Is MPS being smart or stupid ?

Today was a particularly exciting day for MPS as they announced their Q3 results along with a second interim dividend of Rs 10 per share. They also passed an enabling resolution to issue securities for QIP upto 150 crores, The market, keeping in line with its eccentric reputation lived up to it by dropping the share price by 8% the moment they heard QIP.

Here are the takeaways from the Conference Call.

• Q3 last year was an exceptional year for MPS as a lot of extra’s were scored. This year, without any of those extras, they beat their performance by 12% increase in sales and 6% in operating profit.
• While the number of publishers are not growing, the market size in terms of players is stagnant. However, the degree of consolidation and outsourcing is growing and that is the biggest tailwind that MPS has enjoyed over the last 3 years.
• There is a major amount of disruption waiting on the shores in the education industry. I strongly suggest you read what Damodaran has to say about this : http://aswathdamodaran.blogspot.in/2014/09/the-education-business-road-map-for.html
• While the word disruption can immediately raise ones antennas, more important than the change itself, one has to see which side of the change one is landing up on. MPS seems to be on the right side. With its DigiCore platform and their focus to make things cheaper, faster and easier, they themselves are a part  of the so called disruption taking place. There will be an effect on the business if and when the entire industry changes, but I am pretty sure MPS will take only a temporary hit only to emerge stronger with a larger advantage that before.
• MPS continues to have a high client concentration with its top 10 clients giving them 85% of their business. But again, it i think this should be complimented rather than penalised as they have been able to mine existing clients.
• They have successfully implemented Digicore in 2 of their top clients, however, the strategy going forward seems to be to target much smaller clients across the globe. This allows larger margins and also is sort of risk free as MPS is in fact using them as guinea pigs 🙂
• There has been much talk about the QIP placement of 150 crores. MPS has paid/ announced over 50 cr of dividend in the recent years. They can easily raise money with debt or just not distribute dividends and acquire companies instead of the QIP. Here is why i think it is a good idea.
  • Waiting 3 years might not give MPS the benefits of consolidation tailwinds in the industry today.
  • A PE fund will hopefully only strengthen the management.
  • At a 1,000 rupees a share, the share price is probably a little frothy, but then isn’t it the best thing that can happen when you want to raise capital.
  • The most important thing however is that Nishith Arora clearly mentioned that the acquisition/ acquisitions will be EPS ACCRETIVE and will increase NEW CUSTOMERS and NEW SERVICES. I have no reason to be unhappy if he keeps his word.
• MPS currently employs 2,862 employees with 1,000 of them at Dehradun.
• Publishers continue to have a TOP-DOWN interest in consolidation and outsourcing and this will keep the tailwind going for MPS.

At 900 rupees a share an approximate EPS of about 36, MPS trades at about 25 times FY 15 earnings. Not cheap if all they planned to do was to keep returning the spare cash as dividend, but having observed Nishith Arora, i think it is time to hold on to your seats and wait for the next Quantum leap. Yes, there can be an erosion of stock prices of about 20% from here, but that is not the question, the question is what will it be if the new acquisitions work out.

Don’t want to take that risk, go buy HDFC bank.

I’m staying put.