Initiation Call

Q3 results discussion

Nishith Arora has systematically turned around the business with ease and panache. He has framed rules of keeping employee expense under 40% of sales, done away with expensive locations, kept only Dehradun as the only option of expansion, concentrated on increasing services in the geographies he is already strong, mined clients and more importantly, did not spread himself too thin. He has also greatly increased investor confidence by being transparent, paying dividend and providing as much clarity as he can on the company.

2014 ended much in accordance with the guidance given and has promised an even more exciting future for the company.

While most of the developments are listed in this Earnings Presentation, MPS Q4 FY14 Investor Release copy , this is what i am totally kicked about.

  1. On an EPS of Rs25, Rs17 was paid out as dividend.
  2. 29cr is being kept in cash for possible buyouts in the near future. These buyouts can be in the range of 10-60 cr. With an expert in turning around business and most of infrastructure ready, all that needs to be bought out from dying businesses are their client lists.
  3. Bangalore building on residency road worth 45 cr will not be sold. Brigade road building has been put on sale for about 30cr.
  4. Client mining is in full swing. With American and European markets recovering, and with the Modi govt creating larger India confidence, these clients will be here to stay. Cost of increasing business with existing clients is almost NIL.
  5. No significant dollar threat i.e rupee depreciation threat as that could kill the entire IT industry. In fact with the impetus that the Modi govt has on employment, i would not be too surprised to see the tax rate on Export oriented & labor oriented companies come down.
  6. MPS has ability to service 23 languages and has occasionally done work in Asia. Till now, Africa, Asia, and South America have almost not been touched.
  7. The Digicore Platform is gaining speed and acceptability. MPS has already deployed this amongst a few of its top clients and hopes to have the patented platform ready for commercial sale in 2017, unleashing a completely new, parallel revenue stream.
  8. With 2,767 employees today, MPS has decided that most of its future staff additions will be recruited in Dehradun. The Dehradun campus houses only 700 employees today, however, it has a capacity of 2000.
  9. The Elements LLC business has been consolidated for just one quarter. The revenues from this business will kick in this year. It might be a little drag on the margins, but will definitely contribute on an absolute basis.

Assuming that the company will grow at 20%, Fy 2015 PAT should be upwards of 50 cr. At the CMP of 325, the company is trading between 10 and 11 times FY2015 earnings, and 13 times FY 2014 earnings. With a management that has proven itself in its ability to turnaround, zero debt, a 1.5 billion dollar indian market in publishing that is set to expand by at least 15% per year, a low rating due to rupee appreciation fears, it is an absolutely opportune time to get in yet again.

At a 50cr PAT and 15 times earning, MPS should trade at at least 450 by the year end. This is obviously ignoring that 30+ cr it may gain from the sale in the Brigade towers property in Bengaluru.

If this still does not excite you, i don’t think much else would either.


One thought on “MPS Ltd – FY 2014 Results Discussion

  1. My problem is that is this a low end word crunching job that has got a lift thanks to Re depreciation, also if there is no moat / pricing power wont competition be severe or is the business opportunity so large that this is a volume game? How is this comparable to say RS Software which seems some what better placed on the value chain? Nice blog happy to see some stocks that i own discussed RS Soft and Heritage !

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