Cybertech Systems And Software – Another Vakrangee In Making?

“Minimum Government, Maximum Governance” is this Government’s mantra and objective. As a path to this objective, E-Governance is being touted as the route. This would involve digitization of records, civic planning, automation of workflows, monitoring of activities etc. Add to this the locational intelligence and you get the right tools for optimum civic planning and development thereby helping India build truly smart cities. Smart Cities would obviously involve “smart” civic planning and monitoring and hereby lies the opportunities. With government’s desire of building 100 smart cities and government’s diktat and affinity for e-governance, the opportunity is simply mind boggling. (Imagine all the cities in the country and add to that 100 additional smart cities).This is going to be a herculean task for the government, but an extremely rewarding proposition for companies in the right areas nonetheless.

Software Services has been one single most important factor in the evolution and prosperity of our country’s middle-class. What started out as a small area of exports, now accounts for nearly 12% of our GDP. It has also taken the world by storm with indian IT services companies like TCS,Infosys,Wipro,TechM and CTS (arguably an indian IT company) giving the IBMs and Accentures of the world sleepless nights. The huge cost arbitrage along with young and educated population were huge factors contributing in this growth. But with nearly three decades of scorching growth the cost arbitrage has reduced quite dramatically (though still pretty lucrative). It is clear that the growth moving forward cannot be based on just Software services alone, as this growth is linear and huge workforce could pose a different set of problems for the companies. Smarter companies are now evolving themselves to more non-linear growth propositions like IP and Software Product licensing. Companies who have been able to identify and embrace this trend would emerge as the next set of winners from this sector. One such company that has “successfully” transformed itself from software services based company to an IP and product engineering based company is Cybertech Systems.

Background: The Company was an erstwhile software services company and like every other company was into body shopping primarily and a bit of offshoring. Like every other company during the dot com era, its stock price also zoomed and went to the dizzy heights of 750 or something and then came crashing down like everyone else. What really helped this company survive that massacre was its reserved management. They had to take tough decisions and were also quick to realize the flaw in the basic business premise of “outsourcing/offshoring”. During the latter half of that decade the company consciously started moving towards IP based work and then eventually towards products (which is the only way forward for Indian Software Industry IMHO). They also forged some very important strategic partnerships with their chosen industry’s leaders, especially ESRI (World leader in geo-spatial solutions) and now NC4 (a leader in safety, security and advanced risk visibility solutions).

Evolution: From Software services to IP based to eventually products based business, the company – backed by an extremely ethical and transparent management, has successfully transformed itself to next stage of growth. Company’s success stems from its strong technology and business partnerships with industry leaders like ESRI, SAP, IBM, CISCO, MICROSOFT and now NC4. Especially with ESRI, the partnership has been very successful and fruitful. The partnership is of strategic in nature, with ESRI having close to 15% stake in the company. With the involvement of ESRI (World leader in geo-spatial solutions), the company has created some outstanding products to serve both the international (some of ESRI’s contract are also executed by this entity) and indian customers and especially Indian government. The GEO suites of products have already created a huge buzz around this and company has got great reviews from its customers about the same. The company has been demolishing competition like Rolta, Vakarangee etc on back of their superior products and is flying with virtual monopoly.

The company also recently won the very prestigious, Skoch Order of Merit 2014 in the 37th Skoch Summit on “Minimum Government, Maximum Governance” held in New Delhi in Sep 14. The Product suite is a comprehensive suite of GIS applications, designed to help Local Governments, leverage geographic intelligence for optimum civic planning and development. Also, the company has won many orders from various civic municipalities and many are in pipelines. The recent ISRO launch of navigation satellite would strengthen the country’s GPS capability which in-turn would make Cybertech’s product even more relevant. The growing domestic business has clearly made Cybertech a much better and evolved player now as evident from the standalone numbers which have grown from just 17 cr in Mar 10 to 40.66cr in Mar 14 and profits from 4.76cr to 8.69 cr and consolidated revenues have grown from 39cr to 67.5 cr in last four years and bottomline has grown from 1.38 to 7.63 cr for the same period. The company has won orders from thane, CIDCO, Bangalore municipalities and akola and Amravati are in pipeline. There was a major jump in revenues from June quarter on back of these order wins and with new orders now flowing in the earnings should jump further and the company is confident of similar growth pace in future as well. The company has around 450 employees at present and has taken additional space to accommodate 250 more employees. This additional space is specially dedicated to be built as GeoSpatial Technology Center and would be creating and serving Geo-Spatial solutions. These solutions as part of an IP based Product development would improve non-linear revenue and this is going to be really exciting. The partnership with NC4, is a more recent one. NC4, is a world leader in risk management and situational awareness solutions. Together with NC4, Cybertech has launched an exclusive Business unit, called “CyberTech Risk Center”. To improve predictability of business, whatever little IT services business they have (they have a US subsidiary who’s primary job is to get outsourced and offshored projects) that they have moved from a project based jobs to long-term annuity contracts. Though the US subsidiary has made some very minor losses, it is expected to move into black very soon but more importantly, the domestic business is where the major growth is anticipated. Company’s body language is very confident and it’s also confident of very strong growth in near future. What I personally also like about the company is the fact that they have a very active stock options program and this means they are ready to share wealth with their employees by making them stakeholders. Also, their Annual reports are very transparent and comprehensive. The passion they have shown in giving detailed analysis of their actions, products, and business is very encouraging and shows their commitment towards transparency with shareholders. Great People…

Lever’s For Growth:

1. E-Governance for the entire country and smart cities.
2. Virtually no competition
3. GEO Suite of products which off-late has gained massive visibility and traction and has gained tremendous pace in securing civic contracts as evident from CIDCO,Bangalore, Thane contracts and is going to be fuelled further with other contracts in pipeline like Amravati and Akola.
4. After an already very successful partnership with ESRI now they have forged another partnership with NC4 in the lucrative “Security and Public Safety” area. With this government’s strong focus on Security, this would be another winning partnership.
5. With around 450 current employees, and additional 250 employee space being taken up which would be filled with people working on product development, it will significantly enhance non-linear growth for company and in-turn improve margins.
6. Management itself is very confident of the similar pace of growth in future as seen in Q1.
7. Hit-rate is very high with their GEO suites of products.
8. New management catering to Domestic Business, has proved itself.

Valuations: At current market cap of 150cr, this regular dividend paying company with Debt to Equity of just 0.08 is available at PE of around 12. The company OPM has improved from 2% to over 17% in last four years and is generating free cash flows. The standalone growth is going to be scintillating in next few years thanks to its partnership with ESRI and now with NC4 and more importantly with government’s focus on e-governance and smart cities. The other income is the rental income from cybertech owned property. The promoters have also increased their stake from 33% to over 37% and together with strategic partner ESRI who holds around 14.71% they have more than 51% stake.

Technicals: This stock has broken out after 14 YEARS. The stock could go a long long long …way now, because the massive breakout is backed by changing fundamentals as well.

Note: Since the results are tomorrow, I purposely decided to publish it before results as my conviction in this business is pretty strong and personally I am not really bothered what Cybertech would report tomorrow. Please use your own conviction to evaluate the business and understand the difference between price and value.

God Bless !!!

http://www.cybertech.com/

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