Subex Ltd. - Possible Turnaround?

Stock Opportunities
1

Am sure everyone knows the disaster that Subex has been post 2008. This is more about a possible turnaround. There are a lot of obvious red flags as well as green shoots.

Borrowing steadily down from Rs.1089 Cr as of Mar '09 to Rs.229 Cr as of Mar '16.

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Going by the interest payment quarter on quarter in FY17. The borrowings must have reduced much further. Interest payment in Mar '16 quarter is Rs.9.30 Crores but in Dec '16, the interest payment is halved at Rs.4.56 Crores which means that the borrowing must be under a Rs.100 Cr now.

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The obvious red flag is the increase in share capital from 2008 to now. From 34 Cr to 502 Cr! There is further equity dilution and FCCB conversions that are pending which are going to further muddy the waters. I believe all these are already in the price. The stock trading at a P/E of 7.88.

Looking at the quarterly results again, you can see that sales is on a steady climb, OPM for recent quarter is at a healthy 28.84%. If the company posts profits for Q4 FY17, the TTM EPS is bound to go up considering the losses in Q4 FY16. The downside I feel is very, very limited but there is a significant possible upside if the company keeps in the green and coasts through the FCCB headwinds. Time will tell.

Disc: Invested from 10 levels.

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2

The company has recently allotted equity shares on preferential basis to the tune of Rs5,60,00,000/- to Foreign Investors at the rate of Rs 14/- (including a premium of Rs 4 per share).
Though the margins of the company are attractive , the bloated share capital leaves very little scope for accelerated increase in earnings per share. The last tranche of conversion of FCCBs were done at Rs 13 per share and there shall be a huge supply of these shares on account of such investors who are seeking an exit post the allottment upon conversion of FCCBs.
I am invested since past one year at Rs 9.40 levels and am holding patiently

3

If the company posts a healthy Q4, it would mean four consecutive quarters of good performance. With the debt almost gone, if the company is posting good profits, they can probably look at a buyback or find a investor. Could be an interesting investment over the next 2-3 years. Let’s see.

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Pls refer to the latest interview given by Mr.Surjeet Singh

From the above it is very clear that the management has done a good job in clearing out its past mess and working towards a profitable growth strategy. The preferential capital will mostly aid towards inorganic growth…

However having said this key concerns remains the bloated equity which doesn’t augur well from ROE and EPS perspective…

Having said this this is one to watch for a longer term perspective…

Disclaimer: Invested with no transaction in past 30 days. These are purely my investment strategies and not a general recommendation of buy or sell. Please do your research before investing.

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One key question is whether this is cash revenue or mere accounting . Check receivables which is piling up

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The company seems to be writing off what it considers as trade receivables gone bad and/or adjusting it against its payables from the same entities. It looks like all of the payables and receivables are against its own subsidiaries and the payables are more than the receivables in each case. (Page 115 in AR FY16). Am no expert but this doesn’t seem to be good but maybe not too bad either.

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Long term debt seems to be between 10-15 million. Also, Subex seems to have won a multi-million dollar contract with BT (British Telecom).

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Interesting to note they have amended the MOA for increasing the share capital by issuing preference shares way higher than CMP.

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Well 100% of owners shares are pledged, big red flag for me.

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The promoter holding is only 0.19% in the company which is 9.74 lakh shares - all pledged. This company has enough and more red flags, as is the case with most turnaround companies.

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11

What are the exceptional items in Q4 result P&L?

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Its surprising how theres NO followup discussion on this stock for well over 2 years now!

And i guess a lot of things have changed over the last 2 years which, on the contrary, should have evinced further interest in discussing the stock. After going thru the recently released Annual Report, i list down some of my observations as hereunder, hoping other forum members to catch upon and discuss further.

The last 2 years were marked with some interesting developments, starting with:

Induction of fresh blood

Fresh talent was brought in and the old team was reorganised which, hopefully, should address issues around corporate governance and business strategies that was plaguing the company earlier.

  • Mr. Anil Singhvi gets appointed as the non-executive Chairman of the company in May ’17. For those uninitiated, Mr. Singhvi is the founder director of the proxy advisory firm IiAS (Institutional Investor Advisory Services), a firm dedicated to providing participants in the Indian market with independent opinion, research and data on corporate governance issues as well as voting recommendations on shareholder resolutions.
  • Mr. Vinod Kumar Padmanabhan, serving with Subex for more than 20 years, gets appointed as the MD & CEO of the company in Apr ‘18
  • Mr. G S Venkataraman, with more than 25 yrs of experience in the finance field (last 12 years in Mindtree), gets appointed as the CFO of the company in Sep ‘18
  • Mr. Rohit Maheshwari, with over 20 yrs of experience in consulting, data analytics, business development, sales & delivery (of which 17 years with Subex), gets to head Strategy and Products in the company in May ‘18
  • Mr. Shankar Roddam, having worked with Subex for 10 years where he was part of the executive team in the capacity of head – Emerging Markets and played a key role in establishing and setting up the Sales and Channel network in emerging markets, returns for a second stint (from Plivo) as a COO of the company in Oct ’18.

Formulation of a new strategy to take care of growth, over the longer term

The new team formulated a three-horizon strategy where

  1. List item

Horizon 1 – focus on core products (to take care of growth over the immediate term)

  • With the exceptional performance in Horizon 1, put in place last year with their core products, the management claims to take on a more aggressive outlook to further expand their market share, y going after the smaller players in this fragmented market with an enhanced portfolio.
  • This, in their opinion, should result in a growth rate higher than the previous year.
  1. List item

Horizon 2 – focus on newly launched products with huge potential (to take care of growth over the immediate to medium term)

  • This consists of products in areas pertaining IoT security and analytics
  • These products have already been proved in the market place and the management intends leveraging on the large market expansion
  1. List item

Horizon 3 – focus at aspirational growth areas and big impact use cases (to take care of growth over the longer term)

  • To take care of their long-term growth, for the next 3-5 years, the management hopes for a sustained growth in the sales of existing Horizon 2 products and from some newly launched Horizon 3 products
  • Their Horizon 2 and 3 products, such as IoT security and Anomaly detection, cater to an extremely large and growing market segments, in the managements opinion, which they hope to translate into significant revenue drivers going ahead.
  • The management also claims that their subscription-based revenue model from these products to start contributing significantly (in the next couple of years)

Enforcing accountability and monitoring

The CEO has guided fast tracking selected components of their strategy to pursue a more aggressive growth. And some messages delivered by the CEO, in the annual report, implied accountability that the management intends attaching to their strategy.

  • They have apparently broken down the strategy to specific Annual Operating Plans (AOPs), which is further simplified into what each team will have to work on.
  • The management claims to have initiated an OKR (Objective Key Result) system which explores objective and key result areas to be achieved in 90 days which would eventually help the team to keep focus on vital goals, amidst daily operational compulsions.

In the same context, some examples were cited to display the effectiveness of these strategies - new business acquisition apparently was the strongest in Q4FY19, resulting in a 30% increase in yearly order booking; building on the competitive advantage in the IoT security space by enhancing and extending our honeypot to top research institutions in Singapore, Spain and the UAE etc.

Inducting financial discipline

A look at the movement in some key financial metrics, specially over the last one year, look encouraging… hinting at some success in the strategies implemented so far

  • EBITDA to Operating Cash flow grew to 85% in FY 19, from 40% in FY 18
  • EBITDA to Free Cash Flow grew to 79% in FY 19, from 34% in FY 18,
  • Days Sales Outstanding (DSO) for FY 18-19 coming down to 100 days versus 120 days in FY 17-18.
  • Efficient collection of receivables and optimal utilisation of cash has reportedly helped them to report good growth in operating cash flow and improved Days Sales Outstanding (DSO).
  • 0 Debt - Having come out of the FCCB loans and related overhang which was on the balance sheet of the Company, they incrementally intend working on strengthening the balance sheet. The company has paid off Working capital loans from its banking partners in entirety, in Jan ‘19. As per the CFO’s guidance, the company intends looking at addressing their large equity capital base and make the balance sheet lighter
  • The company has invested close to Rs. 14.7 Crores in IoT security and Analytics offerings – implying the intent of the management to invest into build required skill sets and capabilities for the newer businesses
  • On the cost front, company is constantly monitoring and controlling IT costs using Cloud technology. At the same time, company will continue to focus on significant costs including Payroll and Travel costs and look at ways to optimise this further

These initiatives are apparently targeted to sustain profitability, without having to deviate from their focus from growth in their chosen areas.

While i shall continue to read and post my observations/comments in this forum, i would appreciate if other members (specially those who have been tracking this earlier) exchange their opinions as well.

P.S.: Ive initiated some small tracking positions in this stock.

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15

Thanks for posting. The problem with Subex is that the market sentiment is unfavourable. The other issue is that the free float is too large and unless there is a HUGE positive change in the quarterly earnings, there doesn’t seem to be much hope over the short-term. Moreover, the Small-Cap space is being ignored by institutions and Subex is a micro-cap.

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Hi ysk… I understand where you are coming from. That said, i would try and understand the impact of what they are attempting to do (which is in my control), rather than trying to forecast on whats beyond my control (sentiments, institutional disinterest etc). All i know is that eventually fundamentals drive interest, which then drive the price…either up or down. As far as the free float issue is concerned, the fact that they themselves have acknowledged it and have guided to address it gives me a lot of comfort.

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17

You misunderstood, I am long the stock since the last two years. Every thing that you have stated is known to the market. What I meant is that unless there is a sea change in the sentiment, I don’t expect the market to take cognisance of the change in the fundamentals.

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Hi @padi @ysk both are correct , I read somewhere in moneycontrol forum that altruist Group is interested in acquiring stake but couldn’t find any news regarding that.
Do you guys have any idea about altruist group?
https://www.thehindubusinessline.com/companies/altruist-group-acquires-it-firm-secova/article27164832.ece

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Thanks for the update, I don’t follow the forums. As a result, had never heard of this snippet. Subex is an attractive takeover target, no doubt about that. But, who will bell the cat? As per their ratios and FCF, it should be quoting closer to Rs. 10 and not languishing at Rs. 5. Apart from sentiment, there is only one explanation and that is the market knows something that I don’t. Or, an alternative explanation is that the market doesn’t trust the guidance of the management and is waiting for the numbers to show growth. Despite a clean balance sheet, the growth in the top line is sub ten percent. But If management guidance is to be believed the growth metrics will show up in the next six months. That’s my analysis, but I am open to any other thoughts and would love to be corrected.

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Alturist aquiring stake in Subex has not come to my notice. That said, im not sure how seriously should we take random news/rumors posted on MoneyControl message board. Its a free-for-all board and anyone can write anything on the MMB without any accountability.

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From whatever i’ve understood so far, most of their current revenues are derived from the core products in the telecom industry. With the sector facing headwinds, growth from this offering seems challenging (which the management themselves admit) and hence the strategy to gain market share (to spur revenue growth). The call possibly is on how quickly can the company manage to scale up their revenues from the newly launched, but scalable, products in the IoT and digital space. News flows of success and revenue ramp up / client wins in that direction would, probably, determine stock price in the near term (assuming the hang over of the huge equity base as a continued dampner).

That said, speedy and effective execution of strategies penned down by the newly inducted team would be another factor closely watched on.

Thats my read, so far.

22

I now understand where this inference would have come from. ‘Alturist Technologies’ have apparently purchased 65 lac shares from the secondary market in the quarter ended Mar '19! They have trimmed some positions (~ 4 lac shares) in the June qtr though.

This is as per the BSE shareholding data. This is just FYI.

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