Hi Hemanth,
Thanks for your kind words. I got in MPS pretty late at about 90 levels…though dad had brought to my notice much earlier but I failed to work much on it.
These collaborative discussions help in continuous work and more study.
Thanks & Regards,
Ayush
Hi Ayush,
Great work on MPS. You initiated this thread & your conviction levels (strongly backed by Donald) on this one in the face of so many “Doubters”, remained stead fast. This level of self belief / conviction is rare & can make all the difference. Wishing you many more such successes in future!!
Rajeev
Hi Ayush,
Wonderful work on MPS and the thought provoking discussions. Please let me know is it worth a buy after the correction at current levels.
I have been looking at MPS for the past few days. the latest annual report provides a lot of insights into the business of the company.
Stock price is in consolidation mode after the sharp run up. Currently the flavor for the markets have been the beaten down sectors.
Based on current price stock price reflects a div yield of around 5%. (although div is already paid but rs 17 was total dividend for fy 14.)
Management has stated that div payment in future also will be liberal.
A recent report by a brokerage house citing management interaction seems to indicate that a growth of 20% cagr should not be too difficult to achieve.
Currently when most of the stocks have run up sharply and the run ups are being justified by assigning PE for fy 15 earnings or else the omnipresent argument of “market cap versus opportunity size”, MPS seems to have some more scope to respond to even marginally positive surprises.
Current prices seems to indicate that markets expect very tepid sort of growth and static or marginally higher dividends.
I think that there are a lot of growth opportunities for a company like MPS provided they do proper client mining and marketing.
Since their Dehradun facility is vastly underutilised , all incremental business will be hugely margin accretive.
On the flip side, first quarter is usually lack lustre historically whereas the second and third quarters are the best quarters.
disc: Bought recently as I think downsides might be limited provided there are no nasty negative surprises.
I bought a small position in the stock and will buy on dips
Read the annual report :
MD & A seems very generic and does not entitle how they are going to increase :
)- the number of customers (given that there are only 20-25 customers in the world who need their services)
)- increase share of wallet
That to me seems a bit of a worry. Also, if one looks at FY 14 performance after the currency depreciation, the growth is very low <10%. That said, they seem to be fleshing out costs through outsourcing, better products etc.
From what I know in this business, topline growth is not easy to come by given the long gestation and the slow pace of movement in customers like pearson, axel springer etc.
I don’t see a downside but will reserve comments on if this can be a multi-bagger. I am thinking of going for the AGM on August 8th in Chennai. Any one else coming along ?
Hi Hitesh,
I could not agree more with you! You put the whole situation so succinctly…
I too have studied MPS in detail in last couple of months and it looked very interesting. I have also taken position with 5% allocation with average price of 330.
As most of us have already acknowledged, the key factor to monitor is top-line growth. If I remember correctly, In the last concall, management just stopped short of saying they are targeting 20% growth. I feel that 5% dividend yield provides an excellent cushion against significant downside.
On the marketing side, they seem to be showing some aggression through participating in almost all major conference/exhibition in their industry in US market (As evident from the events listed on MPS’s website). Though I did not have any first hand interactions with management, the impression that I gather from concalls is that management has its fingers on the pulse of the business and are focused on making things happen (like they did for turnaround of business through cost cutting). So, the probability of revenue growth eventually picking up seems decent.
I would give at least a year to management to execute its plan and show result. Till that point, it remains a reasonably priced medium conviction bet with limited downside.
Hi Hitesh,
I could not agree more with you! You put the whole situation so succinctly…
I too have studied MPS in detail in last couple of months and it looked very interesting. I have also taken position with 5% allocation with average price of 330.
As most of us have already acknowledged, the key factor to monitor is top-line growth. If I remember correctly, In the last concall, management just stopped short of saying they are targeting 20% growth. I feel that 5% dividend yield provides an excellent cushion against significant downside.
On the marketing side, they seem to be showing some aggression through participating in almost all major conference/exhibition in their industry in US market (As evident from the events listed on MPS’s website). Though I did not have any first hand interactions with management, the impression that I gather from concalls is that management has its fingers on the pulse of the business and are focused on making things happen (like they did for turnaround of business through cost cutting). So, the probability of revenue growth eventually picking up seems decent.
I would give at least a year to management to execute its plan and show result. Till that point, it remains a reasonably priced medium conviction bet with limited downside.
Hi Donald,
Did you’ll manage the Q&A with the management. We would love to read about it as the MPS story continues to evolve very well. Did you receive a response from the management regarding the Q & A?
Hi Hitesh,
Thanks for the great analysis and summary views from the last AR published. I’ve studied and having following set of queries (sorry again if they’re not relevant or basic here):
1). MPS was having a US subsidiary and was making loss until Mar’14 and started broken even from there. Will it add more margins now?
2). MPS has acquired element llc last year which seems to be very niche in providing solutions from kinder garden and high schools. Is the revenue addition and benefits have started reflecting in MPS #s?
3). Management – It is having reputed people with scholars from reputed institutes. CMD is having performance linked bonus. But having his son as CMO from Aug’13. Will this make set of changes in management and revenue growth?
4). You’ve mentioned that **their Dehradun facility is vastly underutilised. **Please help me to learn on how much it can power the new growth and potentials. Again 2013vs2014 – Revenue/net profit has changed but expense seems flat.
5). MPS is also giving solutions/service on mobile application development/integration/supporting. It will be great to know how much it will be on the break-up on revenues/profits.
6). You’ve mentioned 20% cagr expected from a brokerage report. Is that for the current fiscal year or there is a possibility to foresee for upcoming years as well since industry itself is providing 2 to 3% cagr as per AR. Will it be coming from other set of plans/solutions?
Thanks again for your inputs.
-Muthu
hi muthukumar,
regarding ur queries
1). In their q4 fy 14 presentation (available on their website), they mention that during the year they incorporated a US subsidiary MPS North America LLC which acquired the assets of Element LLC. The contribution from the subsidiary would be the difference between standalone and consolidated numbers.
2). I think calculating from standalone and conso numbers, one can deduce that subsidiary sales was 9 crores and net profit was minus 1.2 crores. (Element was acquired midway during May 2013 ------ I guess it would take some time for the management to have a meaningful impact…I expect better results from its subsidiary in the subsequent quarters)
3). Impact of inducting his son as CMD … this would have to be seen how it pans out…
4). Dehradun facility has 2000 seats and current occupancy is 600 seats. So idle capacity could be put to use for incremental business. (the emkay report provides this details)
5). Question number 5 should be asked by anyone attending the AGM in chennai. I tend to look at the whole picture of the company.
6). The 20% cagr growth assumption was put up in the emkay report in May 2014. Management has indicated their strategy to attain growth through organic and inorganic (Element LLC) initiatives in their presentation for q4 fy 14.
For me the maths is :
What is the current price factoring in? What kind of growth does markets expect from MPS at current prices?
Is there a possibility to get a strong response from markets to a positive surprise in terms of unexpectedly good sales/profit growth.
The company currently does present a nice mix of attributes for disproportionate returns.
1). possibility of good growth (which if materialises would reward shareholders handsomely)
2). High promoter holding
3). Capable management – the proof lies in their demonstrated track record after taking over an ailing company in 2011 and getting it on track within 2-3 years and in the meantime providing shareholders with decent dividends
4). Clean balance sheet.
5). High ROE and high dividend payout ----- always a great combination and if it is present in a company showing growth, it inevitably leads to a winning stock.
I think next 2-3 quarters should provide answers to whether growth comes about or not.
Thanks Hitesh for the very detailed response to the queries and great explanation on the disproportionate growth possibilities in MPS (The hen can lay golden eggs more). Have read the emkay and company inventor presentation as well – You’ve given the best summary from those to students like me 
As always, Hitesh has very succinctly put the investment case for MPS.
As he mentions in the last line, the key question is the source of growth for this company going forward. This is the key ingredient in this case as the other building blocks on the delivery side and the cost control side have already been laid by the management. The management has displayed till date that they understand the business and have the management capacity to put those plans to work.
The dollar revenue growth was 2% for FY14. This is extremely modest by any stretch of imagination. The 15% increase in rupee revenue was a one off on account of the rupee depreciation.
The management has stated that the top 10 accounts will be the focus going forward and account mining will yield almost all of the revenue increase? Can account mining alone take us from a 2% revenue increase to say a 20% increase? Are there such large opportunities in the existing accounts that they have visibility of? The management till date has not indicated this.
If I put myself in the shoes of the management, then i would be seriously think going the inorganic route( The management has also indicated this). The criteria that i would have in mind for an acquisition would be the following;
The more that you think about it, more it looks like a case of betting on the management to deliver the goods and more specifically on the ability of the management to make a smart acquisition and make it work.
Publishing outsourcing/off-shoringwill continue to happen but there seem to be no immediate triggers which will accelerate this change.
Discl - Invested
beoff-shored? outsourcing/off-shoringwill
I raised a specific query on acquisitions during the concall.
The CEO replied that they are looking at various proposals and he was blunt enough to divulge the deal size Rs. 10 crores, Rs. 70 crores and Rs. 150 crores.
The way i look at it MPS has the following in hand:
1). Rs. 30 crores in cash and liquid assets.
2). Rs. 25 crores in excess property in bangalore which they are trying to encash.
3). Rs. 50 crores free cash flows in a year so around 100 crores.
So if they skip dividends (Which they have skipped in Q4 and are most likely to skip in Q1 as no announcement of dividend has been made) they can easily fund the acquisition without any equity diluation or resort to debt.
Assuming a 70 crore acquisition and using the same market valuation / Sales of between 2.5 to 3 that would mean an incremental sales of Rs. 30 crores. So that would mean an incremental EPS of around 5 in the medium term assuming that they can use excess capacity in gurgaon.
Very good set of numbers yoy!All numbers includes results of north America subsidiary ( element LLC)
Sales up 26%
Profit up 223% ( includes exceptional item n forex gains)
Profit excluding exceptional item up 80%
Profit excluding exceptional item & forex gain up 28%.
PS: QoQ nos not considered due to seasonality in business.
MPS has come with very good set of numbers, Here is the link,
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=e057eaf0-c289-4805-aa37-f5e5efe7d0ad
On consolidated basis, Revenue has increased by 20% YoY
PBIT before extra ordinary items has increased by 132% from 8.19 crore to 19.07 Crores
PAT after extra ordinary items (due to change in depreciation policy) has increased from 5.4 crores to 17.45 crores.
Some of the hypothesis which seems to be proving right are
)- Moving forward, topline growth will result in to significant operating leverage and hence margin expansion: There is significant operating leverage coming in play with increase in topline. Thus, the margins can continue to expand if the top line grows consistently.
)- Element will also turn around quickly considering the focused effort of management :Element has turned profitable on EBIDTA level. Actually, there seems to be significant growth in topline of Element as the full year revenue for Element was around 10 Crore in FY 14 while for Q1 FY 15 revenue is around 5 Crores.
As Dhwanil mentioned the hypothesis seems to be playing out.
I expected slowish growth but this has surprised me. 25% topline growth in what is usually a traditionally weak quarter is quite good. Operating leverage as dhwanil mentioned is playing fully well.
And according to a further announcement by the company, there is a meeting on 20 aug to consider interim dividend. That should add fat to the fire.
augustine
How do you arrive at the comparitive figures of profits before extraordinaries and forex?
Wouldn’t it be better to ignore either forex profit or loss in calculating op profit?
rgds
hitesh.
Hello hitesh, sorry my calculations on profit before forex n exceptional items is wrong. I adjusted only for q1 FY 15( by removing exceptionalitem n forex gain n adjusting tax)but completely missed on FY 14 forex loss… n just realized thatwe could have calculated this from item 5 in financial statement.
I removed forex as this would have a one time impact. But you are right, generally forex can ignored as net impact will be zero in say 1 year or more depending on hedge.
Thanks,
Augustine
augustine,
to summarise the results,
I have taken out any forex gains or loss out of the results and put in the operating profits without forex impact for comparative purpose.
| period | q1 fy 15 | q1 fy 14 | q4 fy 14 | fy 14 |
|---|---|---|---|---|
| sales | 50 | 40 | 52 | 197 |
| Op Profit | 15 | 7.73 | 17.43 | 60.85 |
| net profit | 17.45 | 5.4 | 13.05 | 42 |
| extraord | 7.72 |
Taking out the extraordinary item and tax paid (@30%) theroen, the net profit figure comes to 12.5 crores for q1 fy 15.
