Publishers Man Friday
Major publishers shift concentration to content creation and outsource all allied functions to prep for the digital age. – DEC 2012
Over the 42 years of dominant presence, MPS has evolved to be a trusted partner of publishers at every stage of the publishing process. With publishers wanting to focus on real time content creation across all stages, outsourcing of the ancillary activities is rising fast, giving the content creators the advantage to publish in time for the digital age. MPS is a full service publishing partner handholding major publication houses to deliver the most time sensitive functions to the most mundane functions, in a package that makes its services highly profitable and sustainable.
The publishing world is going through a paradigm shift, with “digital” being the core of every decision and “on time” being a part of almost every activity, consolidation has become commonplace. Big players are getting bigger and many small ones are shutting shop. In a time like this MPS stands tall due to its reputation as a peer for many years and now as a partner for the most able players.
Having significantly reorganised the business post the acquisition by ADI, MPS has put its house in order and seems all ready for take off.
Strengths
Outsourcing was primarily an activity indulged in, to shift parts of operations to areas where the overheads were lower, to significantly reduce the cost of the product. However as more players queue up for oustourced services from countries like India and the Philippines, Knowledge and Technology are the most coveted qualities after cost reduction.
MPS has a 200 member team wholly focused into bettering publishing technology, doling out new platforms and cloud based applications for publishing technology.
As MPS is now distinct from Macmillan Publishing many of its peers which were once weary of giving work to their competitors have begin to employ MPS for its services.
With over 2600 employees, Freelancers across the globe, 8 production facilities and a Sales office based out of Portland, Oregon, MPS has a worldwide network and has the history and relations with top publishing companies for over twenty years.
Of the 7 big players in the worldwide publishing companies 3 of them account for over 45% of MPS current revenue.
MPS is a full service company handling the most complex and simple tasks enabled with proprietary “MPS digiCore” technology.
Having created 10 million journal pages, 8 million digital pages conversion a year and dolling out 1.2 million pages of books and major reference works MPS has tremendous experience int he sector.
MPS revenue is 100% foreign exchange revenue. A depreciating rupee is only good for MPS.
CAPEX investment in could based services is completed. Whats left of the process is to simply harness the investment.
Growth Drivers
Over all content creation in the world is increasing in geometric progressions, mainly due to new tools that ease creation and more so due to the alternate mediums of distribution. Education is going the Open University route, texts are getting interactive, and content across races and countries are being translated, thus erasing the language barrier, and multiplying content for universal access.
Digital READER based content consumption is on the rise across the world.
Publishers want to move away from the step by step publishing process and complete all tasks simultaneously making publishing a tech driven process.
There are just 5 companies offering similar services with turnover of more than 150 cr. The opportunity is large.
Publishers in the US, faced with near bankruptcy due to the overhead costs want to concentrate purely on content creation and outsource all other functions, critical or mundane.
MPS, with its strong balance sheet plans to grow inorganically in a few areas where it does not have presence.
School education is a hugely untapped market and is undergoing rapid change due the accessibility of newer and more efficient learning methods.
Indian business is still not of the right size to drive volumes, but when it matures, MPS should lead the change.
MPS also plans to lease its technology for a fee, allowing a faster capex recovery.
Concerns
There are no more cost secrets. Publishers are informed about the costs of developing countries and take into consideration the currency advantage that outsourcing agents are likely to have while fulfilling the contract. Free lunches due to information are therefore passé.
As consolidation happens and smaller firms go out of business, they are likely to damage the industry by undercutting mundane tasks and literally erasing all margins on the same. MPS has a policy to stay away from these service individually and participate in rendering these service only if they are bundled with more profitable and knowledge driven services.
Acquisitions for pure labor cost advantage are a thing of the past.
There are just 7 large players(publishers) in the world, any significant problems with a single one or a few of them can permanently damage the income stream of the company as MPS derives 43% of its business from its top 3 clients.
Since 100% revenue is in foreign exchange, and only 65% of the exchange is hedged as a policy, foreign exchange losses can creep into the profits.
Financials
MPS is likely to close the year with sales over 180 cr as the Dec quarter is its best quarter.
Due to available MAT credits the Tax rate is likely to be 26% for the next two years.
The company plans to become debt free by FY13 wiping out its existing 5.5cr debt from accruals of the current year.
MPS operates at a EBITA margin above 25% and is likely to sustain the same over the current year.
MPS is sitting on cash investments of 21 cr as on date and plans to use the same for inorganic growth.
The dividend policy is not in place, but the company has paid dividends of Rs 7 per share till date for the current year.
Mps has a sustainable income of 4 cr a year from rental properties in Residency and Brigade road in bangalore.
With sustainable PAT margins of 18% the company should end the year with a PAT over 30cr.
Employee cost will continue to be 20cr a quarter for the next 4 quarters.
Valuation
Currently the shares are trading at Rs 116 a share on the bourses which translates to a PE of 6.8 to a forward EPS of Rs 17 for the FY13.
The industry PE is 15.72. Recent deals have valued companies in this space between 9 and 11 times EBITA, which translates to 405-495cr MCap and between Rs241-Rs294 a share, a 100% growth from the current rate.
Given the competitive advantage of a 42 year old brand history and superior publishing technology, MPS is rated as a BUY at the current market price.