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IT Products Sector Outlook
Neutral
Stock performance (%)
1m 3m 12m
CNXIT 4.8 7.3 4.5
Sensex 1.8 (6.7) (1.6)
Date Oct 5th, 2015
Market Data
SENSEX 26221
Nifty 7951
CNX IT 12032
Relative performance
SRIVATHSAN RAMACHANDRAN, CFA [email protected] +91 44 4344 0039 AISHWARIYA KPL [email protected] +91 44 4344 0040
Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset
Page 1
Sector Update
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Sensex Index CNXIT Index
Software products: Restart Enterprise technology landscape is undergoing a massive change with heightened focus on digitizing both customer facing and internal process of a business. This shift is providing an opportunity for India based software product vendors to fulfil their respective aspiration of global software product firm. In this note, we explore five India based product firms which has undergone substantial restructuring across business parameters. We believe the opportunity for these products to evolve into global software vendors is true and some of the firms are having the right building blocks. Ramco and Intellect Design in our opinion have a head start to Majesco, Subex and Nucleus across a number of parameters.
Tectonic shifts in enterprise technology provide opportunity: Digital technologies are reshaping the enterprise technology landscape and companies across industries are looking to reinvent themselves with the aid of technology. Mega trends such as Software as a Service, Predictive Analytics and Automation are driving enterprises to bolt on best of breed products. Some of the large incumbents have not made adequate investments in reorienting the products to cater to the changed requirements of enterprises. Other large players such as SAP and Oracle are acquiring newer software firms to catchup with new generation firms such as Salesforce.com.
Large market with leaders having low market share: End-market catered by the firms showcased in this report are predominantly operating in large global markets with no clear dominating players (except for HCM SaaS). BFSI software especially is highly fragmented and with large number of banks still using core systems built in 1980’s the need for bolt-on products have increased substantially.
Indian firms have evolved: Indian products firms have been around for a while either as standalone entity or part of services firm, however have not been able to make a meaningful mark owing to various reason. Over the last three years restructuring have taken place across these five firms in various forms. In Ramco, an external CEO has brought focus to the product and go to market strategy. Majesco and Intellect design were demerged from services companies with management principles different from their erstwhile services avatar. All five firms have been catering to clients in their respective end markets for over a decade, thereby building up significant reference sites, domain, technology and client specific know how enabling an improved competitive positioning.
Early times still: None of the firms researched are dominant players in their category and are much smaller than their rivals. Sustained investments would be need to ensure sustained high growth and this would result in low profitability. Revenue growth would be key driver of value and given low profitability we prefer to use EV/Sales as our valuation metric, We note that valuation differences are huge in comparisons to global players. Sustained and predictable revenue growth would rive multiple convergence in our view
IT Products Sector Outlook
Neutral
Page 2
Valuation of product companies
Year end M.cap (USD) EV (USD) EBITDA margins (3 yr)
EV/sales EV/EBITDA
CY Y+1 Y+2 CY Y+1 Y+2
Temenos 12/15 Y 2,781 3,229 18.7 6.9 6.1 5.5 17.7 17.5 14.9
ACI Worldwide 12/15 Y 2,488 3,246 13.0 3.2 3.1 2.9 14.4 12.3 11.1
Bottomline 06/16 Y 1,030 1,045 -1.3 3.2 2.9 2.7 25.8 13.8 11.9
Ifs Ab-B 12/15 Y 889 851 8.8 2.4 2.1 1.9 13.4 12.2 11.1
OFSS 03/16 Y 5,087 4,519 35.6 7.6 6.7 6.0 19.2 16.2 14.4
Guidewire 07/16 Y 3,734 3,163 6.5 8.3 7.7 6.9 109.8 43.5 33.7
Innovative group 09/15 Y 732 657 5.9 2.1 1.8 1.7 16.3 9.7 8.7
Cornerstone 12/15 Y 1,789 1,792 -21.4 6.8 5.2 4.1 NM 110.0 73.0
Salesforce 01/16 Y 45,824 45,038 -4.5 8.4 6.8 5.6 80.4 34.2 27.1
Workday 01/16 Y 13,221 11,817 -34.4 15.0 10.2 7.4 NM 172.6 93.3
Ultimate 12/15 Y 5,117 5,012 10.0 9.9 8.1 6.7 68.1 33.7 26.6
Netsuite 12/15 Y 6,632 6,518 -13.4 11.7 8.8 6.7 295.9 133.9 393.3
Intellect* 03/16 Y 281 237 -17.1 2.6 2.1 2.0 NM NM 57.9
Majesco* 03/16 Y 104 98 0.4 1.3 0.9 0.8 NM 8.6 7.1
Subex* 03/16 Y 30 131 18.5 2.4 1.8 1.6 10.2 7.4 6.8
Ramco Systems* 03/16 Y 319 308 9.0 5.5 5.1 3.8 28 20.8 15.0
Nucleus Software* 03/16 Y 114 69 17.0 1.3 1.2 0.9 6.9 6.1 5.4
Valuation
*Spark Estimates, CY is trailing year
IT Products Sector Outlook
Neutral
Reference points: Being part of critical IT infrastructure, it is more difficult for product
companies to get clients on board than service companies. Indian IT product companies have struggled for a long time to gain presence in the developed economies. Overtime, IT product companies have established strong reference points with Majesco and Intellect faring better than other IT product companies in developed economies. Eg. Intellect Design Arena has JP Morgan, HSBC, Bank of Montreal, Barclays as strong reference points for its iGTB product
System integrators play a huge role in markets where Product vendors doesn’t have any significant reference points
Ramco Systems has the maximum SI vendors among Indian product vendors which has been the prime reason for the company’s strong wins in Australia and other developed economies especially for ERP and HCM products.
Internal restructuring: Products companies in India were run with a service mindset and lower
investments in Sales and marketing. Most of the sales people were promoted delivery personnel. Led by repeated failure, most product companies have revamped the entire sales structure by hiring sales people from international peers and customers. They are also voicing out for S&M expenses to be higher than 17-18% of total revenues.
Eg. In the last two years, Intellect has hired > 50 sales guys and established geographies heads (from Fundtech, Lloyds and JP Morgan) to aid the product heads in winning new deals. Majesco and Ramco also have made substantial addition to their sales and solutioning capabilities
State of Technology: With most of the Indian product players having a product refresh / being
launched in the recent years, they have the current SOA while most of the erstwhile global product companies run on 90’s technology. Eg. Guidewire did not have a SaaS based P&C policy admin system until this August while Majesco launched a SaaS based product last year.
Current technology includes − Java/ .Net enabled architecture − Integrated across all OS/ devices including PoS integrations − SaaS or Cloud based product − API’s to make the product technology agnostic and aid data extraction
from every existing system − Raise deployment model flexibility & configurability − Incorporation of Big data Analytics & customer feedback into systems
Changing industry trends: Digital technologies and reduced time to market, are forcing companies
across industries to opt for products that could support the entire spectrum of data without making changes to the core legacy/ existing systems. Increasing necessity to invest coupled with cost pressures have pushed companies to adopt bolt-on software which creates the digital experience and seamlessly integrate data from existing systems.
Demand for package software in the BFS sector alone is expected to reach US$ 10 bn from current US$ 7 bn in the next three years.
With current state of technology coupled with connectors for data integration, Indian IT product companies are well equipped to capture this wave.
Banking products space: Temenos, Finacle, TCS BanCS, OFSS, Fundtech, Bottomline Technologies, ACI Worldwide, FIS, Misys Insurance players: Guidewire, Innovative Group, CSC, Oracle, StoneRiver, Sunguard,FiNeo s HCM/CRM: Salesforce, Workday, Peoplesoft, Netsuite, Advent, Cornerstone, Ultimate, Concur Telecom: Wedo Technologies, cVidhya Networks, Razorsight, TEOCO
Key Global Competitors
Why IT Product stories from India are turning attractive now?
IT Products Sector Outlook
Neutral
Market opportunity for Product companies
Source: Company, Industry Reports, Spark Capital
BFS Insurance
HCM SaaS ERP SaaS
Telecom Revenue Assurance
0%
5%
10%
15%
20%
25%
30%
Indu
stry
Gro
wth
BFS products is the largest market with core banking being the largest sub-market. The US$ 25 bn market is expected to grow 4-4.5% in the coming years
Demand for SaaS enterprise applications exceeds on premise demand by five times and is expected reach US$ 50.8 bn by 2018. The fastest adoption among SaaS is CRM, HCM followed by ERP. HCM SaaS is expected to grow ~25% primarily aided by Core HR and Payroll. ERP SaaS is expected at a CAGR of 20%. Global Aviation M&E market is estimated to be ~ US$ 3 bn and we expect this market to grow at 8-10% in the coming years.
Global Financial Assurance market is a niche segment (US$ 683 mn) which is expected to grow ~13% in the coming years. The largest sub segment in financial assurance is Revenue Assurance followed by Cost & Margin Assurance
Aviation $ 3 Bn
INTELLECT, NUCLEUS MAJESCO RAMCO SUBEX
Industry Size ($ bn)
1 2 3 4
Ranking
$25 Bn $15 Bn
$1.8 Bn $8 Bn
$0.7 Bn
Market opportunity for Product companies
Insurance also is a large market with Policy Admin, at US$ 8.2 bn, being the largest sub market. Insurance industry is expected to grow at a CAGR of 5% in the next 3 years
IT Products Sector Outlook
Neutral
Product portfolio – Having the largest suite of banking products, Intellect leads the pack
Source: Company, Spark Capital
Technological architecture along with product marketability
Source: Company, Spark Capital
iGTB, iGCB, iRTM, Intellect SEEC
STG Policy Admin, Billing, Claims, Elixir North America Policy Administration System
Ramco Aviation software, Ramco ERP, Ramco HCM, Ramco Analytics
ROC Revenue Analytics, ROC Cost Analytics, ROC Network Analytics
Finnone Neo® , FinnAxia
Latest Technology SAAS System Integration Strong Reference Points
Intellect JAVA / .NET Minimal Presence Yes Banks – Tier 1 Banks Insurance – Minimal
Majesco JAVA / .NET Billing & Policy Admin Suite Yes Insurance – P&C (U.S) L&A – UK, India
Ramco Systems JAVA / .NET All Products Yes Aviation – Chopper HCM, CRM – Australia & APAC
Subex JAVA / .NET All Products Yes Tier 1 Telecom Players
Nucleus JAVA / .NET Finnone Neo® , FinnAxia Yes Australia, Eastern Europe & MEA
2
1
2
3
2
1
1
2
2
3
Ranking
Product portfolio and functionality
IT Products Sector Outlook
Neutral
Billing rates in developed economies is 2-3x the rates in developing economies. Additionally, winning orders in developed economies requires more higher S&M investments
Source:Company, Spark Capital
SI partnership with IT services vendors is crucial for Product business scalability
Source: Company, Spark Capital, Industry presentations, SI – system intergrators
60%
40%
Intellect
92%
9% Majesco
50% 50%
Ramco Systems
30%
70%
Subex
20%
80%
Nucleus
Developed Economies Developing Economies
Space Product Vendors SI Partners Leading Competitors & SIS Ranking
HCM, CRM, ERP Ramco > 10 Salesforce: > 500, Workday: >30
Banking Products Intellect 1-2
Temenos: > 30, OFSS: > 25; ACI Worldwide: > 10
Nucleus 0-1
Insurance Products Majesco 2-5 Guidewire: >20
Telecom Assurance Subex 0-1 cVidhya:>10
1 1 2 3 3
1
3
2
4
4
Ranking
Geographical presence and Integration Partners
IT Products Sector Outlook
Neutral
Temenos: Segmental revenue contribution and Gross Margin over time
Source: Company, Spark Capital
37% 34% 36% 31% 28% 30% 30%
25% 32% 35%
42% 45% 45% 48%
32% 38%
34% 30% 27%
24% 21%
56%
60%
64%
68%
72%
76%
80%
0%
10%
20%
30%
40%
50%
60%
CY08 CY09 CY10 CY11 CY12 CY13 CY14
License Maintenance Professional services Gross margins Decline in professional services
SI partnerships with IT service vendors would bring huge revenue opportunities: Agreement with strong Global IT service players like Wipro, Cognizant
etc. to become product companies’ SI partners would improve the revenue trajectory profoundly as these companies influence client behaviour in procuring application software. Additionally, with Professional services having the lowest margins, outsourcing of this service to SI partners would led to gross margins improvement.
Temenos case study: In CY08, Temenos earned around 32% of its revenues from Professional services. Outsourcing professional services to Global IT vendors like Cognizant aided in reduction of these services to 21% in CY14. This has led to Gross margins improvement of 700 bps during the same period.
Concluding, SI partnerships not only provide a huge revenue opportunity but also help in gross margin improvement.
Few SI partners for major Banking products vendors
Source: Company, Spark Capital Research
Temenos Cap Gemini, Cognizant, Tech Mahindra
Infosys HP,IBM
SAP TCS, CTS, Accenture, Wipro, Infosys
OFSS Wipro, Accenture, Tech Mahindra
TCS Wipro
SI partnerships with IT service vendors would bring huge revenue opportunities
IT Products Sector Outlook
Neutral
License revenues as % of sales
Source: Company, Spark Capital; *Nucleus does not disclose License revenues as % of sales
19%
9%
29%
25%
0%
5%
10%
15%
20%
25%
30%
35%
Intellect Majesco Ramco Systems Subex
Current ESOP outstanding as % of shares outstanding (Basic)
Source: Company, Spark Capital, *Intellect and Subex have enabling resolution for 4-5% of ESOPs to be issued
0.0%
9.0%
4.9%
0.6% 0.0% 0%
2%
4%
6%
8%
10%
Intellect Majesco Ramco Systems Subex Nucleus
Sales structure and quality of sales personnel is very crucial for deal conversion. We believe, Dual responsibility - Product wise + Geography wise (largely held by industry experts) , followed by Intellect, is the most effective way to drive the sales engine. Deal cycles in Products are larger than IT services with deal cycles in ERP and Core banking running more than a year.
License revenues as % of sales and executable order book are key parameters which give near term revenue visibility. Indian product companies (except Nucleus) do not give executable order book numbers.
Higher the license revenues higher are the gross margins. In a SaaS model, there is no significant upfront license fee and has only subscription revenues.
The above parameters 1) Industry growth 2) Product suite 3) State of Technology 4) SI partnership 5) Sales structure 6) License revenues 7) ESOP allotted are key variables that affect an IT product business model.
Sales structure in IT product companies
Source: Company, Spark Capital
Product-wise + Geography-wise (Dual)
Geography-wise
Product-wise
1
2
3
3
3
Ranking
Sales structure, ESOP allotted and License revenues as % of sales
1
2
3 4 4
1
4
3
2
IT Products Sector Outlook
Neutral
Snapshot of Temenos’ EBITDA, Cash flow and DSO trends
Source: Bloomberg, Spark Capital
Snapshot of Salesforce’ EBITDA, Cash flow and DSO trends
Source: Bloomberg, Spark Capital, *has a Jan ending year
100
127 123
89 109
153
183
51
110 117 94
81
157 176
50
90
130
170
210
250
0
40
80
120
160
200
CY08 CY09 CY10 CY11 CY12 CY13 CY14
No.
of D
ays
US$
Mn
EBITDA CFO DSO days
158 232 253 238 261 278
560
230 271
459 592
737 876
1,174
50
60
70
80
90
100
110
120
0
200
400
600
800
1000
1200
1400
FY09 FY10 FY11 FY12 FY13 FY14 FY15
No. o
f Day
s
US$
Mn
EBITDA CFO DSO days
Temenos is the largest banking software product company with strong presence in core banking space. Temenos earns ~98% its revenues from traditional license model and ~2% of revenues from SaaS subscriptions. Though margins are high in the Traditional model (39% of sales), they generate lower cash flows (37% of sales). Salesforce is the largest SaaS based CRM software company in the world. The company earns 100% of its revenues from SaaS subscription model. Though Salesforce EBITDA margins is low (10% of sales) CFO generation is high at 21% of sales. Concluding, though movement to cloud results in lower EBITDA margins, cash flow generation continues to be high led by subscription based revenue model.
Though SaaS companies have lower EBITDA margins, they earn strong CFO as subscription based revenue model is followed
IT Products Sector Outlook
Neutral
Why EV/Sales for product companies?
Source:
US$ mn Y Y+1 Y+2
Sales 100 200 300
Sales growth (%) 100% 50%
Cost of Sales 55 100 135
Gross profit 45 100 165
Gross Margins 45% 50% 55%
R&D 20 22 25
S&M 26 40 60
General Administration 18 20 23
EBITDA -19 18 57
EBITDA margins -19% 9% 19%
Why we prefer to use EV/Sales for software product companies? Software Product companies enjoy high operating leverage. During the initial periods, the costs of developing and marketing a software product is high, which leads to an EBITDA loss. License revenues is the most crucial variable for a product company. Higher percentage of license revenues (as % of sales) higher is the operating leverage. Additionally, solely dependent on deal wins, Product companies does not have a linearity in growth (across years) like service companies. Small product companies could grow > 50% yoy. EBITDA growth could be double the Revenue growth as shown in the example. (140% growth in EBITDA from Y+1 to Y+2 for 50% growth in revenues during the same period). We prefer using EV/Sales to value Product companies as these companies enjoy strong operating leverage and sales growth is the key factor influencing their profitability.
EV/Sales for product companies
IT Products Sector Outlook
Neutral
Most of the Product companies in India are still small
Source: Company, Spark capital, * includes Coverall Technologies revenues too
… DSO (billed + unbilled)
Source: Company, Spark Capital
Revenue/Employee across companies
Source: Company, Spark Capital, * includes Coverall Technologies revenues too
167
96
189
158
100
80
100
120
140
160
180
200
Intellect Majesco Ramco Systems Subex Nucleus
99 106
60 59 58
40
50
60
70
80
90
100
110
Intellect Majesco* Ramco Systems
Subex Nucleus
US$
mn
Snapshot of Product companies
S&M expense as % of sales
Source: Company, Spark Capital
13%
26%
19%
20%
18%
0%
5%
10%
15%
20%
25%
30%
Nucleus Intellect Majesco Subex Ramco
As %
of s
ales
29317
57514
40132
71711
36686
20000
30000
40000
50000
60000
70000
80000
Intellect Majesco* Ramco Systems
Subex Nucles
US$
Page 12
Ramco Systems Fair value
Rs.825
CMP
Rs.751
Stock Performance (%)
1m 3m 12m RMCS 0% -4% 83% Sensex 2% -6% -1% CNXIT 3% 6% 3%
Financial Summary Year Revenues (US$ mn) Revenues (Rs. mn) EBITDA (Rs. mn) EPS (Rs.) EV/Sales(x) EV/EBITDA(x) FY16E 76 4895 1201 24.7 5.1 20.8 FY17E 93 5631 1423 33.8 3.8 15.0 FY18E 114 6656 1844 49.4 3.1 11.2
Initiating coverage
Date Oct 5th, 2015
Market Data
SENSEX 26221
Nifty 7951
Bloomberg RMCS IN
Shares o/s 30mn
Market Cap Rs. 22bn
52-wk High-Low Rs. 1,113-377
3m Avg. Daily Vol Rs. 74mn
Index member NIFTY
Promoters 57.0
Institutions 24.0
Public 19.1
SRIVATHSAN RAMACHANDRAN, CFA [email protected] +91 44 4344 0039 AISHWARIYA KPL [email protected] +91 44 4344 0040
Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset
Interesting product play
Ramco Systems is a niche enterprise software firm focussed on select sub-segments with in the broader enterprise resource planning market. Ramco’s offerings are both cloud based and on premise based. Ramco’s product suits consists of i) Material management for aviation sector ii) End-to-End Human Capital Management product suite and iii) ERP focussed more on the services business and iv) Tier-2 ERP. Within the various categories, we believe HCM is the most important segment for the long term growth of the firm as it’s a large market (SaaS HCM market is US$ 1.8bn) and Ramco has initial success in this market. Continued entry into new markets and stronger systems integration partnership would be key growth drivers over the medium term. We expect Ramco to be the revenue growth leader within the product’s pack.
Presence in a high growth market: Ramco has strong presence in high growth SaaS market across its product suite. We are positive especially on the growth opportunities for HCM and ERP focussed on the services industry. SaaS is the fastest growth category within enterprise software. Firms such as Oracle and SAP are clawing back their lost positon by acquiring SaaS firms SAP acquisition of Concur and Oracle acquisition of Rightnow are examples. Ramco’s product score well in emerging markets and has established a strong reference with MNC having a large emerging market exposure. Ramco launched its HCM product in US recently and is a crucial market. Given the highly competitive market (over 30+ vendors offer HCM on SaaS) Ramco success could be delayed.
Focus on Systems integration partners: Over the last two years Ramco has strengthened its systems integration ecosystem including firms such as Infosys, Tech Mahinda, Hexaware, Paychex, NIIT Tech. Our channel checks indicate good feedback for their products and increased activity within the I partner ecosystem. Ramco’s management is keen on expanding SI relationship and would like to focus more on product. We believe a robust SI ecosystem would improve sales reach, reduce implementation risk, enable Ramco to bid for large deals and improve margins and return ratios. Option value: Post the capital raise, Ramco’s in a strong position having repaid its debt. Ramco is trading at 4x FY16E and it is the costliest stock in the product pack. However, we note that US listed SaaS firm trade at 5x-10x EV/Sales. We would like to point out few differences and why the discount is justified. SaaS have a negative working capital, however Ramco has not be able to garner similar terms across its customer; Recurring / Subscription revenues are still a small component of the overall revenues with services accounting for ~50% FY15E revenues. Ramco offers high risk reward with success in US HCM market being a key monitor able for Ramco as a stock. Our fair value is based on 4x FY17 EV/Sales.
Page 13
Ramco Systems Fair value
Rs.825
CMP
Rs.751
Ramco had a strong growth of 33% in FY15 after years of tepid growth primarily led by restructuring efforts undertaken from 2012
Source: Company, Spark Capital
37.0
47.1
48.6
45.4
45.4
60.2
-5%
0%
5%
10%
15%
20%
25%
0
10
20
30
40
50
60
70
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
US$
mn
Revenues EBITDA Margins
Description: Established in 1999, Ramco Systems (RMCS) is a part of US$1 billion
diversified conglomerate, Ramco Group of Companies. In 2012, after Mr.Virender Aggrawal joined as CEO, the company underwent a gamut of changes, from its traditional roots of being a core ERP player.
RMCS has three Strategic business units (SBU) operating around three major project offerings – Aviation, HCM and ERP. Each SBU functions as a fully integrated unit taking complete ownership from R&D, pre sales, marketing, implementation and support.
All the three product suites can be hosted in the cloud and have strong reference points in India, S.E.Asia, Middle East and Australia.
Under Aviation, RMCS primarily caters to MRO* companies. In HCM*, RMCS has a strong payroll product and in ERP*, the company is known for its Services, Staffing and Facility management ERP.
Timeline – Key events
Source: Company, Spark Capital Research
Incorporated in 1999
Launch of ERP on Demand 2.0
“ERP on Rent” Saas – band offering
Launch of on demand Analytics & Gateway on Cloud
Launch Saas ERP for Aviation Manufacturing
Virender Aggrawal joined as CEO Launches ERP on Cloud for Australia
Aviation on cloud from Helipad operators Ramco HCM on Cloud goes global 10 Aviation deals won in FY13
Entry into wearable technology Announced right issue @ Rs.155/ share
Raised Rs. 325 crores via QIP with Rs.668/share as floor price
Global payroll on cloud Launched China Cloud payroll software
1999 2010 2011 2014 2012 2013 2015
Company Description
* MRO – Maintenance repair & operations, HCM – Human capital management, ERP – Enterprise resource planning
Page 14
Ramco Systems Fair value
Rs.825
CMP
Rs.751
Revenue by service lines (FY15)
Source: Company, Spark Capital
Revenue by products (FY15)
Source: Company, Spark Capital
Revenue by geography (FY15)
Source: Company, Spark Capital
46%
19%
35%
ERP
HCM
Aviation
18%
8%
20% 28%
19%
7%
America
Europe
APAC
India
MEA & North Africa
South Africa
Recent deal wins under each product
Aviation ERP HCM
Cobham Aviation Services FreshFood Management Paypartners
Mission Aviation Fellowship Paypartners Bureau Veritas
Sundance helicopters Norske Skog Delhi Duty Free services
Hutchinson Aerospace Tat Hong Nesma group
Kenya Airways Halogen Security Vopak Asia
Falcon Aviation Services Mother Dairy Dabur
Source: Company, Spark Capital
Company Description
29%
21%
49%
1%
License
Recurring
Services
Resale of material
Page 15
Ramco Systems Fair value
Rs.825
CMP
Rs.751
Ramco Aviation Suite: Materials Management & Maintenance are areas where Ramco has strong presence, while Human Capital Management would be key focus area going ahead
Source: Company, Spark Capital
Ramco Aviation Software
Page 16
Ramco Systems Fair value
Rs.825
CMP
Rs.751
Ramco Aviation Software Aviation Software is a differentiated product of RMCS and has strong
presence in Heli operators, MRO, CAMO* and Airlines across India, APAC and Middle East. RMCS has good presence in US as well.
Ramco offers one of the widest range of integrated MRO, finance and EFB* solutions. Ramco’s DecisionWorks® and VirtualWorks® are highly rated by industry experts, built in latest technology and could be seamlessly integrated across various devices. Ramco is also one of the largest vendors in the aviation software industry.
The Malaysian Airline deal (US$ 10 mn) won in 2014 was a deal breaker in the commercial airline space for Ramco, which has been traditional been strong in the heli operators (serves 5 of top heli operators)
Most of the Aviation software is largely on premise due to strict regulations. Deal sizes in Aviation software are typically around US$ 1-5 mn.
Key clients in the Aviation space
Malaysian Airlines Air Tahiti Air bus Helicopters
Republic Airways Good Year Kenya Airways
Spice Jet Indigo Gulf Helicopters
Emirates Air costa Asia Atlantic Airlines
Astra airlines T’way Dan Copters
Air India Hevilift Mission Aviation Fellowship
Alliance Air Safe Air Airport Authority of India
Source: Company, Spark Capital Research
Key competitors’ products in Aviation
Alkym (Volartec) IBM Maximo
Aircraft Maintenance Systems RAAS (Aviation InterTec)
Airline Suite (C.A.L.M. Systems) AMICOS (Cimber Air data)
Dash Aviation software DigiMANT (Aerosoft systems)
Amos (Swiss Aviation software) infoTrak MRO (Infospectrum)
ADOC (AIS Aviation) Inservice MRO (Engima)
Aircentre Movement control (Sabre Group) Integrated Aviation software
Source: Capterra.com, Spark Capital Research
Our view: Aviation has grown 37% yoy in FY15 and currently contributes around
37% of RMCS revenues. Over the last one year, the company has made investments to expand into Europe in Heli Operator segment (in which RMCS has leadership position) and also spread into fixed wings.
The Malaysian airlines deployment went live in March 2015 in a span of 11 months. The landmark project would be a strong reference point for RMCS to grow in the fixed wings space.
RMCS has won significant deals in the last few quarters in this space notable among them being Cohbam Aviation services, Hutchison aerospace etc.
We believe RMCS is a clear leader in Aviation solutions and the segment would continue to grow more than the company average in the short term.
Ramco Aviation Software
* CAMO – Continuing Airworthiness Management Organisation
Page 17
Ramco Systems Fair value
Rs.825
CMP
Rs.751
HCM Suite: Payroll is the strongest product of Ramco among the HCM suite
Source: Company, Spark Capital
HCM on Cloud
Page 18
Ramco Systems Fair value
Rs.825
CMP
Rs.751
NEAT Evaluation: Payroll BPO (Multi-Country Focus)
Source: Company – Nelson Hall report, Spark Capital Research
Sopra HR
Talent SD Worx
SGWI
ADP NGA
Ceridian
Ramco
Ract
OSV
Capita
High Achievers Leaders
Major Players Innovators
Abilit
y to
del
iver
imm
edia
te b
enef
it
Ability to meet future client requirements
Key clientele in HCM
Dabur RadissonBLU Bureau Veritas
Red tag Avaya Seagate
KPMG Lifestyle Network18
RAKBANK Landmark Group Khimji Ramdas
Bata Kerner Nesma Group
Paypartners Vopak Omega Healthcare
Source: Company, Spark Capital Research
RMCS’ HCM on Cloud: HCM is the new product among RMCS’ portfolio which grew around
113% in FY15 led by strong traction in Payroll system. With an integrated Global Payroll on Cloud for 35+ countries along with IRIS (RMCS Integration services) which aids seamless integration across all other on premise & cloud databases, Ramco HCM has become very popular among MNCs and global conglomerates.
Of the US$ 11.5 mn HCM revenues, Ramco earns ~US$ 7 mn from Payroll services with Indian and MEA being the largest markets.
Ramco has more than 200+ clients in HCM out of which 170+ are based out of India. It’s cloud payroll supports 110+ clients. Along with payroll cloud offering, RMCS also offers managed payroll services and MPRHO services. In 2015, RMCS has forayed into China and Australia.
Ramco partners with Paychex and ADP for U.S and U.K. Payroll delivery.
HCM on Cloud
Page 19
Ramco Systems Fair value
Rs.825
CMP
Rs.751
US is concentrated with strong global HCM players
Source: Industry reports, Spark Capital Research
Companies Positioning Strategy Market Presence
1 Workday Leader Very Strong Medium
2 Success Factors Leader Very Strong Strong
3 ADP Leader Strong Strong
4 Ceridian Leader Strong Medium
5 Ultimate Software Strong Performer Strong Medium
6 FinancialForce.com Strong Performer Strong Weak
7 Meta4 Strong Performer Strong Weak
Our view: RMCS is the largest payroll provider in India and has become a well
established brand within a short span of time. The reason is not only RMCS superior product suite but also the fact there is no significant player in the these markets. Workday is the only key player which has payroll solutions for India and Singapore.
The recent QIP raised was to aid RMCS HCM’s foray into the US markets and to achieve scale in the next two years. RMCS has a strong team in place and plans to cross sell HCM platform to existing Aero clients.
US HCM cloud market is a very competitive space with strong players like Workday, Success factors, ADP etc. RMCS breaking into US market, though crucial, is a daunting task. Given the highly competitive market (over 30+ vendors offer HCM on SaaS) Ramco success could be delayed.
Revenue & margins of Global cloud vendors
Company Revenues (US$ mn) EBITDA margins (%)
Workday* 788 -17%
ADP* 10,941 22%
Ultimate Software* 506 15%
Cornerstone* 263 -13%
Tableau Software 412 5%
Netsuite 743 7%
Source: Bloomberg, Spark Capital Research, *US HCM players
HCM on Cloud
Page 20
Ramco Systems Fair value
Rs.825
CMP
Rs.751
ERP on cloud: Ramco’s differentiating proposition is the industry it operates – Services, Staffing and Facility management
Source: Company, Spark Capital Research
ERP on Cloud
Page 21
Ramco Systems Fair value
Rs.825
CMP
Rs.751
Ramco ERP: Built on VirtualWorks®, Ramco ERP Suite covers the entire spectrum
of enterprise functions through a suite of products – Manufacturing, financial management, Supply chain management (SCM), Human Capital management (HCM), Enterprise Asset management (EAM), Project management, Process Control, Analytics, Advanced planning & optimization and Connectors. Integrated across all OS, Ramco ERP is available both as on-premise and SaaS model.
Largely focussed on the services market, Ramco ERP is highly rated for Facility management, Staffing and services organisation. RMCS also facilities a “Two Tier ERP” as hub and spoke model for channel partners of large enterprises.
RMCS ERP has 800+ customers and is spread across 35+ countries – largely based out of Middle East and APAC.
Few of RMCS clients in ERP
Schneider Electric Pricol Freshfood management
DLF India Mother Dairy Norske Skog
Cavin Kare TVS Tat Hong
TAFE Honeywell Halogen Security
ITC Ltd. Preferred meals MHW limited
Lubrizol Gulf Precast Vedanta
Caterpillar Group 4 Securitas Mulk Holdings
Source: Company, Spark Capital Research
Key Competition in Resource planning
Netsuite Planview software
Financial force CA Technologies
Sage HP
Epicor Innovatas
SAP Changepoint
Oracle Clarizen
KeyedIn® solutions Microsoft Dynamics
Source: Industry reports, Company, Spark Capital Research
Our view: Ramco has strong positioning in Staffing, Facility management and
services organisation (especially consulting) by serving the leading players in this market. Adecco, the largest global staffing firm, is RMCS’ key client.
Recently, RMCS launched Logistics ERP on cloud for Australia and New Zealand.
As of FY15, ERP (US$ 27 mn) contributed 46% of total revenues growing 17% yoy. With marquee reference points in this segment coupled with strong System integration partners, RMCS’ ERP would continue to grow ~15-20% yoy, primarily driven by APAC and MEA.
ERP on Cloud
Page 22
Ramco Systems Fair value
Rs.825
CMP
Rs.751
Way ahead:
We expect RMCS US$ revenues to grow 29% & 22% yoy in FY16E and FY17E respectively primarily led by growth in HCM and Aviation.
Led by growth and strong operating leverage, EBITDA margins would also increase to 24.8% and 25.4% in FY16E and FY17E from 20% in FY15.
As of Q1FY15, ESOPS contribute ~4.6% of the total shares outstanding (basic). ESOP charge would be significant in the coming years.
Notably, RMCS capitalises most of its R&D expenditure. In FY15, RMCS capitalised around Rs.605 mn including interest cost of Rs.227.4 mn. With expected reduction in R&D expenditure, EBIT margins would come in better with lower amortisation. Other Indian product companies fully expense their R&D costs. We believe RMCS expensing R&D costs would only happen post FY18E.
In Q1FY16, RMCS raised Rs.3.3 bn via QIP at a floor price of Rs.668/ share. Most of the QIP money would be utilised to pay long term debt. We have assumed debt payment of Rs.2.3 bn in FY16E.
DSO of RMCS is high led by receivable issues in Sudan. With most of this being provided for and also led by more revenues from cloud subscriptions we expect DSO days to improve in the coming years
DSO would come better with most of Sudan receivables already written off and better revenues from cloud subscriptions
Source: Company, Spark Capital
Research & Development Expenditure (Standalone)
Particulars (Rs.mn) FY14 FY15
Capital Expenditure 0.0 1.6
Recurring R&D
Employee costs 299.0 330.5
Finance costs 271.0 227.4
Other expenses 49 47
Total R&D capitalised 618 605
Source: Company, Spark Capital Research
Financial outlook
128 111 125 118 112 116 112 75
85
95
105
115
125
135
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Day
s
Page 23
Ramco Systems Fair value
Rs.825
CMP
Rs.751 Financial summary
*Adjusted EBITDA is EBITDA – Capitalised R&D
Rs.mn FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E
Profit & Loss Cash flows
Revenues 3,605 4,852 5,601 6,628 Cash from operating 219 954 1,218 1,577
Other Operating Income 48 43 30 28 Cash from investing -440 -620 -570 -520
Total revenues 3,653 4,895 5,631 6,656 Cash from financing 239 855 -125 60
Employee costs 1,620 2,227 2,626 3,104 Free cash f low -228 334 648 1,057
Other Operating Expenses 1,313 1,466 1,581 1,708 Key ratios (%)
EBITDA 720 1,201 1,423 1,844 Revenue grow th 37.0% 34.6% 15.4% 18.3%
Depreciation 449 451 464 473 EBITDA grow th NM 66.8% 18.5% 29.5%
EBIT 271 751 959 1,371 PAT Grow th -153.3% 474.0% 36.8% 46.0%
Interest exp/ (income) 120 -17 -90 -160 EBITDA margin 20.0% 24.8% 25.4% 27.8%
Tax 24 38 52 77 EBIT margin 7.5% 15.5% 17.1% 20.7%
PAT 127 727 995 1,452 PAT margins 3.5% 15.0% 17.8% 21.9%
Diluted EPS 5.7 24.7 33.8 49.4 ROE 7.0% 16.1% 14.2% 17.7%
Balance sheet ROCE 12.8% 20.0% 20.0% 22.8%
Share capital 244 297 297 297 Valuation metrics
Reserves & surplus 2,283 6,208 7,203 8,655 Shares o/s (mn) 21.2 28.0 28.0 28.0
Total shareholder's equity 2,528 6,505 7,500 8,952 Fully diluted shares (mn) 22.1 29.4 29.4 29.4
Long term borrow ings 2,184 118 3 3 Market cap (Rs. mn) 16,615 22,090 22,090 22,090
Other long term liabilities 123 124 126 128 Adjusted EBITDA* 115 601 873 1,344
Current liabilities 1,689 1,708 1,886 2,153 EV (Rs.mn) 20152 24950 21350 20612
Short term borrow ings 540 440 340 240 EV/Sales (x) 5.5 5.1 3.8 3.1
OCL 1,149 1,268 1,546 1,913 EV/EBITDA (x) 28.0 20.8 15.0 11.2
Total liabilities 6,524 8,456 9,515 11,236 P/E (x) 131.2 30.4 22.2 15.2
Net Fixed Assets 2,740 2,910 3,016 3,062 Other ratios (%)
Goodw ill 995 995 995 995 DSO days 118 112 116 112
Cash and cash equivalents 109 1,298 1,821 2,938 Book value per share 114 221 255 304
Debtors 2,379 2,952 3,382 3,940 Cash per share 4.9 44.1 61.9 99.9
Total assets 6,524 8,456 9,515 11,236 FCF per share -10.3 11.4 22.0 35.9
Financial summary
Page 24
Subex Limited Fair Value
Rs. 14
CMP
Rs.11.2
Stock Performance (%)
1m 3m 12m SUBX -3 -17 28 Sensex 2 -6 -1 CNXIT 3 6 3
Financial Summary Year Revenues (Rs. mn) EBITDA (Rs. mn) EPS (Rs.) EV/Sales(x) EV/EBITDA(x) P/BV(x) FY16E 4000 965 0.9 1.8 7.4 0.8 FY17E 4241 981 1.2 1.6 6.8 0.7 FY18E 4727 1171 1.5 1.3 5.1 0.7
Initiating coverage
Date Oct.5th 2015
Market Data
SENSEX 26221
Nifty 7951
Bloomberg SUBX IN
Shares o/s 244mn
Market Cap Rs. 3bn*
52-wk High-Low Rs. 18-8
3m Avg. Daily Vol Rs. 123mn
Index member NIFTY
Promoters 0.5
Institutions 0.3
Public 99.2
SRIVATHSAN RAMACHANDRAN, CFA [email protected] +91 44 4344 0039 AISHWARIYA KPL [email protected] +91 44 4344 0040
Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset
Niche Telecom BSS player
Subex is a telecom and cable service provider (CSP) focussed software and solution provider in the area of Revenue Assurance, Fraud Management and Asset Assurance. Subex’s solutions are focussed at the Chief Financial Officer at a Telecom service provider and has presence with over 100+ telecom service provider including the likes of British telecom, Airtel and Verizon. Last seven years for Subex were marred due to the couple of acquisitions not delivering results as per expectation and sharp decline in demand post the global recession in 2008. Over the last three years under the leadership of a professional CEO Mr. Surjeet Singh, efforts have been undertake to solve the debt crisis by renegotiating terms and have a large portion of debt converted into equity and bring the balance sheet under control. From FY16 onwards, Senior Management team at Subex can focus their energy on building the business and this would drive more predictable revenue growth in our opinion.
New solution offering key growth driver: Subex’s capabilities is well positioned in the revenue assurance and fraud management space with the TSP market and is one of the top-3 players in the market. However with the market getting saturated growth opportunities would be due to increased market share and transactions than new installations. Over the last two years ,Subex has launched a new solution focussed on better Capex optimisation at CSP by enabling better asset discovery and reporting. As an extension of its strong understanding of the customer landscape with a CSP, Subex is incubating an analytics practise which could be offered on an managed services basis. We believe this Asset assurance product and Analytics offers substantial scope for growth given Subex’s existing relationship in the communications industry.
Management now focused on growing business than addressing balance sheet issues: Subex ability to add new logo’s and even expand relationship with some of its existing clients would have been hampered due to its weak balance sheet. Reset of FCCB conversion price to Rs. 13 per share would aid in most of FCCB converting into equity shares. With debt overhang done with, we believe management’s efforts underway would bear fruit and drive better revenue growth. FCCB conversion crucial for long term value creation: FCCB to the tune US$ 60mn are outstanding and needs to get converted into equity. We are assuming conversion in our financial model. Post conversion, debt would stand reduced to Rs. 2.1bn, manageable at 2.5x EBITDA. We believe demonstrated revenue growth would be key driver of value as Subex revenues have declined for the past few years. Given its high profitable we believe Subex could trade on par with other firms inspite of operating in a highly competitive end market. Our fair value is based on 2x FY17 EV/Sales.
*Mcap is calculated with 267.7 mn outstanding shares (till current FCCB conversion)
Page 25
Subex Limited Fair Value
Rs. 14
CMP
Rs.11.2
Revenue has been tepid over the last few years led by spin off of non profitable business and internal restructuring efforts
Source: Company, Spark Capital
Description: Established in 1992, Subex Limited is a Bengaluru-based IT company
which provides business and operations support system products for telecom operators and communications service providers. It has 800+ employees and 200+ customers.
Subex has its own platform named Revenue Operations Centre (ROC) – a centralised approach for operational and financial control for its customers. ROC acts as an integrated platform which holds all Subex OSS/BSS products or third party systems and provides real-time and actionable insights to the telecom operator to achieve lower costs, higher margins, higher revenues etc.
Post the appointment of Mr.Surjeet Singh as CEO in 2012, Subex underwent internal restructuring efforts to strengthen the product portfolio and to get through the FCCB overhang which has been hindering the performance of the company since 2008.
Company Description
Timeline – Key events
Source: Company, Spark Capital Research
2006
Acquired Azure Solutions, Revenue Assurance company
Acquired Sotas, Fraud management business
1992
Subex was incorporated
1999
Got listed on the exchanges First non-BT interconnect
implementation - Telenor
2000
• Acquired IV generation – Telecom Software consulting
2001
First International Installation of FMS.
Acquired Magardi Inc., Canada
2004
Acquired Lightbridge Inc., Fraud Management Business Assets
Acquired Alcatel Fraud management group, Fraud management business assets
2007
Acquired Syndesis, Canada. Raised FCCB worth US$ 98.7 mn @ convertible share price of Rs.656/share
2009
Launched Managed services
Restructured FCCB debt
2010 2013
Launched ROC Cloud SaaS model
• Sold off part of the business & rolled over the existing bonds to 2017 & issued new bonds worth US$ 128 mn to mature in June 2017
2015
• Converted part of the FCCB into equity at @ conversion price of Rs.13. Post this conversion, Subex has FCCB worth US$ 60 mn
88
95
105
68
62
59
18%
27% 27%
12%
20%
24%
10%
15%
20%
25%
30%
0
20
40
60
80
100
120
FY10 FY11 FY12 FY13 FY14 FY15
US$
mn
Revenue (US$ mn) Margins
Page 26
Subex Limited Fair Value
Rs. 14
CMP
Rs.11.2
Revenue by product (%)
Source: Company, Spark Capital
Revenue by service lines (%)
Source: Company, Spark Capital
Revenue by geography (%)
Source: Company, Spark Capital
Key Telecom clients
Geography Customers
Americas Bell, Claro, Level (3), Rogers, Sprint, T Mobile, Telefonica, Telemex, Telus, Verizon
EMEA BT, COLT, Orascom, du, MTN, Saudi Telecom, Swisscom, Telecom Egypt, Telekom Slovenije, Telenor, Vodafone, Zain
APAC BSNL, dTac, Idea, Indosat, Airtel, Maxis, Reliance Communciation, STarHub, Telecom Malaysia, Telstra
Source: Company,Spark Capital Research
57%
20%
23%
EMEA Americas APAC
4%
34%
30%
7%
25%
Third Party
Managed Services
Support
Customization
License Addl. License
65%
35%
Fraud & revenue assurance Network Analytics
Company Description
Page 27
Subex Limited Fair Value
Rs. 14
CMP
Rs.11.2
Subex BSS/OSS Portfolio
Source:
What constitutes Financial Assurance for Telecom operators?
Source: Industry report, Spark Capital Research
Business, Network and Partner/Supplier Operations
Revenue Assurance Cost and Margin Assurance Fraud Management
Internal Process Data Leakage Analysis Partner Data Analysis Revenue Collection Verification for
Accounting and Regulatory Conformance
Revenue Comparison with Cost of Sales “What if” Planning Profitability Optimization Cost Accountability
Define Fraud Processes and Methods Proactive and Reactive Fraud Operations Maintain Fraud Rules, Lists and Tools
ROC – Revenue Operations Center
Revenue Analytics Cost Analytics Network Analytics
ROC Revenue Assurance
ROC Fraud Management
ROC Credit Risk Management
Managed Services
ROC Partner Settlement
ROC Route Optimization
ROC Cost Management
SaaS (Software as a service)
ROC Asset Assurance
ROC Data Integrity Management
ROC Capacity Management
Consulting Services
Subex product portfolio
Page 28
Subex Limited Fair Value
Rs. 14
CMP
Rs.11.2
ROC Revenue Assurance®: Revenue Assurance is a niche segment which helps in reducing
“leakage” from flow of data between a Communication Service Provider (CSP)’s systems and through its business processes, most notably within the billing and partner management functions. Worldwide around 7-10% of the CSP revenues is lost in wrong billing.
Revenue Assurance is a BSS layer which sits on top of existing OSS/BSS layer. It aids seamless integration among different parts of the IT infrastructure of CSP’s and aids in reducing leakage. There are around 30 Revenue Assurance solution providers in the
world. The top 8 players contribute about 80% of the market. Subex is the market leader in Revenue Assurance around ~20%
market share. ROC Revenue Assurance 5.3 is the most comprehensive which can be hosted on premise/ on cloud/ managed services and provides a first-of-kind auto configuration solution which gives close to real time data.
Financial Assurance market is expected to grow 12% yoy to reach US$ 765 mn
Source: Company – Frost & Sullivan, Spark Capital
470
533
606
683
765
400
450
500
550
600
650
700
750
800
FY12 FY13 FY14 FY15 FY16
US$
mn
ROC Fraud Assurance®: Fraud Assurance is a key sub segment in Revenue Assurance, which
aids to reduces revenue leakage led by wilful attempts to deceive the CSPs. Telecos lost ~US$ 6.1 billion of revenues in fraud last year. Growth in VOIP provider, increase in the number of channel partners, reduced due diligence are key reasons for increase in carrier frauds. ROC fraud Assurance for Wholesale carriers which could be hosted on
premise or on cloud and aids in preventing fraud by removing known threats, identifying new partners, minimizing run time frauds, augmenting internal controls and supporting continuous fraud management process improvements. ROC fraud assurance is known in the industry for its data integration,
processing and real time data reports.
Key Competition in Revenue & Fraud Assurance
WeDo Technologies Cartesian
Cvidhya Infogix +Agilis International
Razorsight Keynote SIGOS
TEOCO XINTEC
Capana Fraudbuster
SAP CR+X
Araxxe Neustar
Source: Industry reports, Spark Capital Research
Revenue & Fraud Assurance
Page 29
Subex Limited Fair Value
Rs. 14
CMP
Rs.11.2
Network Analytics: Capex optimisation has been crucial for CSPs led by falling ARPUs,
falling margins and increasing number of services which come in the Telecom spectrum. In FY14, worldwide capex spending totalled around US$ 320 bn, 16% of total revenue. An Network Asset management survey report 2014 conducted reports
that 1 out of every 3 operators do not measure return on capex investment led by increasing complexity of network infrastructure. Subex Network Analytics solution – ROC Asset Assurance, ROC Data
Integrity, ROC Capacity management aims at bringing transparent on capex investments, utility and reducing capex burden for Telecom operators. The opportunity in Network Analytics is huge and there are no strong
product companies which provide a comprehensive solution to address capex issues.
With falling ARPUs, capex rationalisation has become crucial for CSP’s survival…
Source: Bloomberg, Spark Capital
ROC Asset Assurance®: ROC Asset Assurance solution is a on premise/ on cloud product /
managed services network analytics based software platform, comprising of three key elements – data discovery, reconciliation, asset assurance and capacity management, aims at increasing ROI for capex investments. The PoC project deployed at a Tier-1 CSP in North America achieved
capex savings of more than US$ 100 mn and reported ROI of more than 700%. TCVs in Asset Assurance are higher at US$ 5- US$10 mn vs. Revenue
Assurance TCVs of US$ 1 – US$ 3 mn. Subex partners with Consultant firms like KPMG, Deloitte and PwC to
sell their products
Network Analytics
115
41.1
36 38 40 42 44 46 48 50
100 105 110 115 120 125 130 135
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
E
US$
Cap
ex s
pend
s in
dexe
d
Capex spending ARPU wireless
…While at the same time, investments are required with increasing requirement of service from CSP
Service Then Service Now
Fixed Voice, Mobile Voice, SMS, Dial up connection then DSL
Internet, Download Music
Fixed Voice, Mobile Voice, SMS, Dial up connection then DSL
Internet, Download Music, Mobile broadband (2G/3G/4G/5G), Content
driven services, Digital TV, Banking, IoT, E-commerce
Source: Company, Spark Capital Research
Page 30
Subex Limited Fair Value
Rs. 14
CMP
Rs.11.2
What went wrong in history? The FCCB overhang • The company acquired UK based Azure solutions (highest ever Indian Tech acquisition back then) for US$ 140 mn in 2006 and Syndesis (acquired for IP
and had negative margins) for US$ 165 mn in 2007. Led by failed GDR, Subex raised FCCB I worth US$ 180 mn - with a maturity of 5 years at a convertible share price of Rs.656/share – to fund this acquisition. Hit by recession in 2008 and sluggishness in overall telecom spend, Subex financials deteriorated from then and the share price fell from a peak of Rs.726 in 2007 to Rs.26 in 2009.
• In 2009, Subex managed to restructure its debt by issuing fresh equity and repricing the conversion price from Rs.656 to Rs.80. This brought down the outstanding debt to US$ 98.7 mn (FCCB II) post some redemptions due by March 2012.Out of the US$ 98.70 mn of FCCBs II, bonds having a face value of US$ 31.90 mn were converted into equity shares as of March 31, 2010 and bonds with a face value of US$ 12 mn were converted during the year ending March 31, 2011, retaining a closing balance of US$ 54.80 mn outstanding FCCBs II bonds.
• Pursuant to the approval of the holders of “US$ 180 mn 2% convertible unsecured bonds”,[of which US$ 39 mn was outstanding (“FCCBs I”)] and “US$ 98.70 mn 5% convertible unsecured bonds”, [of which US$ 54.80 mn was outstanding (“FCCBs II”)], at their respective meetings held on July 5, 2012 and exchange offers received under the exchange offer memorandum dated June 13, 2012, holders of US$ 38 mn out of FCCBs I and US$ 53.40 mn out of FCCBs II offered their bonds for exchange and secured bonds with a face value of US$ 127.72 mn (“FCCBs III”) were issued with maturity date of July 7, 2017.
• During 2012-13, 2013-14 and 2014-15, FCCB III with a face value of US$ 3.25 mn, US$ Nil and US$ 6.62 mn, respectively, were converted into equity shares of the Company, retaining a closing balance of US$ 81.53 mn as at March 31, 2015. Subsequent to the year ended March 31, 2015 the company has received an intimation for conversion of FCCB’s III of US$ 5 mn, leaving a current outstanding of FCCB III bond of face value of US$ 76.53 mn
• In May 2015 the board approved the reset of conversion price from Rs.22.79 to Rs.13 which would potentially be converted into 329,988,530 shares
Our view: Subex has a good portfolio of products in a niche segment and a space
with concentrated large clients. Additionally, Subex has strong references by major Telecom consultant firms like Deloitte, PwC etc. We believe Subex would show US$ revenues growth of ~13% yoy in
FY16E primarily led by Revenue & Fraud Assurance. Success of Asset Assurance and analytics is crucial for strong revenue growth in the medium term. With larger TCVs and lower competition, Asset Assurance could change fortunes for the company. Margins would fall in the medium term led by investments in Sales &
marketing and ESOP charges ( to be approved by shareholders).
Business outlook
What has changed? In Oct. 2012, the then promoter CEO, Mr.Subash Menon stepped down
and Mr. Surjeet Singh, ex- CFO of Patni computers was appointed as CEO. From then, Subex has been on an internal restructuring process to increase the quality of revenues and also to reduce the FCCB overhang. The shareholders approved the reset of FCCB III to be converted to
equity shares at Rs.22.79 to Rs.13/ share. Post this, Subex would have FCCB outstanding of US$ 2.4 mn. Prior to this, the “available for sale” tag and the question for survival would have made client wary of extending business relationships with Subex. This is also the reason for tepid revenues growth in the last 5 years
Page 31
Subex Limited Fair Value
Rs. 14
CMP
Rs.11.2 Financial summary
*Assuming FCCB conversion; **M.cap is adjusted for FCCB conversion
Rs.mn. FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E
Profit & Loss Cash flowsRevenues 3,598 4,000 4,241 4,727 Cash from operating activities 658 624 708 790 Cost of materials 209 193 224 249 Cash from Financing activities -487 -345 -369 -351
Personnel expenses 1,629 1,828 2,024 2,240 Cash from investing activities -86 -16 11 40
Gross profit 1,760 1,979 1,993 2,238 Key ratiosS,G&A expenses 911.2 1,014 1,012 1,067 Revenue grow th 6% 11% 6% 11%
EBITDA 849 965 981 1,171 EBITDA grow th 25.4% 13.6% 1.6% 19.4%Depreciation and amortisation 40 54 58 56 PAT Grow th NM 378% 26% 29%EBIT 809 910 923 1,115 EBITDA margin 23.6% 24.1% 23.1% 24.8%Interest costs 610 145 169 151 EBIT margin 22.5% 22.8% 21.8% 23.6%
Other income 9 40 67 96 PAT margins 4.2% 12.2% 14.5% 16.8%PBT 207 687 821 1,061 ROE NM 10.0% 7.7% 9.2%Tax 57 199 205 265 ROCE 1.7% 6.3% 6.4% 7.7%PAT from continued ops 150 488 616 796 Valuation metricsP/L from discontinued operations -48 0 0 0 Fully diluted shares (mn) 173 517 517 517
PAT 102 488 616 796 M.cap** 1,988 5,941 5,941 5,941
EPS (Diluted) 0.6 0.9 1.2 1.5 EV (Rs.mn) 8,668 7,180 6,630 5,950
Balance sheet EV/Sales (x) 2.4 1.8 1.6 1.3
Share capital 1,829 5,166 5,166 5,166 EV/EBITDA (x) 10.2 7.4 6.8 5.1
Reserves & surplus 261 2,509 3,125 3,920 P/E (x) 19.5 12.2 9.6 7.5Total equity 2,090 7,674 8,290 9,086 EPS(E) / CMP (%) 5% 8% 10% 13%
Long term borrow ings 5,777 681 681 681 P/BV(x) 1.0 0.8 0.7 0.7
Total Current liabilities 2,487 2,649 2,525 2,492 Interest coverage ratio 1.32 6.27 5.47 7.39Liabilities + Share capital 11,338 11,988 12,480 13,242 Goodw ill/T.assets 76% 71% 69% 65%Assets 82 83 82 82 Per share dataGoodw ill 8,564 8,564 8,564 8,564 Book value 12.1 14.9 16.0 17.6 Cash 567 712 1,062 1,542 Cash 3.3 1.4 2.1 3.0Total current assets 2,435 3,084 3,577 4,340 Operating cash f low 3.8 1.2 1.4 1.5
Total assets 11,338 11,988 12,480 13,243 Free cash f low 3.4 1.1 1.3 1.4
Financial summary (consolidated)
Page 32
Nucleus software Fair Value
Rs.270
CMP
Rs.232
Financial Summary Year Revenues (US$ mn) Revenues (Rs. mn) EBITDA (Rs. mn) EPS (Rs.) EV/Sales(x) EV/EBITDA(x) FY16E 62 3963 775 21.2 1.2 6.1 FY17E 70 4178 722 20.1 0.9 5.4 FY18E 80 4805 970 26.9 0.7 3.3
Initiating coverage
Date Oct 5th, 2015
Market Data
SENSEX 26221
Nifty 7951
Bloomberg NCS IN
Shares o/s 32mn
Market Cap Rs. 8bn
52-wk High-Low Rs. 353-160
3m Avg. Daily Vol Rs. 99mn
Index member NIFTY
Promoters 60.6
Institutions 10.8
Public 28.5
SRIVATHSAN RAMACHANDRAN, CFA [email protected] +91 44 4344 0039 AISHWARIYA KPL [email protected] +91 44 4344 0040
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Play on single product upgrade cycle
Stock Performance (%)
1m 3m 12m NCS 0 -4 0 Sensex 2 -6 -1 CNXIT 3 6 3
Nucleus (NCS) is a banking and financial services focussed software firm with strong presence in the products focussed on the Lending market. Nucleus growth trajectory would be hinged on its ability to upgrade a number of its existing clientele to newer products and also penetrate the western market. Nucleus is taking a cautious approach to Go-To-Market and has not invested aggressively in sales and marketing similar to India or global peers. Moreover Nucleus new lending product Finnone Neo® is relatively new vis-à-vis competition in the SOA architected product space. Nucleus has a unique opportunity of having over 100+ installed base for its Finnone new product and can cross-sell to a number of them. We believe the company needs to strengthen its go-to-market and has to step up sales and marketing investments to ensure high success in upgrades from Finnone to Finnone Neo® .
Oldest player with limited product suite: NCS incepted in 1991 generates most of its product revenues from one product Finnone and its newer version Finnone Neo® . Over the last few years new offerings such as mobile banking, portal and transaction banking have not seen the same success as Finnone.
Finnone Neo® an opportunity and threat: Finnone has over 100+ installations with a number of they over 10+ years old. While this is an opportunity, heightened competition could result in NCS not winning some of the upgrades. NCS sales and marketing spend in the lowest among product companies we are covering in this report. High developing market focus: NCS generates ~80% of its revenues from developing markets. Developing markets are more competitive and generate lower revenue per deal vs. developed markets. Further cost associated with a developed market go-to-market strategy is expensive and has a high gestation period. Low growth trajectory : NCS reported revenues of US$ 45mn in FY07 and US$ 61mn in FY15, implying a CAGR of 4% over an eight year period. During this period NCS generated over 10% EBITDA margin and was net cash. The growth for NCS has been primarily driven by increased customisation for existing clients rather new installations. We believe steps are being taken now to address growth concerns however, they are not adequate in our view. Attractive valuation: NCS trades at 1X EV/Sales one of the lowest among our product companies under coverage. NCS has generated cash on a consistent basis however, growth trajectory has been tardy. Fair value for NCS would be 1x EV/Sales in our view. Additionally, we believe given the nature of business, we would prefer valuing Nucleus at EV/EBITDA than EV/Sales. Fair value is arrived by attaching 7x multiple to our FY17E EBITDA.
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Nucleus software Fair Value
Rs.270
CMP
Rs.232
Revenue has been tepid over the last few years with declining margins
Source: Company, Spark Capital
Description:
Established in 1989, Nucleus software exports (NCS) is a Global Banking products & solutions provider with prime focus in providing lending and transaction banking products to Global Financial industry for the last 20 years. NCS currently has 1512 employees.
NCS has two flagship products – Finnone™ (Product aiding Lending operations) and FinnAxia ™ (Global transaction banking platform) and caters to developing economies across APAC and MEA. With the recent upgrade, the lending product has the latest technology and is integrated across various OS. Notably, Lending product contributes larger part of revenues for NCS.
As of Q1FY15, NCS has an outstanding order book of Rs.3.47 bn executable in the next 2 years.
Company Description
Timeline – Key events
Source: Company, Spark Capital Research
49
72
69
55
53
62
60
63
58
29%
19%
10%
15%
20%
25%
30%
40
45
50
55
60
65
70
75
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
US$
mn
US$ revenues EBITDA margins
2003
FinnOne Live in 37 countries
1989
Nucleus was incorporated
1994
Opened Singapore office
1996
• Got Listed on BSE & NSE
1998
HDFC Bank installs Finnone
1999
First customer in Japan
2006
ACOM Ltd. Japan installs Finnone
2011
Bank of Muscat, ING Vysya goes live with Finnone
2013 2014
Launched Mobility solutions
• FinnOne Neo® and FinnAxia launched
• 22 customers in Africa • ICICI Bank wins Asian
Banker Award
2015
150 customers in 50 countries
Global collaboration with Red Hat
Page 34
Nucleus software Fair Value
Rs.270
CMP
Rs.232
Revenue by product (%)
Source: Company, Spark Capital
Client contribution to total revenues
Source: Company, Spark Capital
Revenue by geography (%)
Source: Company, Spark Capital
Company Description
16%
17%
22%
10%
19%
6% 8%
3%
India
Far East
South East Asia
Europe /U.K.
Middle East
Africa
Australia
Rest Of The World
72%
28%
Products Project & Professional services
0%
10%
20%
30%
40%
50%
60%
FY11 FY12 FY13 FY14 FY15 Top 3 clients Top 3-5 clients Top 5-10 clients
NCS clientele
Source: The Banker, The Asian Banker 2013 Rankings
11 of the 50 biggest banks in Asia Pacific
5 of the 10 biggest Banks in India
6 of the 20 biggest Banks in Middle East
6 of the 50 Banks in Africa
3 of the 5 biggest Banks in Singapore
3 of the 10 biggest Banks in Indonesia
3 of the 10 biggest Banks in Nigeria
4 of the 5 biggest Banks in the Philippines
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Nucleus software Fair Value
Rs.270
CMP
Rs.232
Consumer Vehicle Loan
Personal Loan
Consumer Durable Loan
Educational Loan
Mortgage Loan
Gold Loan
Loan Against Property
Construction Equipment
Commercial Vehicle Loan &Fleet Finance
Business Loan
Inventory Funding
Working Capital Loan Bill Discounting
Murabhah
Ijarah
Istisna Tawarruq
Service Ijarah
Line
of B
usin
ess
Bus
ines
s Ap
plic
atio
ns
Mob
ility
Ad
d-on
Ap
plic
atio
ns
Retail SME/Corporate SME/Corporate SME/Corporate Credit Card
CAS Origination & Credit Appraisal
LMS Loan Servicing
Collections Delinquency & Recovery
Management
FAS Finance Against Securities
mCAS mServe mCollect
Customer Self-Service Securitization Commission Payout
Business Analytics
Finnone Neo® suite addresses the entire spectrum of Loan Lifecycle
Page 36
Nucleus software Fair Value
Rs.270
CMP
Rs.232
Finnone™ - NCS Lending suite: FinnOne™, the flagship product of Nucleus, is one of the popular
lending products in the APAC and MEA. It is an integrated lending software suite designed to support part or all of the end-to-end lending process of banks, finance companies, captive auto finance companies and retail business.
The lending suite consists 1) customer acquisition system (CAS) 2) Loan management system (LMS) 3) Collections Management system (CMS) 4) Islamic Financing 5) Finance Against Securities (FAS) 6) Forecaster system
Finnone Neo™, launched in 2014, is a brand lending software suite which could be enabled as an On premise/SaaS model.
Nucleus will have traction in the coming years with existing clients coming for an upgrade to Finnone Neo™.
Key competitors in Transaction banking
Intellect
Temenos
Misys
Fundtech
ACI
Avaloq
Bottomline
Source: Capterra.com, Spark Capital Research
FinnAxia™ - Treasury banking solution suite: FinnAxia™ is an integrated global transaction banking solution built on
latest Java J2EE technology and mutli layered Service Oriented Architecture(SOA) platform.
The key components of FinnAxia™ - 1) Global receivables 2) Global payments 3) Global Liquidity management 4) Financial supply chain management integrated with mobility solutions
NCS has enrolled 2-5 customers on the new FinnAxia. FinnAxia is a low penetrated product of NCS when compared to
Finnone.
Key competitors’ products in Lending
Loan origination software Fiserv, Corelogic, KwikLoan, Avista Accelerator, Credit Delivery Platform, SMART system
Commercial Loan software Cadence, Captaloans, Ambit Optimist, ARGO
Commerical Lending, CAMS, Unity Loan systems
Loan servicing software Sopra banking suite, Kwik Loan, Loan Assistant, Loan management software, Risksorigins
Source: Capterra.com, Spark Capital Research
Product overview
Page 37
Nucleus software Fair Value
Rs.270
CMP
Rs.232
Nucleus has lower S&M spends than peers
Source: Company, Spark Capital
Nucleus Revenue/Employee is lower than peers despite being the oldest software banking products companies
Source: Company, Spark Capital
Outlook
29317
57514
40132
71711
36686
20000
30000
40000
50000
60000
70000
80000
Intellect Majesco* Ramco Systems
Subex Nucles
US$
Continuous to have high developing economies concentration
Source: Company, Spark Capital
Our view: Nucleus doesn’t give license revenues as % of total revenues. Lower
revenue/employee and EBITDA margins suggests lower license revenues. Notably, for a mature product company License revenue is 30-40% of sales.
Lower than peers investments in S&M is led by NCS strategy to continuously focus in developing economies. Better pricing and margins is possible only in developed economies. No significant change in geography mix, lower margins, lack of product portfolio expansion, low license revenues suggests that NCS is more a product customization company than product vendor.
We believe Nucleus would have revenue growth of 12.2% & 5.4% in FY16E & FY17E primarily led by Finnone Neo™ upgrade.
13
%
26%
19%
20%
18%
0%
5%
10%
15%
20%
25%
30%
Nucleus Intellect Majesco Subex Ramco
As %
of s
ales
0%
10%
20%
30%
40%
50%
FY07 FY15 India Far East South East Asia Europe /U.K. Middle East Africa Australia Rest Of The World
Page 38
Nucleus software Fair Value
Rs.270
CMP
Rs.232 Financial summary
Rs.mn FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E
Profit & Loss Cash flows
Revenues 3,531 3,963 4,178 4,805 Cash from operating 398 690 493 633
Other Operating Income 0 0 0 0 Cash from investing -170 139 146 194
Total revenues 3,531 3,963 4,178 4,805 Cash from financing -227 -7 -7 -8
Employee costs 2,014 2,244 2,418 2,641 Free cash f low 308 570 373 513
Other Operating Expenses 858 944 1,038 1,194 Key ratios (%)
EBITDA 659 775 722 970 Revenue grow th 2.0% 12.2% 5.4% 15.0%
Depreciation 120 122 121 122 EBITDA grow th -1.9% 17.7% -6.8% 34.3%
EBIT 539 653 601 848 PAT Grow th 0.6% 5.9% -5.2% 34.1%
Interest exp/ (income) 339 263 266 314 EBITDA margin 18.6% 19.6% 17.3% 20.2%
Tax 219 227 217 291 EBIT margin 15.3% 16.5% 14.4% 17.6%
PAT 647 685 650 872 PAT margins 18.3% 17.3% 15.6% 18.1%
Diluted EPS 20.0 21.2 20.1 26.9 ROE 15.5% 14.5% 12.1% 14.2%
Balance sheet ROCE 17.9% 16.9% 13.6% 15.9%
Share capital 324 324 324 324 Valuation metrics
Reserves & surplus 4,060 4,738 5,381 6,244 Shares o/s (mn) 32.4 32.3 32.3 32.3
Total shareholder's equity 4,384 5,062 5,705 6,568 Fully diluted shares (mn) 32.4 32.3 32.3 32.3
Long term provisions 47 47 47 47 Market cap (Rs. mn) 7,514 7,504 7,504 7,504
Other long term liabilities 0 0 0 0 Net debt (2,813) (3,634) (4,266) (5,084)
Current liabilities 1,132 1,441 1,538 1,768 EV (Rs.mn) 4534 4691 3869 3238
Trade payables 259 315 336 387 EV/Sales (x) 1.3 1.2 0.9 0.7
OCL 873 1,126 1,201 1,381 EV/EBITDA (x) 6.9 6.1 5.4 3.3
Total liabilities 5,563 6,551 7,289 8,383 P/E (x) 11.6 10.9 11.5 8.6
Net Fixed Assets 590 588 587 585 Other ratios (%)
Deferred tax assets 13 13 13 13 DSO days 87.4 86.4 88.5 92.0
Cash and cash equivalents 2,813 3,634 4,266 5,084 Book value per share 135.3 156.5 176.4 203.1
Debtors 846 938 1,014 1,211 Cash per share 86.8 112.4 131.9 157.2
Total assets 5,563 6,551 7,289 8,383 FCF per share 9.5 17.6 11.5 15.9
Financial summary
IT Products Sector Outlook
Neutral
Spark Disclaimer Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of time. Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure advisory services. This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital , its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this report.
Absolute Rating
Interpretation
BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year horizon
ADD Stock expected to provide positive returns of >5% – <15% over a 1-year horizon SELL Stock expected to fall >10% over a 1-year horizon
Disclaimer
Page 39
IT Products Sector Outlook
Neutral Disclaimer (Cont’d)
Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:
Disclosure of interest statement ALL
Analyst financial interest in the company No
Group/directors ownership of the subject company covered No
Investment banking relationship with the company covered No
Spark Capital’s ownership/any other financial interest in the company covered No
Associates of Spark Capital’s ownership more than 1% in the company covered No
Any other material conflict of interest at the time of publishing the research report No
Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:
Managing/co-managing public offering of securities Investment banking/merchant banking/brokerage services products or services other than those above in connection with research report
No
Whether Research Analyst has served as an officer, director or employee of the subject company covered No
Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No
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The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.
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This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Auerbach Grayson, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). Auerbach Grayson accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities discussed in the research material may do so through Auerbach Grayson. All responsibility for the distribution of this report by Auerbach Grayson, LLC in the US shall be borne by Auerbach Grayson, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if Spark Capital Advisors (India) Private Limited or Auerbach Grayson, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Auerbach Grayson, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material concerning investment to you under relevant legislation and regulations;
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