Company Name – Intellect Design Arena Limited (Intellect Design Arena) Current Share Price – INR 440 (February 3, 2023) Market Cap – INR 5,968 cr |
1. What is interesting about the stock?
Has it ever intrigued you to find out what powers the RBI’s banking operations as they encompass millions of transactions with banks, ministries, and departments across states as well as treasury operations? The correct answer is Intellect Design’s Quantum Central Banking Solution or e-Kuber, as it is called within the RBI.
Intellect Design Arena is the world’s pre-eminent cloud-based, multi-product financial technology products and platforms provider to 270+ customers across 97 countries with over 25 years of domain experience. It was the BFSI products vertical at Polaris Consulting & Services (earlier known as Polaris Financial Technology), before being demerged in March 2014 and listed in December 2014.
Intellect Design Arena offers products for corporate banking (iGTB), and retail banking (iGCB) including digital core banking, lending, wealth management, digital retail banking solutions, treasury, and capital markets (iRTM), insurance (Intellect SEEC), e-governance solutions (iGov).
The Company’s customers include commercial banks, central banks, non-banking financial institutions, capital market participants such as brokerages, stock exchanges, asset managers, wealth management firms, government enterprises, and insurance carriers. The Company partners with them in their digital transformation agenda as they set out to expand their customer base, improve customer engagement, streamline their processes to improve standards of customer service, and build efficiencies while being compliant with the evolving regulatory landscape.
The Company operates in three different models:
Traditional Product Sale Model: In this model, the Company licenses the product to their customer for use on-premise. The customer also pays for maintenance of the product during the period of the license.
Customer-Centric Partnership Model: The Company collaborates with the customers as their Strategic Technology partners and works with them on their technology/business roadmap. The Company receives payment for the services provided apart from any Intellectual Property licenses that the company grants the customer for use.
Cloud deployment/ Subscription based Revenues: For customers who do not wish to take on the investment in Technology Infra and/or the complexity of managing them, the company offers their products and platforms on the Cloud deployment model - either in a unique hosting arrangement or through an independent Cloud Services provider. The Company receives revenues through Product licensing, Cloud setup, Hosting, and Subscription revenues - either fixed or linked to Customers' Business metrics.
Company has been steadily increasing its license-linked revenue (license, SAAS/subscription, and AMC) from 33% in FY15 to 54% in Q2FY23.
Implications from the outbreak of the pandemic have accelerated digital activities among large global enterprises, leading to increased spending on workplace transformation and collaboration tools, cybersecurity, and higher cloud migration. As technology is seen as a source of competitive differentiation in every industry, technology spending is expected to remain at an elevated level in the next 3-5 years even after the situation normalizes. Further, increased online activity is driving higher technology spending in developed markets, which would drive outsourcing growth in India as the Indian IT industry has remained far more resilient as compared to global competitors and captive units of large enterprises and talent diversity. Large global enterprises have increased spending on Cloud and Cloud-related technologies, workplace transformation and collaboration tools, and cybersecurity.
Intellect Design Arena products compete with global players such as Temenos, Oracle Financial Services, Finastra, FIS, FISERVE, ACI Worldwide, and Indian competitors such as Infosys and TCS along with a few regionally available solutions providers in different geographies. The competition is spread across various segments of the BFSI sector based on the offerings and the company competes with different players across the various product line.
Why invest in Intellect?
The key investment arguments summarized would be:
270+ global customers across 97 countries of all sizes, including central banks, across the BFSI industry; transition to a cloud-based platform API-first company allows it to tap into the growing fintech domain rapidly increasing the total addressable market for the Company by nearly 3x
More than half the revenues coming from developed markets like North America, the EU, Japan, and Singapore is a testimony to the quality and service capability of the Company
Deep vertical focus and expansion into cloud-native platforms allow it to offer solutions valued by customers across the spectrum of traditional and new financial institutions
Experienced management team
2. Key Historical Financials
Company’s cost optimization program with a focus on rationalization of S&G expenses and tighter R&D spending and its efforts to increase the license-linked revenue helped to enhance the company’s margin profile in FY21 and onwards. EBITDA margin has jumped from 6-9% in FY19/FY20 to 24% in FY21 and 25% in FY22
EBITDA margin fell to 17% in Q2FY23 vs 25% in Q1FY22 due to slowing growth in Europe (recession fears!) and higher employee costs. Higher tax rate led to a further fall in net profit in Q2FY23 vs Q2FY22
Management is guiding toward 20% revenue growth in FY23 and a long-term EBITDA margin of 30% - revenue growth seems doable in the near to medium term but the EBITDA margin seems aspirational especially after recent quarters
WC days have improved from 91 days in FY20 to 59 days in FY21 due to lower receivable days but have jumped back to 125 days in FY22. This led to a robust CFO/EBITDA ratio of ~96% in FY22
ROE has improved from 14% in FY19 to 22% in FY22
Company is using a small part of the cash generated to pay off loans and financial liabilities. However, the company is not paying dividends and keeping ~ INR 575 cr of cash and liquid investments on the balance sheet
3. What is my view on company valuation?
This is a Company that should be on the radar of any long-term investor as it is one of the few IT product companies from India. Over the past few quarters, it has transitioned into a fintech platform with cloud nativity, open architecture, and an API-first approach. This makes the Company’s solutions to the fintech space, which has seen a lot of new entrants and extensive VC/PE funding in the last few years, attractive, and therefore the demand pipeline remains strong.
At a current P/E of 19x on a TTM basis, it is lower than the Company’s long-term historical P/E of 35x, on the back of falling margins in the difficult business environment. Looks interesting in the long term for investors to evaluate once the business stabilizes.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Single vertical (BFSI) dependence intertwines the Company’s fortunes with the industry’s fortunes significantly
Technology is constantly evolving, and should any competitor offer better solutions the possibility of customers moving to the competitor is high
About the Author
I have over 16 years of experience in private equity and public markets. I am an engineer by background and MBA from a premier institute in India.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.
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