SAKSOFT LTD - BUY

 

IT stocks are attracting renewed buying interest due to more than one reasons . Possibility of revival in Western economies after a gap of few sluggish years is the major reason for this bullishness .A favorable exchange rate is also helping IT companies  to expand margins.In addition to such factors ,IT is a sector which may not affect much due to any political changes or uncertainties  in the centre, post parliament election.In recent times ,many readers requested to suggest some good IT stocks from small/mid cap space .The biggest challenge in selecting listed IT companies for investment purpose from mid/small cap is the integrity of promoters. During 2000 IT bubble many companies from this sector collected money through IPO and then disappeared even without any trace.Most of the  small and mid size IT companies following asset light business models and only the human resources are their asset which is prone to attrition.Hence promoter integrity is most important in such businesses compared with asset rich business models.So, evaluating a small IT company is more challenging  especially at a time most of them are trading around their highs.Considering all these factors , this week recommending a Chennai based small IT company– Saksoft Ltd.

Saksoft is a company promoted by the erstwhile joint  Indian Promoters of WIDIA INDIA  (joint venture  with Meturit A.G. of  Switzerland-subsidiary of Friedrich Krupp GmbH) .Later they divested their stake in Widia in  favour of foreign promoters and now this company is listed here as ‘Kennametal India’. Thereafter, Saksoft is the second company came out with an IPO from the same promoters in 2005 at a price of Rs.30.While large IT companies operating in different verticals ,small and mid size IT companies co-existing and growing in niche sectors.Saksoft is one such company specialising in Information Management solutions and Business Intelligence .In large size companies ,French MNC Capgemini  is a company specializing in this space.Saksoft offering services for various sectors including Banking,Telecom,Retail,Logistics..etc.Recently company entered into Mobile application development .Company having three development centers one each at Chennai,Noida and Manchester and sales offices in various countries at London, Manchester, New Jersey, Chicago, Pennyslvania, Singapore and in India. Company operating through five subsidiaries and three step down subsidiaries located  in different countries.Last year Saksoft acquired 100 % stake in US based Electronic Data Professionals (EDP) through its US subsidiary Saksoft Inc.

                                                               From an investor’s perspective one interesting fact about this company is the low valuation market assigning to this stock. Even when many mid and small size IT companies promoted by promoters with suspicious background  are getting a P/E of 15 or 20 ,this stock is still trading at a one year forward P/E of  just around 5 .That itself only after recent up move when it came out of periodic call auction.I believe , a major reason for such a low valuation is the working structure of this company. As I mentioned above ,it is operating through various subsidiaries hence only the consolidated result reflecting the true picture of the company . But in many sources where data about company results are published ,only the stand alone result is available which is not attractive prima facie .For the FY 2012-13 ,Saksoft reported a consolidated turnover of Rs.160 Cr and a net profit of Rs.11 Cr where its stand alone sales was only Rs.42 Cr and profit was mere Rs.2.8 Cr.This difference is very huge and only few investors may be aware about this . ( Comparative consolidated yearly result HERE) Another fact is ,it  is a low liquid stock where floating stock is very limited due to high promoter stake.Promoters are holding near the maximum permissible limit of 75 % and large share holders holding another 11 % stake.Mr Ajit Thomas ,major promoter of south based well known AV Thomas group is a director of this company and he purchased 2 % stake in Saksoft from open market in last FY.

                                                                              In the first half of this FY,company reported a consolidated Sales of Rs.112 Cr and a net profit of Rs.7.6 Cr . ( Consolidated qtr results HERE) . I expect ,company will cross the last full year profit figure in this 9 months itself and report a full year EPS of Rs.15 in FY 2013-14. It is consistent dividend payer for the past ten years which paid 20 % in last FY, an increase from 10% from preceding years .In a recent interview , ( Read it HERE ) founder and MD of the company projected a turnover of Rs.1000 Cr in next 5 years.It is not impossible considering company's past efforts through inorganic route . Company also started to merge its subsidiaries and recently merged one of its subsidiary Synetairos Technologies Limited with itself . I believe it is one of the quality IT companies available at cheap valuation even after recent run up from small cap space .One major risk is low liquidity but it may be a blessing too for a performing business.Expecting at least 50 % appreciation from current level and  recommending as a strong buy for risk takers due to its low liquid nature.Stock is currently trading around Rs.82 and listed in NSE and BSE.

Link to Company Website HERE 

Link to company's Subsidiaries  Link1 ,Link2

Link to latest Annual Report HERE

Disc: I have vested interest in Saksoft.