ValuePickr Forum

Nucleus software exports limited

Dear value pickrs community, this is my first post on this forum. I request the esteemed members to add their valuable comments. I summarise the story with -ves first and then +ves next.

-ves:

    • Company does not give any guidance about earnings. It broadly outlines the trend in sales and profitability. Retail investors will be the last to know in case some thing goes wrong.
    • Literally no coverage from brokerage houses. It is not easy sell this stock to retail investors as they have tough time comprehending the business vis a vis kaveri seeds, vst tillers etc.
    • I have not seen any other way to assess the companyâs progress other than managementâs talk. We donât have any edge over Mr.market in assessing the company.
    • Low liquidity: Volumes traded are generally low for the company.
    • On May 15 2014, HDFC mid cap opportunity fund unloaded its complete holding (around 11 lakh shares) in this company at 197 rs. But Promoter bought the stake from the mutual fund. If a decent domestic fund like HDFC offloads its stake, who else can buy now?
    • Company disappointed institutional investors for more than 6 years. Only from the past 1 year the stock started outperforming the market.
    • In many con calls there were questions regarding better way of cash utilisation, but management is very reluctant to distribute it to shareholders in any form (dividends, stock buy backs etc). This idle cash sitting on balance sheet suppresses the usual ratios. Company thought for some time to grow inorganically by acquisitions but in the recent con call management said they are no more looking for acquisitions. This clearly shows that shareholders should expect nothing from this cash available on books.
    • A con call question: Some questions that might come to our mind being Is it due to lack of market or companyâs inferior products Why did not the company grew for the last 6 years ? Whether the market addressed by the company is growing or not? I am trying to find out since last five years we have got stuck up in the annual turnover of say around 280 crores or something. Is this not market growing or it is only we are not able to grow?
  • Ans: As far as the global market is concerned it is either at the same level or slightly it might have shrunk over last 5-6 years. As far as growth of market is concerned, these decisions do take time. They are not overnight decision. Banks are very conservative on this kind of decision. They have been running the mainframe based systems for decade, and unless they are 200% sure about the ability of the vendor to cater to their needs, they would not like to move.
    • Slightly edited by me to remove technical jargon: Additionally few pressure points that would help banks take decisions in favour of solutions like us are like we are using latest databases which run 10 times faster than legacy systems and we are absolutely hopeful and confident that over the next three to five years our product will move into far bigger customer locations.

+ves:

    • Promoters have not bought in the past 6 years. But now they purchased 3% stake of HDFC recently(May 15 2014).
    • Company is at a sweet spot in terms of rising sales and rising profitability.
    • Reasons from rising sales:
    • Change in marketing strategy: Getting foothold in global market and hiring local people to communicate with customers better. Managementâs new move to hire local people is yielding fruits by positive feedback from customers. Earlier management is reluctant to hire local people which will increase costs. The contract won in Australia is for the company’s flagship product-FinOne, Dusad said. He added that there are several other contracts in the pipeline in Australia, which might take some time to materialise, but the company is fairly confident about this geography.
    • Managementâs improved understanding of market: Till recently we used to think that when it comes to the developed part of the world, they would have all the functionalities that are required, so we will have to upgrade substantially to cater to their needs,: Dusad said. "But going by the example of Australia, we feel our capabilities might be slightly ahead of their requirements. This is not just for Australia but even for other parts of the developed world like Japan and even USâ.
    • What could be the market size for our product? The way we look at market size for our product; the flagship product, I am talking about FinnOne right now and then we will talk about the cash management as well. Product takes care of mortgages, automobile loans, personal loans, education loans and so on. And the global retail assets of the banking industry and non-bank finance companies are of the tune of 30 trillion dollars. Today the size of assets that our product support, nearly 200 customers all over the world in more than 50 countries, is of the tune of 150 billion dollars. So essentially it is half a percent of global retail asset and 200 times of that is the market size.
    • Increasing dividend pay out.
  • Revenue visibility for the next 3 years from April 29 2013: Excerpts from con call below.
    • We have seen a very good traction for some of our new offerings like mobility which we are going to announce next month, which we have implemented at some of our key customers as pilots. This is one of the reasons for our optimism.
    • The second reason is we have implemented our products at Toyota Financial Services in India. And just the way, we were able to implement our same product at General Motor Acceptance Corporation, which is now called General Motors Finance, in 14 countries, we are quite hopeful that we will be able to win similar orders with other captive finance companies after this second captive finance site has gone live. Likewise, we are creating more offerings beyond the transaction banking which we have been working on. Mobility is one.
    • I have talked about the other offerings that we are creating in data analytics, and that is what would bring in more revenue from our existing customers. So these are the three reasons I would say for our optimism.
    • we have mentioned that we do not give guidance. So I would not be able to give you any numbers, but I can certainly let you know that with the new release of our product, we are looking at substantial growth coming in; once all our customers are on our common product background. It takes 18 to 24 months to bring all the customers on to this platform. We would look for non-linear growth in the next 18 to 24 months.
    • Reasons for increasing profitability from 22/July/2013: Improving EBITDA margins. Being a product company, we do invest a lot in products. In the previous investment products, there is a charge to the P&L which is larger than the earnings in that period. As we mature, and with launch of platforms and increased revenues, automatically, there should be a hike in EBITDA. It has not happened for some time, but we do expect it to happen in the next 18 to 24 months.
    • Due to availability of large cash on balance sheet, the management can sail through the growth possible in the coming years with out going through debt or equity dilution or bonds.
    • Last but not the least, this is a pet company of a value investor who appears on CNBC TV 18. Whenever the stock appreciates more than its value, He may come on tv and talk about this company. Thus he more or less sets upper range for this company.

Disclosure: I hold

2 Likes

Nucleus software exports ltd

CMP 208 MARKET CAP 670 CRORES

TOTAL EQUITY OF 32.39 CRORES WITH 3.239 CR SHARES OUTSTANDING OF RS 10 EACH.

PROMOTER HOLDING 57%

The company providessoftware solutionsto the Banking and Financial services industry-from retail banking to corporate banking. The revenue receipts are grouped undertwo business segments-Projects and Services and the Products segment.

TILL FY 13 IT SUFFERED FROM stagnated revenues, lack of growth in revenues and profits, high research and development expenses compared to sales. But SINCE july 2013, The COMPANY SEEMS TO BE ON GROWTH WHICH IS REFLECTED IN THE NUMBERS SHOWN BY THE COMPANY.

A debt free company with 322 cr cash as on 31 march 2014.

Dividend pay upto 2012 around 2.5 rs. Dividend pay in 2013 3 rs. In 2014 Dividend pay again 3 rs with one time additional dividend of 3 rs on completion of 25 years.

Company is one of the best in corporate disclosures.

Recent developments

    • launch of our integrated transaction banking product suite FinnAxia.
    • geographical expansion into new markets like Australia and Europe.
    • Talent acquisition at various levels. Senior leaders from some of the leading global banksjoined the product and pre-sales teams.
    • Management comment: Whatas perhaps more important than the quantum of growth, is the quality of our business growth. We were able to get some large orders, expand some of our existing relationships and created a growth platform for coming years through our product focus.

Disclosure: I hold

HDFC Securities recommended the stock:

Valuing the stock at 9.5xFY15E EPS, we arrive at a price target of Rs. 242. We recommend investors to buy the stock at current levels and to average it on dips to Rs. 178â191 (7â7.5xFY15E EPS) for our price target over next one to two quarters.

http://www.indianotes.com/Investment-Idea/Nucleus-Software-Buy-at-CMP-and-add-on-dips-to-Rs178-Rs191/187982/13020046.00/C

A report by Deanalyst.com

Good to see a thread on Nucleus Software. I have invested in this stock and have sold some as the price rose. At CMP I am a watcher. I do think that there is decent growth possible given that co is looking to explore more developed markets. However, the risk is that the cost of expanding is higher in these markets at least initially which can give poor short term results. Hence I will pick this stock as the market prices it inefficiently.

Lastly, the fact that Vishnu Dusad bought 10 Lakh share at around Rs 200 is a big +ve and if insider is buying we can also piggy back of that.

Hi Rajeev,

Can u please direct me to the link which mentions that Mr Dusad bought 1mn shares. All i see is shares transfer from father to offsprings, 1mn qty.

I just did a quick go through, revenues are stagnant, that is ok if u keep on generating CFO and investing it wisely. This year too they have generated 66 crores, they have accumulated close to 300 crores of cash and liquid mutual funds, with no debt and macap of 714 crores, i guess they r selling cheap. But cheap for a reason, Nucleus is just accumulating cash, they could have gone for buyback, extra dividends, and lastly acquisitions. Why they din do it and still not doing it, puzzles me. In case they do not use cash, valuations willremain suppressed. They can emulate example of Sasken, company’s revenues are not moving up but they did a huge buy back and hadanounced dividends of 42/- per share in the last 2 years. Recently they have brought an outsider as CEO as well. Any views?

An update, as per latest annual report, 298 crores of cash + 25 crores of Govt bonds, total 323 croresare there on balance sheet. In case Nucleus repeats its performance of the last year and generates 60 crores of CFO, with minimal capex, as we r only 20 days short of 2nd qtr, they would have 323 + 60/2 = 350+ crores of cash with mcap of 710 crores. In case some outsider comes n acquires it, like in casre of Kale consultants, this company can be a cash thrower but if current management doesn’t change, things are gonna remain where they r currently i think. Views invited.

Just thinkingif cloud based solutions represent a challenge to a legacy company like nucleus in the medium term - in which case they could become a value trap.

We need to

croresare

Cloud is a technology. How can that be a threat to such a niche company which is having more than 25 years of domain knowledge. Just think about it. They are no 1 in their product offering.

I think Nucleus , after investing for last 4-5 years in the development of new products, is on the verge of high growth. We can already see the transactions happening as recently one of the largest African bank(U-bank) has started using their product.

Hi Raghu,

In technology, things change very fast and its extremely diffcult to establish a superior ability than the rest of ur peers especially if u r developing what can be developed just by throwing some money toward it. Cloud etc is being done by every tom dick n harry these days and u r correct in ur thinking that nucleus can become value trap.

My whole points is even if earninbgs expand in a big way and they do generate more cash in near future,they wont distributeitsovaluations will remain depressed.

Disclosure: I am invested.

The latest quarter results Q4 FY2015 (31 Mar 2015) are decent. I found out about this stock from the Dolly Khanna portfolio and bought it after some research. My note on the company from back then is at : http://www.igvalue.com/2015/01/members-review-nucleus-software-exports.html.

What I am wondering is:

  1. Given that this focussed on the BFSI segment does that make its risk higher than a TCS, HCL or smaller midcap like Mindtree?
  2. Over 65% of the revenue (on consolidates basis) from their own products makes them different from the average IT player.
  3. Their cost per employee is 11.9 L/year and revenue per employee is 24.39 L/year.
  4. Revenue mix is very different from the IT biggies as well - US does not figure in the top 5 geographies. India is the largest market (>25%).
  5. They mentioned on the conference call audio that the product is cloud ready.

Overall I find it difficult to see what the revenue growth will be. I think that the banking products space should make this company grow but its revenues have been very volatile in the past. Any inputs will be appreciated.

Thanks.

@igvalue: As per latest shareholding Mar-15 data on NSE Dolly’s name is not there in public shareholding, plz confirm…Thanks.

Yes. But notice that in the Dec-14 quarter Dolly Khanna was only 1.02% of the stock. If even if 0.021% of stock was sold the name would not show up on the shareholder list.

But on balance some stock was most definitely sold by Dolly khanna and I wonder if the good earnings release is good enough to counter that.
.

Hello All …

After a long time Nucleus Software has given a decent results

Nucleus Soft Q2 Net Profit Up 26.9% At Rs 13.7 Cr Vs Rs 10.8 Cr (QoQ),Total Income At Rs 95.6 Cr Vs Rs 90 Cr (QoQ)

Things again looking better I guess…
From the last time when this Thread was updated there have been many good Fundamental announcements too from Nucleus software too !!!
Anyone still tracking …

Disclosure:- holding a small portion of my portfolio since a year … stuck from 260/- levels !

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Its an interesting products business, but has a few weaknesses

  • ROE has dipped to <10% from 15-20% in past years.
  • +ve cash flow. Low debt.
  • Investments on new cloud & payse products are promising. New sales hires. Sales & ROE may pickup provided competition doesn’t catch up.
  • Telenos, TCS & Oracle have 2-3 times more customers in the crowded market with more than 20 vendors. * Some products like lending software has seen good traction over last 10 years but increasing competition may erode margins & ROE.
  • Disruption in global BFSI & Fintech industry may shakeup vendor rankings & marketshare…not sure how Nucleus will be affected.
  • 15-20% dividend payout is not mouth-watering. Perhaps a 2-3 year trading bet.
  • Long term fundamentals may remain volatile.

If bigger IT majors like Infy and Wipro continue to get hammered, they could be better & higher quality long term investments

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The company looks promising. The immediate next step is to check the promoter integrity. Would appreciate if anyone have some info there. So far, I don’t have much info on them. Next would be the employees working there and their profiles. 8k miles was a wake up call on that ( not invested). Not gonna invest in any tech unless I know promoter and employees working there :slight_smile:

From shareholding in Dec 2018, a few holding companies / subsidiaries that hold the majority of shares. Do we know the shareholding pattern in those?

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I was looking at the AR and the historical figures. Few observations:

  • They are investing quite a bit on R&D (about 29 Cr R&D out of EBITA of @80 Cr). This has been the trend for last few years. Hope the value is unlocked in near future

  • The book value of the company grew only by about 7-10% on an average, while ROE is about 10-15%. The company bought back significant shares last year and it caused the net equity to drop

  • The salary of CEO jumped by 57%. Still within the ceiling. There is also a new CEO with a product management background taking over the helm. Probably the jump is because the prev. CEO was the founder himself.

  • I remember the management mentioning in concall that they are comfortable in growing through “word of mouth” and dont want to do aggressive marketing. They seem to be conservative on growth part.

  • They are recruiting high quality professionals for software development. No concerns there. Have checked in Linkedin and Glassdoor.

  • The Annual Report seems to be very comprehensive. Did not find any intent on hiding stuff.

  • The client list is quite good and their slow and steady expansion is visible in the news search.

  • Latest news about CIMB bank (Malaysia) and CRDB (Tanzania) choosing Nucleus software.

  • An earlier business standard news article talks about various clients including Manapuram Finance.

  • A major shareholding is through “Karmayogi Holdings Private Limited”, which is a holding company for the Dusad family. You can look it up here. The holding company itself has existed since 1999.

  • They are also trying to push their new solution PaySe, which is a prepaid card that can be used for payments. Something similar exist in Singapore called CashCard. However, no revenue / expense visibility is shown in AR.

Overall, I did not find any red flags in the company.
My major concern is the very slow wealth creation over the last 7 years. If they do not grow their revenue & OPM, this could be just growing at 7-12% per annum. I just hope that the value will be unlocked in coming future.

Disc: Not holding. But seriously considering.

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@shyamdsundar you have chosen very good company for considering investment no doubt. But your expectations of R&D unlocking and more than avg returns in near future is little more to expect here.

I seriously don’t understand what they are doing with R&D because they have been in banking/lending apps/models for long and this is their regular business. Considering 30% EBITDA for R&D is huge.

Overall

  • conservative company in terms of growth
  • no red flags on Promoters
  • continuos dividend paying
  • very good cash positions and liquidity in terms of mutual fund investments. So they always have a very good other income

Disclosure: Was Invested in past. Will be interested buying on dips

2 Likes

As with many small-mid sized technology companies, the major risk is loss of capital as we do not have much of tangible assets and everything depends on the story told by management. With this company, I feel that the money is safe. But growth is non existent. So, it is more of heads I win, tails I don’t lose much. Just need to evaluate the win part more carefully. Seems like a 3-5 year play at a minimum.

Since it is a very conservative industry they are in, it could take a much longer sales cycle to put their products to work. And on top of it, the management is very conservative (which could be rightly so) with respect to growth.

If Nucleus Software’s products are better than their peers, that could be something that can be capitalized. But, I am not from banking industry and would really appreciate someone who had some first hand experience about Nucleus Software’s products and their growth prospects.

I am fine with R&D expense, as long as it results in revenue growth. But the story line is changing a bit too slowly. The AR of 2016 and 2018 looks very similar :frowning:

Found that they have IL&FS preference shares. Not sure if they are affected there…