’ve been Adding As the story improves every quarter as I get more information and a dip. They’ve proved their mettle via the past results and is still valued fairly. The market still hasn’t gone euphoric regards laurus… right now increase in earnings has led to increase in stock price.
Once the earnings slow down and euphoria increases valuations disproportionately will be the time to take a break from averaging up for me atleast and we are nowhere near that point right now. At current run rate in 2 quarters from now they’ll be at 20 EPS or more which pegs them at valuations in high teens at cmp.
Considering their shrewd capital allocation in verticals with high margins and their execution so far the next 5+ years look fantastic so imo it’s still fairly priced(even if short term API pricing pressures etc hit)
And I want a large, large allocation in it… the problem is money comes in spurts (salary/business profits) so while I’d have loved to put a lump-sum at 100 to 200 that’s just not practical so adding as the story improves on dips and at fairly priced valuations right now is a good compromise.
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Single digit PE for digital services got me curious, On a quick look expleo , something definitely seems off. It has done well till 2016, it appears erstwhile promotes got exit around same time.
In last few years 2016 onwards/current setup India unit maybe more of a captive/backoffice with not much control on sales engine. Hence slave to parent driving business to India. Which didn’t seem to be going well in the case in last 4 years.
Unless there are specific triggers on business growth visibility- performance change is unlikely and may become a value trap.
June 20 leadership change is a possible catalyst for turnaround
This seem to have reflected in some changes in performance in last 3 quarter itself. Given that current openings paints a quick picture of overall pipeline, for a services company, there seems to be good openings at group level and some at India level too.
Technicals are telling similar story, multi year downtrend was broken and currently re-testing a recent base around 475 after weaker Q3.(QoQ)
One key risk seems that they are calling themselves as predominantly testing services for BFSI - per press release focus on product as below -
PRIME, TS2®, First Vision®, Oracle FLEXCUBE®, T24, Equation, B@ncs24, CS Eximbills,
FinnOne™, Kondor+, Siebel, Newton, Kastle, Genius, Premia, MIDAS, ClarityQ and Finacle.
Associated risk being hardly any peneteration in US, which is mother of all BFSI deal pipeline. While current openings in India has RPA skills ask - which is good.
All in all - risk reward seems favorable. Key rerating trigger
- Overall and especially North America pipeline buildup
- Pricing pressure ( as per Q3 press release) coming off - if one don’t have pricing power now - doubt they will in future
- Continuing hiring of digital skills for deployment ( will require some upfront investments)
- Extending India contributions to other industry vertical and digital solutions
- Understanding the sales and leadership incentives to promote biz deals with India use play( this is bit tricky to find out) - especially given not much control on sales. - in absence of it visibility will be poor
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Thanks @Dev_S … means the world having someone from the IT background post regards Expleo. Since I’m not from that domain and don’t have much experience there I’m relying on the story of the management change + technicals + low valuations + good communication from management(considering low mcap) for the future and while I have a couple of IT friends I consulted before investing… they aren’t really into investing in general so to get colour from you is fantastic.
One question… regards the query raised by @ankit95 … overall as a sector do you see businesses purely into testing having good scope going forward or is there a danger of testing and development being merged.
Being new to this field the articles have read and the friends ive spoken to seem to indicate testing regards RPA, AI etc should be kept seperate from developers but would love your opinion on this too. Basically, do you see growth in this sector for companies like Expleo(who are apparently market leaders in specialised testing at the moment) or do you see the testing sector as a whole slowly disappearing and getting merged with development?
Also, they’ve begun hiring for development off late as per @ankit_tripathi and not just testing.
How easy or difficult would it be for a tester to move into development would you say?
One sidenote is that assystems took over sqs in 2018:
and Balaji Vishwanath (with a very impressive resume) was installed as CEO. They’ve only had about 2 years and change to get the engine running again out of which 1 year was covid and they’ve done pretty ok since as proven in the recent quarters.
Note:
- Will keep a track on North America. Expected to improve next few quarters as per latest concall
- Pricing pressure going down is what management said so will need to see If it happens next few quarters
- They are doing this and have a lot cash for investments so will be interesting
- I don’t think they have any plans for the listed india entity to benefit from other verticals. The only option is maybe getting into development for bfsi which looks like what they are doing.
- This I don’t know how to track either. The only info regards marketing I have is an exerpt from recent concall where management said while we look at the listed entity as a small microcap in reality companies look at them as expleo as a whole which puts them on a much higher footing regards size and trust. Nothing about sales, incentives etc mentioned anywhere though.
The concalls are currently primarily individual investors and not many funds so il try getting questions forward since it seems like it will be possible for me to do so. Will update if I get a chance to ask any queries.
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At times it works really well for a developer to move from Testing to Development but not always.
Good thing of having both the department is you can move resources based on performance.
Some times you hire a person for development but he could not perform due to lack of interest or intellect but such person can perform well in Testing. But a Fluent Tester can become a good developer as well.
Having both in house helps in saving expenses of Hiring in such cases.
More than that in project time line there could be phases where Development is primary and Testing is secondary which reverses at later stage.
So Some resources who are well verse in Development and Testing can be utilized in both phases.
I hope i was of some help.
regards
Thanks @ankit_tripathi
Of course you were of help. Based on your input and what I’ve gathered so far:
IT firms can have both Developers and Testers in house. These testers as of now are fantastic at Manual and QA testing which led manual testing companies to change direction a bit. Some organisations like Expleo got into specialised testing using next gen methods like RPA/AI etc to make testing more efficient than the previous methods.
IT firms could end up doing this specialty next gen inhouse testing later too but as of now expleo is leading the lines in this kind of specialty testing since it adds to the overheads of these companies and isn’t widely adopted yet and seperating developing and testing to a third party allows for more efficient detection of errors and improvement of UI/Experience for now giving them a window for growth in the medium term.
As the industries merge in the future testers like Expleo will also move into development in order to ensure they dont get nullified and have put a foot in the door by beginning with hiring and upskilling.
Working with the above thesis currently.
Edit: thanks all of you for taking time out of your day to help with this random micro cap IT company and going down the rabbit hole with me especially when there are so many other quality companies in the stock market and this sector. There’s just something about it that screams investment to me and I can’t get it out of my head lol. Cheers.
Disc: Not a sebi advisor
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Just my two cents
All automation testers know coding…with out coding they can not perform their job
Which means if management thinks to move to development… they can easily upskill automation testers.
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Let me explain my view on specialized software testing companies. I think its going to be a long post 
Capgemini was the first company to market themselves as specialized software testing company. Does that mean other companies like infosys, wipro, tcs, techM lacked core testing skills , the answer is a big NO .
The specialized testing companies don’t have any advantage when compared to other services based companies , because other service based companies have/had specialized testing practices within themselves and they could beat the day light of any other so called specialized testing companies any time.
The only reason why a company (into outsourcing their IT work) chose different companies for development and for testing is because they dont want these two division sleep with one another. To elaborate more, if the two divisions are operated by one company the testers will not report defects in tool and they would communicate this to the developer offline and developers usually fix them and if they think it is not critical they will sweep it under the carpet and the product quality will deteriorate, so keep some balance usually projects are outsourced to two or more vendors.so the outsourced testing activity can go to Capgemini or Wipro or Cognizant
Can every and any automaton tester scale to the level of a developer, the answer is again NO, the level of coding skills needed for a automation testing to that a development is way too low , Only one out of 20 automation tester can scale to that rank (if the testers are really sharp) . after all there is a reason why developers are paid more than the testers.
RPA and AI: They say RPA has machine learning and AI skills, that’s the biggest bullshit that I have heard , RPA is nothing but a process automation tool and if you are using RPA for testing then they are using the wrong tool for functional automation testing. RPA is a low-level process automation tool period.
Bottom line , if you have to buy this company stocks, please do so, after studying its financials or on the projection/growth and nothing more
I have 18 years of exp in IT, predominantly in software test automation, project management, process automation… also I have worked in/for/along with major IT companies , be it cognizant, Wipro, Infosys, TCS, Sapient, ATOS …
@Malkd please feel free to ask any questions, i will be glad to help you and others on this forum
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Appreciate your views, just to add some thoughts, you may correct or add to it…in case of BFSI, mostly companies buy core banking or other products and then for maintenance have their in house team (pls add if the product companies majorly provide maintenance or not?). So these companies do not rely on multiple big IT service players (other than ofcourse if they have chosen the TCS Bancs or Infosys finacle) …so that gives them the leeway and also likevise to another pureplay BFSI testing firm to pitch in.
Small example, SAP is a product and a manufacturing company implementing it may have TCS and Accenture both as integration partners where one implements, other maybe plays part in testing and later support…but in BFSI if a company choses Oracle flexcube, then no other IT services company would be a system integrator…it will be Oracle only and hence here comes the scope of a pure play testing company…
These are just thoughts on knowing some details about this industry…views invited
@Investor_No_1 if it is a product that a company buys , then the maintenance for that product is provided by that product company alone , In some cases as you mentioned when an integrators provide the services on behalf of the product, then the integrators do testing of interfaces, configurations and maintenance of the product… but any core defect needs to be addressed by the parent product company only. So the specialized testing company should be a specialized product company to command that premium Or you can have upper hand if you are the implementer and have exclusivity of implementing a product, which is never the case. and I don’t think the company that we are talking is having such exclusivity.
As a matter of fact every major IT service company has an exclusive BFSI testing division and they are implementation partner for one or more major product company
The company(Customer) that buys the product or even the channel partners can at best do configurations and they will never have access to the core code.
I work for a product based company. we implement solutions to various US clients and the customers never actually get to see the code and they wont be able to even manage the maintenance aspect of it , it is not they they can’t understand, but they are afraid that they might screw-up, We try to explain them how the configuration works so that they could take care of the regular day to day tasks by themselves, but none of our clients have opted for it, they will happily let us take care of it. and also that is where we make a good part of the money.
So if a service based company have exclusive rights to be channel partner- implementer, then they are niche and can command a premium otherwise it is a run of the mill.
Sorry for the verbal diarrhea, I am still learning on how to keep sentences crisper and to the point, If I am not clear let me know, I will try to articulate things a little better and if you do not agree with my analysis , please feel free to counter them.
PS: Domain expertise, one can obtain by having exposure to different clientele in the same space/domain. if you ask me if you are not amongst the top implementer a product like ORACLE FIN/SAP… or something in those lines , then u r one among many
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Exactly, so a) a product company - which may or may not be the implemetor/support partner (of course core defects it will only need to solve. I would call them the product issue and not consulting issues). Eg. SAP, Oracle, Flexcube (OFSS), Finacle (Infosys) etc.
B) system integrator - in case of products such as SAP and Oracle ERP - majority of implementation is via system integrators which are various indian IT services companies.
In case of BFSI products such as say Flexcube from Oracle - I do not know. Is it always or majorly always implemented by Oracle finance and day to day support also provided by them? Or such BFSI product companis also work via partners.
Wanted to know the BFSI ecosystem of product development, testing and support/maintenance as I see it bit different than other areas. I see more scope of new niche products and services in this vertical because of the way this ecosystem is at present.