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Very often reputed companies get so burdened with their own ego and comfort zones that they begin to choke their margins unknowingly and if not rescued in time, die ! Some however meet people like Nishith Arora who not only bring these companies back to life, but make them super healthy.

MPS has had a great run since Dec 2012 and has been blessed with a depreciating rupee. Before you simply write off their success as pure luck, remember that the entire IT/ITES sector is riding on the same “luck”. While this moat seems temporary, i wouldn’t be too bothered about it in the near future as the Congress has us screwed for at least another 2 years.

With rules of not spending more than 40% of sales on manpower cost, operating mostly out of own premises and paying little in terms of marketing costs – all the theories of marginal costing are at play. With current strength of 2,600 employees and 1,400 empty seats at Dehradun, MPS is set for at least another 2 years.( About the same time the currency might correct).

An often ignored aspect of the company is that it has 72,000 sqft of commercial space in the heart of Bangalore city that is worth at least 65-75 crores. ( 45,000sqft used in Residency road and 27,000 sqft unused in Brigade Road.)

Investments into platform technology continue and the Digicore platform has begun to be put to use. However, no big bang profits are expected from the lease of this technology in the immediate future.

The Element LLC business seems to be falling into place with the 20 people that MPS took over. No revenues have been merged with MPS during the quarter.

The Philippines are the companies closest competitors, but given its proximity to natural disasters, i would choose India any-day.

The current revenue break up is 32% journal, 28% Books ( both have similar margins) and Digital 12.3% ( highest margins) rest – others. There is tremendous volume growth opportunities in all of the segments.

Here is the best part, ADI is not ownership obsessed and is willing to raise money through their stake sale in case the company wants to make some big bang acquisitions. Therefore, its dividend time for all of us till then. The market loves dividends, which are the worst form of shareholder reward, but hey, it gets people excited.

I expect the company to clock about 185-190 cr Sales during the year. With NPM of 30% that translates into a PAT of 55cr. However reduce that by another 10% to write off the ELEMENT Goodwill( cost unknown) which yields a PAT of 50 cr.

With the stated dividend policy the company could easily trade around15 times earnings allowing a MarketCap of 750 cr or Rs 446 a share. Discount that by 20% as MOS for exchange rate fluctuations(conservative) and you still get a Price of 400Rs a share.

Time to pick up at 330 ? You bet. Its already up2.8x from my first blog in Dec 2012.

2 replies on “MPS Q3 FY14 – Lessons in Marginal Costing

  1. I missed this company as not tracking very closely. Thanks for the post.

    I feel being ownership obsessed is not bad. Growth without equity dilution is much better.

    Instead of diluting equity, they should reduce dividends if buyout is planned. Dividends + dilution will make investors poorer and make govt richer with 15% DDT. Buffet has emphasized this point.

  2. Lalit, when a company’s ROE is higher than 18% it usually make sense not to pay out dividends, especially when we have DDT. I wish the Indian public understood this. However, distribution of dividends ensures the ROE high, keeps the market valuations high and the overall sentiment on the stock high.

    I’ve also noticed that when promoter holding is high in indian companies, dividends also tend to be high.

    About you having missed out on the opportunity, i would urge you to think again.

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