Background: It’s a known fact that the next phase of growth for Indian IT Industry would come from product based companies as India climbs up the software value chain. But even in this space we should try to get into companies with some niche skills. Here we will try to understand a company which has a very strong and futuristic skill set and is one of the leading companies in the Defense and non-defense Simulations and training. Interestingly the company has very significant fact file as discussed in the section below.
The Company: Sankhya Infotech is a leading player in the space of Defense and Aerospace and also has solutions catering to BFSI and Education. The company is one of the better names in the space and has grown at a scotching pace of around 28-29% CAGR (topline) for over a decade – a no mean feat. Still the company fell into oblivion because, in a pursuit of continuous growth the company changed its business strategy in FY12 and got into services and invested heavily into people as they had to opt for near-shore and on-shore development which obviously resulted in severe margin erosion. A few other factors like one of their bigger customer – Kingfisher Airlines going kaput and severe slowdown in EU and US did not help either. Company’s operating margins that were in mid-thirties at that time crashed to low single digits. That is when the management decided to drop the strategy and start focusing on operating margins by offshoring its positions. The previous strategy was dropped in late last FY and the turnaround has started from this FY and in a few quarters the company’s operating margins are expected to improve dramatically (ofcourse there could be slight volatility for a few quarters but the trend will be up). Another very important point to note is that though the company’s OPM deteriorated, company’s cash generation has always been excellent. Infact, Sankhya’s cash generation is way superior to its more celebrated peer Zen technologies (which is in same verticals though different kind of products). The company counts Indian Army, Air Force, Indian Railways and defense PSUs such as Bharat Electronics, DRDO as its major defense customers and have clients in US, France and UAE and Bahrain in the space.
The promoters hold around 24.25% stake in the company along with 9.1% that is securitized with IDBI bank. Another 18.3% stake is held by the parent company of HBL Power (another major listed entity). The company has well written Annual reports and investors should read them all to get a better understanding of the company. Yes the company is facing real challenges but now the times are improving for it. Sankhya has always been a good executor and has also managed to bag some very prestigious contracts amid strong international competition based on its superb execution track record and technical expertise. Last year it had won the CBSE online education project that aims to provide online education to over 11.5 million students. With the present government’s thrust on Defense and e-governance, Sankhya is gearing up to garner a large pie of the defense opportunity that is coming up and is bidding wisely.
Few Interesting Facts :
- Sankhya was the first company in the world to have launched the web based simulation for the Aviation Industry.
- The company’s e-learning product is used by more than 50% of all bank employees in India.
- Sankhya is also the first indian IT company to sell a software product to American Defense Organization.
- The company has successfully completed the execution of the prestigious Mumbai Rail Vikas Corporation Simulation project. Dubbed as the most complex rail network in the world Sankhya successfully completed the simulation project for MRVC that would help the corporation prepare train schedules for improved productivity and efficiency of rail assets utilization.
Valuations: Sankhya available at around 29cr market cap has a turnover of over 181cr, is therefore trading at just 0.17x its FY15 turnover and at just 0.4 times its book value. The stock is also available at less than 5 PE based on FY16 earnings. The company for H1 has delivered revenue of over 74cr with EPS of around 2.78rs. The company gains heavily by weakening rupee as is evident from its other income and therefore, the gains could further go up in wake of Fed’s rate decision. The stock Sankhya is grossly undervalued, especially if one considers that Zen Tech is trading at 5 times its book value and over 8 times its FY15 revenue. The valuation gap is extremely huge and is expected to narrow down significantly which itself could turn it into a huge multi bagger. Most importantly Sankhya’s cash generation is excellent and is way superior to its peers like Zen Technologies. Whereas other product companies are trading at astronomical valuations, a niche product company like Sankhya is available at dirt cheap valuations. Though as of now its more of a technical than fundamental bet. It has debt of around 8.7cr.
Technicals: The stock is not just available at juicy valuations but is also technically “very strong”. The stock bottomed out a few months back and has been on steady uptrend for last few months. But in the last couple of weeks, the uptrend has gathered huge momentum and the stock had bounced from short term supports and the bounce has been so strong that it gave a breakout by taking out its swing highs on huge volumes. More importantly the stock is on verge of another massive breakout on yearly charts and the stock will now gather strong momentum on upside.
Yes, the business was facing challenges but FY16 (especially H2) and FY17 is expected to be landmark years when the company, not only will continue on its growth trajectory but the margins would improve “significantly” too and their domestic focus would start bearing fruits. And let’s not forget that since there are such challenges that is the why we are getting a nice product company at such juicy valuations (0.4Xbook value, 0.17x sales, 5Xfy16 PE). Sankhya is a nice product company that generates strong cash flow, is available at rock bottom valuations and we are catching it at the cusp of its turnaround and importantly the theory is backed by some solid technicals.
Disclaimer: It is safe to assume that I may have some vested interests in the stock. Also, the above stock view is my personal view in individual capacity. For rest, please look at the About page.