I recently attended the AGM of SoftTech Engineers Ltd and following is a short writeup.
SoftTech Engineers Ltd is a product based software company based out of Pune engaged in the field of Architecture, Engineering and Construction Domain. It has a tremendous market share in the Automated Building Permit process through its product AutoDCR ( its investor presentation says 80%). However, there is another Bangalore based co which has a similar product but so far nothing compared to the reach and scale of AutoDCR.
SoftTech was formed in 1997 but was listed recently. Early on in its history it successfully developed and sold Struds (Structural Analysis Design and Detailing Software) and ESRGSR ( Structural Design for Water Tanks) to CSC, UK. CSC was taken over by Trimble, A US-based co based out of California. Trimble is popular for acquiring Sketchup from Google in 2012.
While AutoDCR is well known in the domain, a few months back its name came in the limelight when Ex Mah CM , Mr Devendra Phadnavis mentioned AutoDCR in a discussion.
Without the AutoDCR report building permits cannot be issued. The AutoDCR report is mandatory for the issuance of building permits in local bodies which have AutoDCR installed. Though there is a rule for manual scrutiny. Manual scrutiny takes about 200 manhours and only if there is a serious issue.
In 2019 AutoDCR contributed to 58% of its revenue.
Besides AutoDCR it has several other products chief amongst them are OPTICON ( Its ERP solution) and PWIMS ( Process management for Public Works Departments) which contribute to 6% and 28% of its 2019 revenue. Revenue from other products that are not its own forms 8% ( these primarily come from selling AEC domain products like AutoCAD etc)
Its other products include BIMDCR, Rule Buddy (which is in beta) and IBPS (a collaborative platform for Smart Cities). While PWIMS is doing well, Its thrust area is BIMDCR which they launched in Dec-17 (3D Building Information Model based Automation of Building Permits) as opposed to AutoDCR which is 2D based CAD process.
Existing AutoDCR clients can seamlessly transition to BIMDCR like MCGM (Municipal Corporation of Greater Mumbai), DOITC (Department of Information Technology and Communication) Govt. of Rajasthan and APCRDA (Andhra Pradesh Capital Region Development Authority) for implementing BIMDCR.
In the AGM the co mentioned its desire to expand the products outside India esp in the Asia Pacific and US market. In the sidelines post the AGM its CFO mentioned that even advanced nations like US, the building permits are done offline which was surprising. They have gotten into an agreement with Sputnik Consulting Sdn Bhd, Malaysia in 2019 to sell its products.
The other change happening is in the underlying revenue model of the co. Since a large % of its clients are local government bodies ( Public Works dept and Urban Local bodies), the co is making efforts to transition from a transaction-based to a direct revenue model. The co recently won a contract from UP local body where the money charged for approving building permits will be directly credited into its account instead of the earlier system of collecting from the govt which is the cause for the receivables. This transition can mitigate the issues that it faces in collecting from govt. The mgt was frank enough to admit the receivables issue in the AGM.
The other trigger is that recently RIB ITWO Software Private Limited agreed to advance 14Cr as an optionally convertible loan to SoftTech. RIB Software is a German MNC which provides BIM solutions globally. The terms of the agreement provide for issuance of equity shares upto 10% of the equity in case conversion takes place. For a small co like SoftTech it is interesting to see a German co in the AEC domain advancing a large loan with an intent to convert into equity. In 2018, the R&D exp of Rib Software was 21% of topline with 395 employees out of 1038 engaged in R&D. Its a profitable co with a Net Margin of 16% and EBITDA margin of 28% in 2018.
As far financials are concerned, the co has a net margin of ~12% and an EBITDA margin of ~25% in 2019 with an ROE b/w 12-13%. Its debt will now increase by 14cr post necessary approvals are taken. Its 2019 D/E ratio was 0.21. Receivables formed 17% of its topline in 2019.
H2’2019 v/s H2’2018 results have shown that topline declined by ~9% and due to the fixed cost structure of the co earnings before tax declined by 50%+. However, the co hasn’t yet posted the reasons for decline in topline and my understanding at this point suggests that it maybe due to some seasonal effects in building permits issuance.
Some of the risks i could identify are
- Cyclical nature of the real estate business will impact its topline
- Collections from govt can be a problem
- Too many products in the pipeline and more focus on product engineering than marketing and sales.
- If AutoDCR has too many error reports, the scrutiny can be offline. It happened in Nasik where builder body was dissatified with AutoDCR error reports and matter was escalated.
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Bheeshma
Disc : Invested