If I look at PEG, this looks fairly valued/over valued right now, unless one can get visibility for a 25%+ EPS growth in steady state, I would not want to add to my position.
It’s a good company, good stock - great management but not the right price right now.
70 Cr in Q3 is asking for 30% top-line growth from 55 Cr in Q3 FY14 - which seems aggressive comparing the past growth rates. The EBITDA expectation also seems aggressive - but perhaps operating leverage can kick-in here.
Can you explain your thinking?
managementseems to havefirst
Thanks Mahesh for the very detailed and excellent points of steps on the transformation required for MPS. Steady topline growth establishment will make MPS to be in different league of valuation i believe.
I guess this is possible since acquisition revenues would add up here.
In Q2 results, Management was confident to hit the EBITA margin to 40%+ in coming quarters.
Hi Vardha,
PEG is a good multiple to evaluate where most of the variables are known but in emerging stories where many of the variables are unknown it could deceive. This is true especially when company management is dynamic and not static and has a history of orgnaic-inorganic combination. In case of one good acquisition, the entire PEG theory could go for a toss and thats the reason why emerging stories, till they achieve a saturation or reasonable scale, are best evaluated on downside potential.
Just to cite here an ex., say if MPS is able to acquire Integra which is in a similar messed-up situation as Macmillan was in 2011 for say 1.5x sales (assuming 18x + EV/EBITDA) and the consideration is entire equity dilution then equity of MPS will rise to 18 cr. (@650 rs. per share placement) whereas revenues will rise by 60 cr. in the first year itself…now, with this acquisition, MPS can get another low-cost location (pondicherry) and if MPS can bring this acquisition to say 30 % EBITDA post first year then it will add Rs. 6 EPS immediately…now, for an equity dilution of just 7 % it is getting an addition of 15 % to earning per share…this is what I am calling the beauty of this business…so, what you have is from just assumed 18-19 % growth for PEG, you are getting onto 27-28 % growth and that too sustainable as we are assuming the 28 % growth at still 25 % lower company’s EBITDA margins for the acquisition…
I don’t want to get into the debate whether MPS is fairly valued for the time being or not as thats immaterial to me…what I am more concerned is the downside potential even from current rate of 730 from a 2-3 years perspective and that I am unable to see for now…in the calculation which I will put to Prasanna’s query’s replyin my next post, you will see that without any significant acquisition and only small acquisitions every year as company has done till now (assuming relativelyhigher acquisition price), and a muted 10 % organic growth p.a., company can sustain ~20 % growth in earnings till FY17 and when I calculate dividend that a longterm investorreceives every year (Rs. 68 till FY17) and deduct it from the CMP, there doesn’t seem to be significant downside unless something significant negative development takes place. Hence, what I want to understand is not that whether at current valuations stock is fairly valued or not, it could be if someone has a investment horizon of say 3-6 months…but, for someone with a 3 years investment horizon, does this stock offer significant downside potential that is the question I am pondering at.
Rgds.
Hi Prasanna,
Will explain you in detail why I said ‘I will be disappointed to see Q3 topline to be lower than 70 cr.’ for MPS. In addition, will also provide my thought process for 2HFY15, FY16 and FY17 for MPS…Just to make one point before start, I am assuming INR at Rs. 61 for 2HFY15 and Rs. 60 for FY16 and FY17…
Q3FY14 topline of 54.04 cr. that you are seeing is without Element…if you see Element’s contribution in 2HFY14 then it was ~8 cr. Also, from Q3FY15, EPS numbers will also count.
Now, for Q3FY15 I am assuming 15 % constant currency organic (standalone) YoY growth and a 5 cr. contribution from Element and 3.5 cr. contribution from EPS which takes me to 70 cr. topline… Rgdg. EBITDA margins, in Q3FY14, MPS clocked a 42.50 % EBITDA margins (w/o forex effect) and I am assuming 43 % EBITDA margins for Q3FY15 which seem achievable as Q3 is seasonally the best quarter for the consolidated entity (infact revenues for Element as well as EPS should be highest in Q3).
For Q4FY15, I have assumed only 5.3 % YoY constant currency growth on a standalone basis, a 3 cr. revenue from Element (flat for 2HFY15) and a 2.5 cr. revenue from EPS. EBITDA margin of 38 % is assumed for Q4FY15 (v/s 38.44 % of Q4FY14).
Hence, for 2HFY15 what we have is a 123 cr. topline for consolidated entity with 50.18 cr. EBITDA and 32.6 cr. PAT…I am assuming dividend of Rs. 13 in 2HFY15 (which will take total dividend for the year to Rs. 25) and after dividend outgo including DDT, company should end with a cash & cash equivalent (including MF investments) of Rs. 37 cr.
For FY16, I am assuming just a 10 % cc growth on standalone basis and 10 % growth in Element business. I am assuming that EPS will not show any growth for FY16 and report flat revenues (but revenues will be counted for the entire year instead of half yearas inFY15). Rgdg. acquisition, assuming that company will spend 18 cr. in acquisition (up from 10 cr. in FY13 and ~7 cr. so far in FY15) and will acquire a company of 15 cr. topline of which 10 cr. will get contributed in FY16. Taking all these into account, topline for FY16 works out to be 267 cr. and assuming 40 % EBITDA (up from 38.31 % of FY15), PAT comes to 68.3 cr. Assuming a flat dividend of Rs. 25 in FY16 with no cash addition and therefore cash will remain at FY15 level of Rs. 37 cr.
For FY17, again assuming cc 10 % growth for standalone entity as also 10 % growth for Element and EPS and0 % (flat)growth for FY16 acquired entity. Assuming that company will again acquire an entity with a topline of 18 cr. for a consideration of Rs. 20 cr. which will contribute in FY17 to the tune of 10 cr. revenue. Taking all these into account, topline for FY17 works out to be 309 cr. and assuming EBITDA of 41 %, PAT comes to 81.5 cr… Expecting a dividend payment of Rs. 30 for the year, there will be no cash addition and therefore cash remains at 37 cr. at the end of FY17.
Above we have assumed no major acquisition, no equity placement and a constant but muted improvement in EBITDA margins – all of which is unlikely till FY17…A mid-size acquisition should happen considering the eagerness of the management, a equity placement is also most likely for such acquisition and improvement/deterioration in EBITDA marginsmight not be gradual. However, for a simplicity sake, what we have worked is a rough estimate of the company not embarking on much aggressiveness and continuing with gradual growth trajectory as it has done in last 2.5 years. Even with such a gradual approach what we have is company ending at 127 cr. EBITDA in FY17 with a total Rs. 68 dividend already paid starting from 2HFY15 till FY17.
Remember all these are rough estimates and one should dwell deep into the fundamentals of the company to work out the estimates based on one’s own understanding of the business. Also, these estimates or for that matter my any other post in this thread should not form the basis of any investment decision. These are just for discussion purpose and for collectively arriving at proper analysis of the stock story.
Rgds.
Discl. - Invested in MPS
Hi Mahesh
your analysis is once again very impressive!
Can you upload an excel sheet projecting the cash flow and stock valuation with the KPI’s assumed? will make a much better sense to understand how MPS will pan out to be…
Apart from your ratioanle stated above, the only thing which i believe will be a very critical driver ahead is how the dollar pans out to be? If FED raises real interest rates in US economy (though it may favor MPS on currency realization) but in a conservative scenario it might not favor volume growth…
The alternative could also be if domestic capex cycle picks up then you might see dollar weakening to 50-53 levels which again would dent MPS’s profitability…
My Gut estimate is this stock will end up in 1000-1200 by end of FY15 with an EPS pf around 35-45… Post which inorder to scale up management has to dilute equity to attract big investors…
Hi sreekanth,
Will refrain from making any stock valuation projection as it will be unfair…valuation is always an individual’s perception and it is the concurrence of majority perception at which a stock trades on the bourses…we can work out the numbers and of course KPIs and let every individual take the call on valuation…
As far as numbers are concerned, in my reply to prasanna, have already covered theoretically numbers starting from 2hfy15 till fy17 …OCF for MPS has always been closer to PAT and I don’t see things changing much even ahead…CAPEX is likely to be minimal (slightly above depreciation) till FY17 whereas main expense will be only on acquisitions…also I see majority of the free cash being distributed as dividends and so there also I see no change…still will try to work out a detailed worksheet (from the rough that I already have)…
On the dollar front, yes that will remain a concern but more of a concern will be sharp appreciation/depreciation than gradual one…if dollar gradually depreciates to say 53-55 from current 61 till FY17 then that will be manageable by most of IT cos. including MPS but if it nosedives in 1-2 quarter then it will be a concern…but that’s an external generalised concern we all need to live with…more important will be internal developments like acquisition, platform-strategy execution, client penetration, cost management, equity placement, etc.
I concur with your estimate but on FY15 EPS as I mentioned before, I am working on estimate of rs. 35 (w/o exceptional gain – with exceptional gain it might be rs. 38)…
Rgds.
Thanks a lot for your thoughtful responses Mahesh.
Other Peers results out....have categorised the comparison based on scale of operation (FY14) to make the fact of vendor consolidation in the industry more clear wherein smaller players are finding it difficult to grow whereas larger players are growing at brisk pace.....difficulty is in getting the 'core vendor' status.......
Scale of Operation INR 65-75 cr.
YoY Growth in Topline post ADI's takeover of MPS :
|
FY14 |
FY13 |
FY12 |
|
|
MPS |
20.30 % |
4.12 % |
7.65 % |
|
Crest Premedia |
66.59 % |
51.46 % |
75.65 % |
|
Cenveo |
5.63 % |
-(4.19) % |
-(24.79) % |
EBITDA Margins post ADI's takeover of MPS :
|
FY14 |
FY13 |
FY12 |
|
|
MPS |
33.52 % |
26.17 % |
10.31 % |
|
Crest Premedia |
28.97 % |
41.19 % |
55.33 % |
|
Cenveo |
31.64 % |
25.22 % |
23.96 % |
Scale of Operation INR 10-30 cr.
YoY Growth in Topline post ADI's takeover of MPS : FY14 FY13 FY12 MPS 20.30 % 4.12 % 7.65 % Altivolus 25.53 % 19.71 % 3.09 % Diacritech -(23.45) % -(0.43) % 31.01 % Exeter 39.75 % 60.59 % 35.93 % Jouve -(3.10) % 31.54 % 43.63 % OKS Prepress -(11.12) % -(7.19) % 24.70 % S4 Carlisle -(2.09) % 31.29 % 10.81 % EBITDA Margins post ADI's takeover of MPS : FY14 FY13 FY12 MPS 33.52 % 26.17 % 10.31 % Altivolus 13.68 % 27.08 % 22.85 % Diacritech Loss 13.78 % 17.42 % Exeter 39.77 % 33.22 % 20.69 % Jouve 26.31 % 23.87 % 21.95 % OKS Prepress NA Loss 8.63 % S4 Carlisle 6.14 % 10.04 % 9.68 %
YoY Growth in Topline post ADI's takeover of MPS :
|
FY14 |
FY13 |
FY12 |
|
|
MPS |
20.30 % |
4.12 % |
7.65 % |
|
Altivolus |
25.53 % |
19.71 % |
3.09 % |
|
Diacritech |
-(23.45) % |
-(0.43) % |
31.01 % |
|
Exeter |
39.75 % |
60.59 % |
35.93 % |
|
Jouve |
-(3.10) % |
31.54 % |
43.63 % |
|
OKS Prepress |
-(11.12) % |
-(7.19) % |
24.70 % |
|
S4 Carlisle |
-(2.09) % |
31.29 % |
10.81 % |
EBITDA Margins post ADI's takeover of MPS :
|
FY14 |
FY13 |
FY12 |
|
|
MPS |
33.52 % |
26.17 % |
10.31 % |
|
Altivolus |
13.68 % |
27.08 % |
22.85 % |
|
Diacritech |
Loss |
13.78 % |
17.42 % |
|
Exeter |
39.77 % |
33.22 % |
20.69 % |
|
Jouve |
26.31 % |
23.87 % |
21.95 % |
|
OKS Prepress |
NA |
Loss |
8.63 % |
|
S4 Carlisle |
6.14 % |
10.04 % |
9.68 % |
Newgen is again acquired by the old PE player and that too at double the exit rate – there arehardly fewprecedents even globally where any PE player is inclined to play a second inning in its previous portfolio company at doubleits exit price and that too within just 3 years of exit…signifies confidence in the robust cash generation as well as long term growth of the industry as lifecycle of a PE investment is normally 6-8 years with expected minimum exit atdouble theholding value…since FY14 numbers of Newgen are still not out (newspaper seems to have quoted FY13 nos. in the article), unable to work out EV/EBITDA multiple for the deal ; once they are out will update…
Article published in today’s Economic Times
Carlyle to buy back 54.95% stake in Newgen Knowledge for Rs 200 crore
BySneha Shah & Baiju Kalesh, ET Bureau | 3 Dec, 2014, 04.00AM IST
MUMBAI: In a first for the Indian private equity industry, American PE fund Carlyle will reinvest in a company it had exited in 2010 by buying back the stake from investors it had sold back then.
Carlyle will buy 54.95% in Chennai-based Newgen Knowledge Works Pvt Ltd, a content management and technology solutions provider across digital media, from its investors, Franklin Templeton, Aureos and ePlanet for Rs 200 crore, three people with knowledge of the development said. The global fund will then increase its stake in the company to 75% in a few years by investing an additional Rs 200 crore.
In 2004, Carlyle had first invested $9.3 million in Newgen. In 2011, seven years into the company, the fund more than trebled its investment when it sold the stake to the consortium of three funds for $30 million. Franklin Templeton PE.
Aureos South Asia and ePlanet Capital will double their returns after fully exiting the company.
“Carlyle is very keen to partner the company again. It sees huge potential in the sector and is reinvesting by buying out the existing PE investors,” an investment banker with knowledge of the development said. In an emailed response, a spokesperson for Carlyle said, “As a policy, Carlyle does not comment on market speculations.”
Started in 1996 by promoter Prabhakar Ram, Newgen provides outsourced publishing services to many of the world’s largest and most prestigious publishers, particularly in the US, the UK, and Europe. It offers a complete project management service for books and journals, taking on key processes such as author liaison, development editing, copyediting, design, artwork and permissions, typesetting/composition, XML creation, ebook delivery, and backlist conversions.
Ram started with Rs 12 lakh capital, and built Newgen which is now valued at Rs 370 crore. “Carlyle has committed to invest additionalRs 200 crore in the next few years to raise its stake to 75% ,” another person involved in the deal said.
The company made a profit after tax of Rs 34 crore in March ended fiscal 2014on a revenue of Rs 120 crore. It has 900 employees across its offices in Chennai and Bangalore.
Newgen also owns a subsidiary in the UK, Global Publishing Solutions, which provides highend software solutions for clients who require in-house automation of the documentation/publishing process. Carlye Growth Capital Fund invested roughly Rs 2,400 crore in Indian companies in the past seven years. The fund had a blockbuster exit from dairy company Tirumala for Rs 1,800 crore.
Someof its recent investments in India include Medanta, Mufti and South Indian Bank
ICICI Direct Management Meet Update – with Mr. Nishith Arora…link attached :
Rgds.
Newgen Knowledge Works FY14 results are out.....healthy growth in topline continues wherein it has increased its consolidated topline by 27.67 % in FY14....EBITDA margin seem stable.....Newgen has comfortably crossed 150 cr. mark to reach 152.24 cr. in FY14......
YoY Growth in Topline post ADI's takeover of MPS :
|
FY14 |
FY13 |
FY12 |
|
|
MPS |
20.30 % |
4.12 % |
7.65 % |
|
Newgen |
27.67 % |
22.62 % |
20.19 % |
EBITDA Margins post ADI's takeover of MPS :
|
FY14 |
FY13 |
FY12 |
|
|
MPS |
33.52 % |
26.17 % |
10.31 % |
|
Newgen (Consolidated) |
~ 31.01 % |
~ 30.80 % |
~ 35.10 % |
Integra promoters buyback Baring’s stake in their own company – publishing outsourcing segment seems to be on verge of medium term brisk growth…news article attached below :
CHENNAI, DECEMBER 17
Sriram Subramanya and Anuradha Sriram, promoters of the Puducherry-based Integra Software Services Pvt Ltd, have bought back Baring Private Equity Fundâs majority stake in the company.
Baring had picked up a 60 per cent stake in Integra, a leading digital content services company providing content solutions and digital interactive learning media services to publishers and educational institutions worldwide, in 2006.
Subramanya, Founder, Managing Director and CEO, Integra, would not disclose details about the deal with Baring, but said the company had grown three times in revenues since Baring bought the stake. Integra expected to end this financial year with about â¹ 75 crore in revenue. The number of employees had increased from 400 in 2006 to 1,100 now.
Baring was looking for an exit as the life of the fund from which it had invested in Integra was expiring.
In a press release, Subramanya said the deal was the clearest indication of total confidence in âourselves, our customers, our employees and our marketplace. We also expect this development to give us a whole new operating autonomy in the pursuit of our vision to be a leader in our space.â
The release said the educational technology and publishing space was going through a radical change that presented tremendous opportunities, which needed operating flexibility and autonomy for Integra to be able to take quick decisions to respond to market needs.
Plans expansion
He said Integraâs Chennai office would be augmented by an additional 100 seats immediately to power the growth plans. Integraâs principal delivery centre is in Puducherry with centres in India and the US. It could also provide onshore project management and editorial support out of the UK, Spain and Italy.
Veda Corporate Advisors, an investment bank, which had advised Integra when Baring acquired the stake in the company, advised Integra, its promoters and their associates in this transaction too.
Mahesh
I think you should’nt say that until you are sure that :
)- barings made a decent IRR on its investment
)- there were other investors too who were interested in the stake
If it was a forced buy back and barings did’nt make much, may be it was only because their fund life ended.
If you could dig up numbers it would be help.
Hi Varadha,
My comment on the segment is not only because of Integra deal but based on the YoY growth trend we have witnessed with almost all Indian players…you can check the figures provided by me in postings before in this thread…Even Integra, if the figure of 75 cr. topline for FY14 as mentioned by promoter in the article is correct, seems to have grown by ~20 % YoY in FY14…I must tell you here that Integra is one of the weakest company of the lot and has reported almost stagnant revenue over last 3 years…
Rgdg. Integra deal, a forced buyback only happens at a predetermined price (usually agreed at the time of PE investment) and in such buyback normally there is absence of an Investment Banker as it is based on the terms of an agreement already entered before and there is hardly any scope of negotiation or structuring of the deal…This deal seems to be more based on ‘First Right to Refusal’ clause rather than forced buyback or no other takers for the company…
To add, if Integra was in a dire state or promoters were not confident of future of the business, they would have not risked the expansion as stated in the article…
Trying to dig deeper into the deal and will update as soon as anything is known but, Indian Publishng Outsourcing segment is surely witnessing lots of M&A deals and the trend seems to be positive.
Rgds.
First sign of institutional activity in MPS with L&T Mutual Fund buying some shares
Ventatesh ,
Source of information ? any link?
The morningstar page for L&T India Value Fund indicates that they bought 15000 shares (~0.1%) as on 30th Nov. I am not sure if Venkatesh is talking about this or something more recent
First sign of institutional activity in MPS with L&T Mutual Fund buying some shares
Hi Vishal,
You can also access November’2014 Factsheet of L&T MF wherein under ‘L&T India Value Fund’ MPS is bought…link is given below :
http://www.lntmf.com/Portals/0/Common_PDF/L&T%20Factsheet%20Nov%202014.pdf
Rgds.
Discl. - Invested
Thanks guys for sharing the link.
Do we have any shortcut to find the stocks added by the funds on particular month?
