I was waiting for Dec first week from last few months so that I could sell my entire remaining holding to get tax free profit of around 8-9 times of my initial capital(brought in range of 45-52 ) invested but instead of selling I started buying back more from already booked profit , you will say we know you are Idiot but this much never thought. I had already sold my some shares when I bought Olympia Industies and TechNVision , and reduced to 40% when despite write off by the company and market price was still above 560 . This first week of December , I could have easily said Thank You very Much Intrasoft and Bye-Bye but no I didn't . Despite write-off why I still bullish on it . Initially like others I though it is very much negative but when I talk to one of the senior investors whom I interact on email said if you expecting all products from product based company are going to be commercially successfully then you are having wrong expectation . There will be some products which will not taste commercial success . He said even Google try lot of things , at different stages they stop those project only handful of projects escalates to next level . I am not sure how they write off cost of these project but they had to reflect it . But Google is Google we can't use it for comparison at all . Intrasoft explained that "When we started the e-commerce venture, we pursued 3 or 4 models at the same time because we did not know what will work out. We thought that the auction format will work out and we thought the marketplace model for itself worked out. So as we got traction on the current model we pursued the development on that and put on hold the other models. When we recently reviewed the assets under development and found them non-revenue generating we found it prudent to write them off. Anyway, since April 13 we were advised to debit all software development expenses directly to the PL account thus there has been no addition for
the past two and a half years."
It is true conservative investor don't like write off but in product based companies it is a reality unless debited in PL account . If I correctly remember then around 2008 Vakrangee has done write off of around 50 crores . But from 2008-09 level of under Rs 1 (adjusted) Vakrangee share now trading around 165 . It means whopping 165 times return in 7-8 years .
PE can be misleading :
If two companies are trading on same PE of 100 then does it mean both are trading on same high valuation ?
Lets say I give choice of two companies to choose for investment for 5 years both trading on high PE of 100 (Ignore moat other factors for simplicity)
A . Top line Growing 50% CAGR and has NPM of 30%
PE is going to be half after 5 years due to various reason not related to company .
B. Top line Growing 50% CAGR and has NPM of 0.5%
PE is going to be half after 5 years due to various reason not related to company .
Of course you will choose A . But now if I say that A will have same NPM of 30% after 5 years but B will have NPM of 3% then ? Then , equation will be change and I will have to choose B .
Why ?
A will give around 3.5 x return if PE drops to 50 but B will give 21x return even if PE drops to 50.
So, basically if a company which has scope for NPM expansion(generally young companies) trade on higher PE then it can be misleading and it is completely wrong to compare with others who already has good mature business with very good NPM .
When business news channel compare Intrasoft and Archies then
But ,next time if you analyse a company with high PE then apart from quality, moat , expected growth and other factors, don't forget to add the scope of NPM improvement .
Most of the Indian investors expect profit growth , high ROCE , high margin from even from young companies . They are not at fault because unlike USA we have not seen companies growing their top line first and then focus on profitability . We all have seen young IT companies like Infosys not only growing their top line but even same time bottom line from very young age .On the other hand we have seen Pantaloon which was expanding top line but it was funding it growth through debt or equity dilution because it had asset heavy business model .
Due diligence of reported GMV :
Few investors might not be believe in reported numbers of Intrasoft , lets cross check reported numbers . In fact , we should always do our due diligence before buying any stock .
Ideally , I should have done lot of offline check like talked to management , employee ,vendors , courier partners , Amazon , ebay, even Intel if I am seasonal full time investor. But I am not full time investors so I don't have luxury do all these . So , I relied on online whatever information available to do cross check . Of course , it is estimates and it can't be 100% accurate but it should be accurate with error margin(contingency) of around 20-25 % .
As we know Amazon USA contributes highest GMV to Total GMV of Intrasoft . They have never disclosed GMV shares but As per my initial analysis . It should be the following .
Intrasoft has TTM revenue of around 497 crores out of these around 460 cr should be GMV of e-commerce division .
Now if we talk to seller on Amazon ,eBay you will come to know that actual orders are 8-12 times of feedback count .
Now look at the following feedback count of 123stores on Amazon USA .
http://www.amazon.com/sp?_encoding=UTF8&asin=&isAmazonFulfilled=&isCBA=&marketplaceID=ATVPDKIKX0DER&orderID=&seller=A3SQ9YFE6CSCS0&tab=&vasStoreID=
If we see last TTM feedback count is 42310 but reduce to 40000 due to seasonal effect from last month .
Now as per management Average Order Value in Q2 FY2015-16 = Rs. 3994
But, lets verify it from independent website which track and give rank to Amazon sellers .
http://www.marketplacepulse.com/amazon/usa
http://www.marketplacepulse.com/amazon/usa/stores123
You will notice that how fast 123store is growing in USA. They have life time rank of 372, 1 year rank of 72 and one month rank of 30 .
As per them Average sale price is $75.98 = around Rs 5000 . Management has given Rs. 3994 avg for all the e-commerce websites .
So lets assume that it is 4500 on Amazon USA .
So total GMV of Intrasoft on Amazon USA should be = 40000 * 10 * 4500 = 1800000000 = around 180 crores = Around 39% of 460 crores .
If we consider avg order at 4000 then it comes to 160 crores which is 35% of 460 crores which is also in our range .
Now , look at eBay feedback count .
If we see last TTM feedback count is around 40000 lets reduced to 38000 to seasonal effect from last month .
So, total GMV of Intrasoft on eBay USA should be = 38000 * 10 * 4000 = around 152 crores = Around 33% of 460 crores .
Their own website 123stores.com has around 7000 daily unique visitors(last year it was not around 2500) (source : http://123stores.com.alexaview.com/ , if order conversion rate is mere 5% then they should have daily order of 350 .
So, total GMV of Intrasoft through their direct website 123stores.com = 350 * 4000 * 365 = 511000000 = 51 crores = around 11 % but management always said below 8% .
So, our estimates and reported GMV are very close, not much variance .
If you seen http://www.marketplacepulse.com/amazon/usa/stores123 closely you might have noticed that it says only 581 product in stock or even if you visit http://www.amazon.com/s?marketplaceID=ATVPDKIKX0DER&me=A3SQ9YFE6CSCS0&merchant=A3SQ9YFE6CSCS0&redirect=true it shows only 574 .
Somehow , there is some issue with Amazon USA storefront , not only for 123stores but others as well . It shows count only from few categories only .
Lets cross check it as well . Give following query to Google .
site:http://www.amazon.com/ "sold by stores123"
site:http://www.amazon.com/ "sold by Pharmapacks"
site:http://www.amazon.com/ "sold by Wayfair"
stores123 gives around 48,800 results while Pharmapacks gives 40,500 . Please note Pharmapacks is second ranking seller on Amazon USA and these results are only for the listing where they are are offering top 3 offers to customer for given listing/product. So , actual listing may be 4-5 times more . Even Wayfair returns around 88,100 records which has market cap of more than Rs 24000 crores . https://www.google.com/finance?cid=1060469309126722 . We will go in detail of Wayfair in next few sections .
Now check on eBay it is showing more than 160000 product listing .
http://stores.ebay.com/DynamitePrice
They have grown by around 100% CAGR in last 5 years , currently growing at 130% CAGR but still growing at 100% CAGR in next 5 years is very very much difficult but not impossible .
So , I will again warn you 100% CAGR is best case , We will have to track it during entire holding period and take decision depend on it . This is not moat investing where we buy and forget it .Even at 30% growth in topline we can have 3 times return in 5 years .
So during our holding period we have to closely watch growth rate and how much NPM will it achieve once business got mature . One of the rarest of rare but still possible possibility is they never turned profitable consider that as well . It is very very low risk but still risk , can't ignore it completely .
Margin Of Safety :
Let assume they continue to grow at 100% next year , it means GMV will be 1500 crores . Now investor says we don't want model which can work for US based investors . We want immediately profit , can't hold loss making company or high PE , it gives some non explainable feeling and we also don't have patience ( kal kisane dekha hai ?) . Somehow , due to these type of investors management comes under pressure , they started to focus on profit . So instead of targeting 3000 crores next year they target same GMV of 1500 cores but at 4% NPM . So they can make around 60 crores since investors love profit making company that too in e-commerce they may give at least 20 to 30 PE . Probable market cap will be in range of 1200 crores to 1800 crores in two year . Not bad from current level of 600 crores.
Another margin Of Safety comes from NASDAQ listing . Earlier some investors request about appointment of reputed auditor and NASDAQ listing . First wish has been fulfilled . As far NASDAQ listing is concern they were open if Indian market don't give comparable valuation and it adds shareholder's value .
If NASDAQ listing happens then it can easily get 2-2.5x GMV because it is growing faster than WayFair . Some of the believer of Wayfair model who has missed the bus due to late IPO may show good interest in 123stores.
Once, they get some scale and do roadshow to existing investors of WayFair for fund raising then also they are likely to get good response .
Conclusion : It is one of rare visible opportunity with some margin of safey.
Vakrangee investors made 165 times(sorry, by today's price 185 times) in 7-8 years after IT asset write off , it doesn't guarantee Intrasoft will also give good return despite write off . But one thing is sure market reacts badly to detox but if business is good then it may even rewards in long run .
I have added this section since one of the blog reader Aman Vij has raised valid red point about write off.
Now , after this I dig into write off matter of Intrasoft. I am not accounting expert but I tried my level best to understand it . However , If you have CA background you can send email to me with your unbiased analysis to value2wealth.india@gmail.com .
Now a days write off means complete write off and no direct or indirect benefits to the company . But , earlier it was not the case .
Even before the IPO (2009) , Intrasoft use to write off using "Miscellaneous Expenditures Written off" . It again look like simple write off but no it means "The Expenditure having the impact on the workings of the company in subsequent years or benefit of which shall continue in one or more subsequent years is recognised as Miscellaneous Expenditure.Such Expenditure is written off in equal installment in five years starting from the year in which they have been incurred. "
It was use as account of amortization . E.g you are working on a XYZ product in year x but that product is going to be launch in x+1 or x+5 years then this term "Miscellaneous Expenditures Written off" is used because this year this product is not going generate any revenue or no use. There might be some alternative to this approach but they followed this .
Now , problem started when after IPO money they rapidly started working on some products but that might have increased deferred revenue Expenditure , but after few years as per revised Schedule VI they no more use this term so they had to debit General Reserve Account .
You can not have doubt on corporate governance on a Tata group company . You will better understand it from Voltas example , how that revised Schedule impacted the companies.
Voltas -Utilization of share premium a/c to adjust the deferred revenue exp- confirmed by High Court Mumbai
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=1edb8ccb-c832-4bbf-a7e7-a6506822dca7
Intrasoft had also accumulate lot of deferred revenue exp , they had to adjust that in General Reserve Account after revised Schedule VI. Now , they have clearly indicated in last conf call this is last write off as per their review process. Let's hope for the better .
Some of the other companies used deferred revenue exp, Fixed Assets Discarded or write off are ...
Dabur
http://www.bseindia.com/bseplus/AnnualReport/500096/5000960311.pdf
Repro
http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/Repro_India_Ltd_200514_Rst1.pdf
http://www.bseindia.com/bseplus/AnnualReport/532687/5326870314.pdf
Ashok Leyland
Ashok Leyland Ltd has informed BSE that the Board of Directors at its meeting held today (December 10, 2002) has approved a proposal to write off against the Share Premium Account of the Company as sum not exceeding Rs 1600 million representing Deferred Revenue Expenditure (primarily related to Voluntary Retirement Scheme Payouts) and diminution in value of some investments and fixed assets.
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=f01a1096-65d1-4909-a1a6-e529180596f4
BHARAT HEAVY ELECTRICALS LTD
http://www.bseindia.com/corporates/resultNotes.aspx?Scrip_cd=500103&scripName=BHARAT%20HEAVY%20ELECTRICALS%20LTD.&qtrcode=31.00
Torrent Pharma
http://www.bseindia.com/corporates/resultNotes.aspx?Scrip_cd=500420&scripName=TORRENT%20PHARMACEUTICALS%20LTD.&qtrcode=35.00
STEEL AUTHORITY OF INDIA LTD.
http://www.bseindia.com/corporates/resultNotes.aspx?Scrip_cd=500113&scripName=STEEL%20AUTHORITY%20OF%20INDIA%20LTD.&qtrcode=40.00
GMV Amazon USA Ranking :
store123 has improved it's one month ranking today from earlier 30 to 25 (http://www.marketplacepulse.com/amazon/usa/stores123) . I believe list get updates everyday. Interestingly it might have in top 5 contributor to third party sale on Amazon USA in last one month because as per marketplacepulse.com it's Average sale price is $75.98 while other having like $10 , $20 . If we multiply one month feedback and Average sale price then we may get GMV ranking based on feedback count . I am sure it will be in top 5 but I will do this exercise on spare time or weekend .
Disclaimer : Please treat this post as starting point of your research and not conclusion to invest in any discussed stock. As always , please take the advice of a SEBI qualified financial adviser which I am not .
SideNote/MustRead : I am not sure how much you can learn from Idiot like me but you will defiantly learn lot from Jana Vembunarayanan . Please read his valuable lecture note https://janav.wordpress.com/2015/12/12/final-lecture-note-its-not-easy/
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the past two and a half years."
It is true conservative investor don't like write off but in product based companies it is a reality unless debited in PL account . If I correctly remember then around 2008 Vakrangee has done write off of around 50 crores . But from 2008-09 level of under Rs 1 (adjusted) Vakrangee share now trading around 165 . It means whopping 165 times return in 7-8 years .
PE can be misleading :
If two companies are trading on same PE of 100 then does it mean both are trading on same high valuation ?
Lets say I give choice of two companies to choose for investment for 5 years both trading on high PE of 100 (Ignore moat other factors for simplicity)
A . Top line Growing 50% CAGR and has NPM of 30%
PE is going to be half after 5 years due to various reason not related to company .
B. Top line Growing 50% CAGR and has NPM of 0.5%
PE is going to be half after 5 years due to various reason not related to company .
Of course you will choose A . But now if I say that A will have same NPM of 30% after 5 years but B will have NPM of 3% then ? Then , equation will be change and I will have to choose B .
Why ?
A will give around 3.5 x return if PE drops to 50 but B will give 21x return even if PE drops to 50.
So, basically if a company which has scope for NPM expansion(generally young companies) trade on higher PE then it can be misleading and it is completely wrong to compare with others who already has good mature business with very good NPM .
When business news channel compare Intrasoft and Archies then
But ,next time if you analyse a company with high PE then apart from quality, moat , expected growth and other factors, don't forget to add the scope of NPM improvement .
Most of the Indian investors expect profit growth , high ROCE , high margin from even from young companies . They are not at fault because unlike USA we have not seen companies growing their top line first and then focus on profitability . We all have seen young IT companies like Infosys not only growing their top line but even same time bottom line from very young age .On the other hand we have seen Pantaloon which was expanding top line but it was funding it growth through debt or equity dilution because it had asset heavy business model .
Due diligence of reported GMV :
Few investors might not be believe in reported numbers of Intrasoft , lets cross check reported numbers . In fact , we should always do our due diligence before buying any stock .
Ideally , I should have done lot of offline check like talked to management , employee ,vendors , courier partners , Amazon , ebay, even Intel if I am seasonal full time investor. But I am not full time investors so I don't have luxury do all these . So , I relied on online whatever information available to do cross check . Of course , it is estimates and it can't be 100% accurate but it should be accurate with error margin(contingency) of around 20-25 % .
As we know Amazon USA contributes highest GMV to Total GMV of Intrasoft . They have never disclosed GMV shares but As per my initial analysis . It should be the following .
| Amazon USA | 30-40% |
| Ebay USA | 25-35% |
| 123stores.com | 5-8 % |
| Rest (Amazon Canada , Alibaba’s 11main.com , Sears.com New Egg ,Rakuten (buy.com) , Bestbuy.com and newly added Jet.com ) | 25-35% |
Intrasoft has TTM revenue of around 497 crores out of these around 460 cr should be GMV of e-commerce division .
Now if we talk to seller on Amazon ,eBay you will come to know that actual orders are 8-12 times of feedback count .
Now look at the following feedback count of 123stores on Amazon USA .
http://www.amazon.com/sp?_encoding=UTF8&asin=&isAmazonFulfilled=&isCBA=&marketplaceID=ATVPDKIKX0DER&orderID=&seller=A3SQ9YFE6CSCS0&tab=&vasStoreID=
If we see last TTM feedback count is 42310 but reduce to 40000 due to seasonal effect from last month .
Now as per management Average Order Value in Q2 FY2015-16 = Rs. 3994
But, lets verify it from independent website which track and give rank to Amazon sellers .
http://www.marketplacepulse.com/amazon/usa
http://www.marketplacepulse.com/amazon/usa/stores123
You will notice that how fast 123store is growing in USA. They have life time rank of 372, 1 year rank of 72 and one month rank of 30 .
As per them Average sale price is $75.98 = around Rs 5000 . Management has given Rs. 3994 avg for all the e-commerce websites .
So lets assume that it is 4500 on Amazon USA .
So total GMV of Intrasoft on Amazon USA should be = 40000 * 10 * 4500 = 1800000000 = around 180 crores = Around 39% of 460 crores .
If we consider avg order at 4000 then it comes to 160 crores which is 35% of 460 crores which is also in our range .
Now , look at eBay feedback count .
If we see last TTM feedback count is around 40000 lets reduced to 38000 to seasonal effect from last month .
So, total GMV of Intrasoft on eBay USA should be = 38000 * 10 * 4000 = around 152 crores = Around 33% of 460 crores .
Their own website 123stores.com has around 7000 daily unique visitors(last year it was not around 2500) (source : http://123stores.com.alexaview.com/ , if order conversion rate is mere 5% then they should have daily order of 350 .
So, total GMV of Intrasoft through their direct website 123stores.com = 350 * 4000 * 365 = 511000000 = 51 crores = around 11 % but management always said below 8% .
So, our estimates and reported GMV are very close, not much variance .
If you seen http://www.marketplacepulse.com/amazon/usa/stores123 closely you might have noticed that it says only 581 product in stock or even if you visit http://www.amazon.com/s?marketplaceID=ATVPDKIKX0DER&me=A3SQ9YFE6CSCS0&merchant=A3SQ9YFE6CSCS0&redirect=true it shows only 574 .
Somehow , there is some issue with Amazon USA storefront , not only for 123stores but others as well . It shows count only from few categories only .
Lets cross check it as well . Give following query to Google .
site:http://www.amazon.com/ "sold by stores123"
site:http://www.amazon.com/ "sold by Pharmapacks"
site:http://www.amazon.com/ "sold by Wayfair"
stores123 gives around 48,800 results while Pharmapacks gives 40,500 . Please note Pharmapacks is second ranking seller on Amazon USA and these results are only for the listing where they are are offering top 3 offers to customer for given listing/product. So , actual listing may be 4-5 times more . Even Wayfair returns around 88,100 records which has market cap of more than Rs 24000 crores . https://www.google.com/finance?cid=1060469309126722 . We will go in detail of Wayfair in next few sections .
So, it proves that they have lot more listing than what Amazon store front URL of 123store is indicating .
Now check on eBay it is showing more than 160000 product listing .
http://stores.ebay.com/DynamitePrice
Now , you will get confused like me . What is this store name DynamitePrice ? I had received Intrasoft eBay store URL from them officially . But since name is something different we should cross check that as well . I didn't get DynamitePrice and 123store or Intrasoft relation using Google search . I tried lot of things still no luck . But , then somehow I got relation hint once I found that DynamitePrice eBay store is using some image URLs of 123stores.com by viewing view source option(HTML).
Now, they have appointed Grant Thornton as new auditor for 123store (USA e-commerce division) .
Grant Thornton LLP is the American member firm of Grant Thornton International, the fifth largest accounting network in the world by combined fee income.[1] Grant Thornton LLP is the sixth largest U.S. accounting and advisory organization.
What I liked about management they used to upload audited result of USA subsidiary from last few years even before coming to limelight last year . It may be easy to cook book in India but in USA it is comparatively very difficult due to improved laws in recent past .
So , if they are cooking book then following parties should be involved like management , Amazon , eBay , old auditor , new auditor Grant Thornton and even Intel which holds around 12% .
It is very rare possibility. So , I don't have any doubts on reported numbers .
Lets evaluate on required qualities which experts like Ian Cassel look into micro cap multibaggers
Run by "intelligent fanatic" :No doubts , we don't consider Arvind Kajaria in intelligent fanatic category yet but if he continues to do what he did in last 5 years to next 4-5 years then not all but some people like me will include in this category .We should give whatever credit Arvind Kajaria and management of Intrasoft deserve . Whatever, Intrasoft did in last 5 years is simply amazing and if continue to grow at same rate for next 5 years then it will more amazing . They had revenue of around 23 cr from e-commerce (123stores) in 2010-11 but after 5 years this years they are likely to post around 720 crores from e-commerce division (considering 130% growth for two remaining quarters) . It will be around 31 times in 5 years with 99% CAGR over 5 years . If they deserved criticism for something they could have done better then also deserved appreciation for what they have done so far in e-commerce division.
Market leader and dominates the small but growing market : 123stores/Intrasoft is not market leader of e-commerce but they are growing fast and may be become top 5 seller on Amazon USA in next 2-3 years . If we consider marketplace inside marketplace model then Nasadaq listed WayFair comes first then not sure but Intrasoft should be second in the world .
Asset light business model :
Both WayFair and 123stores has quite similar business model . They're not actually carrying much of any inventory. They're the middleman between all these independent vendors and suppliers. They're connecting them to people who are shopping online. If you're gonna sell stuff that's 1,000 lbs or 500 lbs it seems like that's the way to do it. Rather than having massive warehouse facilities where you're holding all that inventory. They directly ship from vendors .They are cash flow positive.
Earlier WayFair used to have major business from third party websites but now it has 81% from own websites like Wayfair.com, Joss & Main, AllModern, DwellStudio and Birch Lane . It still has GMV around 19% from third party websites like Amazon , eBay , even WalMart etc . But , 123stores has more than 90% business from third party websites .
Even though they don't usually carry inventory but before some big festival sale they own some inventory so that they can quickly fulfill order received and avoid cancellation.As per my knowledge Even they have arrangement to return inventory if not sold .
Normal days based on earlier volume , they get certain quote of a product XYZ from vendor. They add certain cost like shipping , marketplaces fees and gross profit etc .Based on this they decide price and list that item in different marketplace. Once , order received their integrated system in real time(or may few minutes time gap) inform to vendor . Now , vendor pack it and handover to courier service partner of 123store and this get delivered to customers . After few days they received payment from marketplace . They settle their due with vendor . This is normal flow but there might be some other flow like return etc .
Now obliviously you will ask why Vendor will come to 123stores instead of direct listing ?
Business models born because of certain needs .They can but they choose because
1) It is very difficult for small or new seller to show their listing at top . Even if it is lowest price then also it will not appear in top . Like Google, Market Place search engine has some complex formula to order listing of item for a given search.No doubt price is one parameter but there are few others as well like total number of order processed , Feedback etc .
2) They will need some technical expert to decode it .
3) In house team of technical expert will not be affordable to many vendors because of minimum wages in USA .
4) They will also need a team of non tech person for lot stuff like competitor pricing , talking to customers to address some issues , even handling marketplace communication etc .Most of the market places require that you answer an e-mail within 24 hours.The would have to hire customer support agents just to answer Amazon’s queries.
5) Remember what Achal Bakeri ("intelligent fanatic"), founder and CEO of Symphony Limited said "In an ideal world, I would outsource everything, except the bank account". Vendors try to focus on their brand, quality etc. and they just want to outsource online selling to WayFair or 123stores . Wayfair claims to have seven million products from over 7,000 suppliers so there is lot of scope for 123stores .
Scalable Business model : It is highly scalable business model . In fact , they just need to clone it for new marketplace and new country. They already might have good design pattern , they just need to extend interface, start coding as per new marketplace and in few months integration ready from technical point of view . US e-commerce market is very huge if somehow the growth slowdown for them then they can enter in any other developed market . It is very huge scalable business model. You have every right to think otherwise if you have any doubts .
They have not completely utilized 123greetings.com for free leads to business to their website . So far they have only small link . There are milions of unique user visit 123greetings.com every month . I am still clueless why US people use so much for greeting , In India we just wish on what's up . Nevertheless , if they do little redesigning with banner of 123store with attractive offer then they may get lot of free business leads . Not sure about legal aspect but they have very huge email database of 123greetings.com , they can utilize it to send marketing message with best offer of 123stores for free business leads .
High ROE : We will have to give exception on this parameter which will be compensate by high growth of more than 100% .
Low debt or debt free :
Company has grown topline of e-commerce division by 31 times in last 5 years but debt has been reduced from 11 crores to mere 5 crores . This was possible because of asset light and highly scalable business model .
Small equity base and equity dilution : They have not diluted equity from at least last 5 years even grown so much. In fact, they do still have treasury shares around 8% which can be use for expansion. This is amazing you can fund the expansion by selling treasure share without diluting equity .
Little institutional ownership : Intel venture capital has picked up 12% stake long time back not just because of expectation of long term profit but also to serve some strategic interest of parent Intel . Zero MF holding and FII just started buying in only last quarter (Sep 2015 ) .
On other hand if you looked at WayFair then Bank of America upgraded Wayfair from a neutral rating to a buy rating and set a $45.00 target price on the stock in a research report. Citigroup Inc. lifted their target price on Wayfair from $33.00 to $45.00 and gave the stock a neutral rating in a research report . Piper Jaffray reiterated a buy rating and set a $60.00 target price on shares of Wayfair in a research report.Finally, Wells Fargo reiterated an outperform rating on shares of Wayfair in a research report.Five research analysts have rated the stock with a hold rating, nine have given a buy rating and one has given a strong buy rating to the company’s stock. The company has a consensus rating of Buy and a consensus target price of $48.31. Bye the way all are not positive on Wayfair, Whitney Tilson has short position in it . He has personally raised formaldehyde issue, stock reacted little negative but then bounce backed rapidly. Undervalued : When I first discussed Intrasoft it was hugely undervalued and was having market of just 70-75 crores . Now, it is 600 crores but at this valuation also it is undervalued . Black Friday & Cyber Monday ( 5 days period ) they have reported 160% growth . So, if we consider these remaining quarters they will show 130 growth in GMV then total revenue for year will be around 785 crores . So ,assume on safer side Rs 700 crores from e-commerce division which we will use for baseline . Now we will see magic of compounding at high rate and focus topline , topline , topline , topline ................. again topline and then profit business model which has tested success in USA but in India we not experience such success so far ( excuse me for my ignorant if any )
On other hand if you looked at WayFair then Bank of America upgraded Wayfair from a neutral rating to a buy rating and set a $45.00 target price on the stock in a research report. Citigroup Inc. lifted their target price on Wayfair from $33.00 to $45.00 and gave the stock a neutral rating in a research report . Piper Jaffray reiterated a buy rating and set a $60.00 target price on shares of Wayfair in a research report.Finally, Wells Fargo reiterated an outperform rating on shares of Wayfair in a research report.Five research analysts have rated the stock with a hold rating, nine have given a buy rating and one has given a strong buy rating to the company’s stock. The company has a consensus rating of Buy and a consensus target price of $48.31. Bye the way all are not positive on Wayfair, Whitney Tilson has short position in it . He has personally raised formaldehyde issue, stock reacted little negative but then bounce backed rapidly. Undervalued : When I first discussed Intrasoft it was hugely undervalued and was having market of just 70-75 crores . Now, it is 600 crores but at this valuation also it is undervalued . Black Friday & Cyber Monday ( 5 days period ) they have reported 160% growth . So, if we consider these remaining quarters they will show 130 growth in GMV then total revenue for year will be around 785 crores . So ,assume on safer side Rs 700 crores from e-commerce division which we will use for baseline . Now we will see magic of compounding at high rate and focus topline , topline , topline , topline ................. again topline and then profit business model which has tested success in USA but in India we not experience such success so far ( excuse me for my ignorant if any )
| CAGR | GMV | PAT @ 3% NPM | Mcap @25 PE | Mcap @30 PE | |
| Best | 100 | 22,400 | 672 | 16800 | 20160 |
| Avg | 80 | 13,227 | 396.81 | 9920.25 | 11904.3 |
| Decent | 30 | 2,599 | 77.97 | 1949.25 | 2339.1 |
They have grown by around 100% CAGR in last 5 years , currently growing at 130% CAGR but still growing at 100% CAGR in next 5 years is very very much difficult but not impossible .
So , I will again warn you 100% CAGR is best case , We will have to track it during entire holding period and take decision depend on it . This is not moat investing where we buy and forget it .Even at 30% growth in topline we can have 3 times return in 5 years .
So during our holding period we have to closely watch growth rate and how much NPM will it achieve once business got mature . One of the rarest of rare but still possible possibility is they never turned profitable consider that as well . It is very very low risk but still risk , can't ignore it completely .
Margin Of Safety :
Let assume they continue to grow at 100% next year , it means GMV will be 1500 crores . Now investor says we don't want model which can work for US based investors . We want immediately profit , can't hold loss making company or high PE , it gives some non explainable feeling and we also don't have patience ( kal kisane dekha hai ?) . Somehow , due to these type of investors management comes under pressure , they started to focus on profit . So instead of targeting 3000 crores next year they target same GMV of 1500 cores but at 4% NPM . So they can make around 60 crores since investors love profit making company that too in e-commerce they may give at least 20 to 30 PE . Probable market cap will be in range of 1200 crores to 1800 crores in two year . Not bad from current level of 600 crores.
Another margin Of Safety comes from NASDAQ listing . Earlier some investors request about appointment of reputed auditor and NASDAQ listing . First wish has been fulfilled . As far NASDAQ listing is concern they were open if Indian market don't give comparable valuation and it adds shareholder's value .
If NASDAQ listing happens then it can easily get 2-2.5x GMV because it is growing faster than WayFair . Some of the believer of Wayfair model who has missed the bus due to late IPO may show good interest in 123stores.
Once, they get some scale and do roadshow to existing investors of WayFair for fund raising then also they are likely to get good response .
Conclusion : It is one of rare visible opportunity with some margin of safey.
P.S. (17 Dec 2015)
Vakrangee investors made 165 times(sorry, by today's price 185 times) in 7-8 years after IT asset write off , it doesn't guarantee Intrasoft will also give good return despite write off . But one thing is sure market reacts badly to detox but if business is good then it may even rewards in long run .
I have added this section since one of the blog reader Aman Vij has raised valid red point about write off.
Now , after this I dig into write off matter of Intrasoft. I am not accounting expert but I tried my level best to understand it . However , If you have CA background you can send email to me with your unbiased analysis to value2wealth.india@gmail.com .
Now a days write off means complete write off and no direct or indirect benefits to the company . But , earlier it was not the case .
Even before the IPO (2009) , Intrasoft use to write off using "Miscellaneous Expenditures Written off" . It again look like simple write off but no it means "The Expenditure having the impact on the workings of the company in subsequent years or benefit of which shall continue in one or more subsequent years is recognised as Miscellaneous Expenditure.Such Expenditure is written off in equal installment in five years starting from the year in which they have been incurred. "
It was use as account of amortization . E.g you are working on a XYZ product in year x but that product is going to be launch in x+1 or x+5 years then this term "Miscellaneous Expenditures Written off" is used because this year this product is not going generate any revenue or no use. There might be some alternative to this approach but they followed this .
Now , problem started when after IPO money they rapidly started working on some products but that might have increased deferred revenue Expenditure , but after few years as per revised Schedule VI they no more use this term so they had to debit General Reserve Account .
You can not have doubt on corporate governance on a Tata group company . You will better understand it from Voltas example , how that revised Schedule impacted the companies.
Voltas -Utilization of share premium a/c to adjust the deferred revenue exp- confirmed by High Court Mumbai
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=1edb8ccb-c832-4bbf-a7e7-a6506822dca7
Intrasoft had also accumulate lot of deferred revenue exp , they had to adjust that in General Reserve Account after revised Schedule VI. Now , they have clearly indicated in last conf call this is last write off as per their review process. Let's hope for the better .
Some of the other companies used deferred revenue exp, Fixed Assets Discarded or write off are ...
Dabur
http://www.bseindia.com/bseplus/AnnualReport/500096/5000960311.pdf
Repro
http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/Repro_India_Ltd_200514_Rst1.pdf
http://www.bseindia.com/bseplus/AnnualReport/532687/5326870314.pdf
Ashok Leyland
Ashok Leyland Ltd has informed BSE that the Board of Directors at its meeting held today (December 10, 2002) has approved a proposal to write off against the Share Premium Account of the Company as sum not exceeding Rs 1600 million representing Deferred Revenue Expenditure (primarily related to Voluntary Retirement Scheme Payouts) and diminution in value of some investments and fixed assets.
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=f01a1096-65d1-4909-a1a6-e529180596f4
BHARAT HEAVY ELECTRICALS LTD
http://www.bseindia.com/corporates/resultNotes.aspx?Scrip_cd=500103&scripName=BHARAT%20HEAVY%20ELECTRICALS%20LTD.&qtrcode=31.00
Torrent Pharma
http://www.bseindia.com/corporates/resultNotes.aspx?Scrip_cd=500420&scripName=TORRENT%20PHARMACEUTICALS%20LTD.&qtrcode=35.00
STEEL AUTHORITY OF INDIA LTD.
http://www.bseindia.com/corporates/resultNotes.aspx?Scrip_cd=500113&scripName=STEEL%20AUTHORITY%20OF%20INDIA%20LTD.&qtrcode=40.00
GMV Amazon USA Ranking :
store123 has improved it's one month ranking today from earlier 30 to 25 (http://www.marketplacepulse.com/amazon/usa/stores123) . I believe list get updates everyday. Interestingly it might have in top 5 contributor to third party sale on Amazon USA in last one month because as per marketplacepulse.com it's Average sale price is $75.98 while other having like $10 , $20 . If we multiply one month feedback and Average sale price then we may get GMV ranking based on feedback count . I am sure it will be in top 5 but I will do this exercise on spare time or weekend .
Disclaimer : Please treat this post as starting point of your research and not conclusion to invest in any discussed stock. As always , please take the advice of a SEBI qualified financial adviser which I am not .
SideNote/MustRead : I am not sure how much you can learn from Idiot like me but you will defiantly learn lot from Jana Vembunarayanan . Please read his valuable lecture note https://janav.wordpress.com/2015/12/12/final-lecture-note-its-not-easy/
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Sir when u will be posting your new Bamboo stock... Eagerly waiting for it
ReplyDeleteHi Anand ,
DeleteAs a rule I don't post my analysis of more than 2-3 stocks in a year.
There are some but I don't have high conviction in them.
Sir, Thank you very much for your valuable time for reply. Sir I am very much impressed with the detailed analysis you do one your value picks. Found your blog recently and found that I missed these gems. Can you please suggest few stocks from the stocks posted on this blog still a value pick at CMP
DeleteSir since two weeks I am trying to buy technvision.. but I am unable to buy it.. sir when can I buy it ? daily I put order to buy but its not working
ReplyDeleteSir since two weeks I am trying to buy technvision.. but I am unable to buy it.. sir when can I buy it ? daily I put order to buy but its not working
ReplyDeleteHi Ananth ,
DeleteTechnvision in quarterly circuit newly introduce by BSE . In fact , I have also not completed my 100% buying in Technvision . Jan first working day it will open again and can move up to max 92 in next few sessions .
awesome ... nice information
ReplyDeleteThanks Kamal Kumar ,
Deletejust experimenting and learning . I hope my picks remain in good shape in bad times as well .
nice analysis - really loiked your view of looking at it from different view points. /what about risks and inversion ? what are threats to getting disrupted or getting thrown out of amazon because of any issues or pricing pressures
ReplyDeleteI am glad you have pointed about risks . I have not covered all the risk . One of the other risk is they are commentating with Amazon itself on Amazon . But , Amazon don't want sell all the product specially bulky products . Around 60% of products sold through Amazon are from third-party seller like 123stores rest are from Amazon them self . In fact , they now want to improve share of third part sellers so they can become profitable like Alibaba in e-commerce division . Alibaba don't get majority revenue from Alibaba.com but https://www.taobao.com/ which is marketplace arm of Alibaba. Sales on the Taobao marketplaces make up more than 80% of all online purchases in China but majority of us attribuets success of alibaba to alibaba.com .
DeleteWhat’s important to note is that Alibaba’s platforms(Taobao marketplace) merely facilitate the transactions. They manage the marketplace and charge a small commission, but don’t hold – or sell – any merchandise themselves. Amazon USA will have to move this model gradually .
Stock Market is all about risk-reward . We should always evaluate risk but should not give weightage more that it deserve else you may miss some opportunity . If one see risk has very higher probability then should give high weightage skip that stock idea . We should evaluate it in whole context of risk reward but don't give too much weightage to risk if chances are low .
Most of the investors didn't buy Page Industeies (around 500) after IPO fearing risk that Jokey may or may not continue with page .
Avanti Industy has highest risk because shrimp industry always has treat to Disease.
Defiantly , you pointed risk is there but it has very very low probability . If that happens then may be they will focus more on their own websites or other countries where local marketplace are present like Flipkart , Snapdeal .
Sir when will you recommend your next value pick?
ReplyDeleteHi Vivek ,
DeleteAs a rule I don't post my analysis of more than 2-3 stocks in a year.
There are some but I don't have high conviction in them.
Hello sir..really impresses by ur analysis.. U hv put lot of effort and time ...
ReplyDeleteHv u looked Nihar info global. Other listed ecommerce stock..
Thanks..waiting fr ur reply..
Thanks sir its grt to learn different views and analysis..
ReplyDeleteHi,
ReplyDeleteVery good analysis. Just one small concern from my side As per the 2015 Annual report last year they had earned a profit of close to 6 cr. According to SEBI's guideline management compensation cant be more than 10% of net profit but as per annual report management compensation was 1.3 cr(70 lakh+60lakh) Any thoughts on the same.
Hi Aman ,
DeleteI am not worried about it . SEBI , BSE all those have formula based on mature industry . Look at Olympia Industries as per SEBI formula correct valuation is just 45 . Even at current price 145 all future expectation is not capture . In best case ( remember again best case ) it can reach to top line of 600-800 cr in next five years . They can start their own e-commerce websites but again we have management of company which was in BIFR, putting too much expectation will also be wrong.
Hi,
ReplyDeleteSome red flags I found about the business. May be you can look at them(or you may be knowing them already). Some of them are another investors views who meet with the management( His views may be biased)
1. The company had raised around 450 crore in IPO out of which it had put 50 crore in investments and 50 crore in reserves and surplus. It has almost written off those reserves (yes I know write offs is common in product development company) and used up the investment money. It is now planning to raise another 60 cr for US expansion buying an office in US . Now the management is trying its best to find the prospective investors. Currently the company has only 1 guy looking after US sales.
2. According to the management its biggest competitor is loss making company while they have been never made loss in ecommerce.
3. The new auditors walker Chandiok & Co. LLP are the same auditors of Rolta and Moserbaer and you must have read news about questions being raised about Rolta group balance sheet
4. I may be missing something but Management compensation of 1.3 crore is way above SEBI limit of 10% of profit
Lastly when the investor had asked about how he is supposed to buy the stock as the stock was mostly in circuits, the management told him that the stock was not in circuit during the same day. Shouldn't the management be least bothered about stock price movement and focus more on business?
Hi Aman ,
DeleteThanks for raising good point , my analysis might be little bit suffering from ownership bias .
However ,your statics not correct . They had raised only 53.65 Crores , so obviously you will have to revised all the your analysis with correct figures .
Still, it may be valid red points but I the scale will be quite low . I am already invested in it and I will have to take it as pinch of salt. I am not going sot sale because of this new investor may take this point while makaing decision .But I am sure in future they will not do something wrong for x amount when they can easily earn 10x legally , they might be that much smart enough .
Hi Aman ,
DeleteThis are my view on your queries/concern . You have every rights to be disagree .
1. I have updated above analysis with P.S. with my limited knowledge of accounting . I was also surprised when they said they have only 1 guy in USA and rest of the guys fly from India for short duration . It may be because of cost saving .
2. If they are talking about Wayfair then Wayfair have to heavily spend on advertisement , they don't do outsourcing to India and some other factors might be for loss making .
3. To be frank I have not check credential of Chandiok , I was more concern about 123 stores (e-commerce division ) which will contributes more than 90% .
4. SEBI provides some exceptions on management compensation . However , I am valuing company right now on GMV based. I see even management compensation from that perspective which is fine for me .
hi Aman... good information to know at the same time no offense admin :).
DeleteSir, Thank you very much for your valuable time for reply. Sir I am very much impressed with the detailed analysis you do one your value picks. Found your blog recently and found that I missed these gems. Can you please suggest few stocks from the stocks posted on this blog still a value pick at CMP
ReplyDeletehi,
ReplyDeletethanks for the detail analysis. can you also care to share your views on management (which is buffets key consideration while picking value stocks). I was reading up on glassdoor to see employee satisfaction and it looks awfully bad experience. I am reading through their financial reports and one of the observation was the performance 12-13 and 14-15 was almost close while 13-14 was a bad which made 14-15 look way better !!! any knowledge on why 13-14 was bad ? I am sure I will have to read 13-14 report to figure that out :) but thought I will ask you if you had done work towards that end.
I really apreciate your efforts in putting up this nice blog and sharing your research... one other question from my side how much of price growth do you expect in this company after the meteoric rise in 2015 ?
-Rags
DeleteHi Rags ,
Thanks for putting your comment and Apologized for the delayed response , just returned from the vacation .
I am very much impressed with management for scaling e-commerce business without dilution . Glassdoor latest ratting is with very low sample of just 2 employee in 2015 . One has given good feedback and another ex employee has given negative feedback . Obliviously , we can not expect much of positive reviews from ex-employee . If you see 123stores feedback on Amazon USA it has around 97% to 98% positive feedback and eBay USA it has only 486 negative against total more than 40000 feedbacks . Isn't amazing ? Just concentrate on big picture and avoid noise . As investors in bull market we will have to concentrate on big picture , what matters and what weightage we should give to negative points. If we go by proper strict check-list then you may not get even single stock pick with attractive valuation in bull market . We will have to wait till bear market . We should filters Check-list issue with how much it matters ? Every investors has their own viwes on check list issues , some issues we can ignore some issues we can't ignore at all . If Symphony investors had given lot of weightage on online review of Symphony then they couln't had made this much money because of lot of online negative reviews. But , I am culprit of selling Symphony early when it touch the PE of 50 . So far wrong decision .
As a investor our objective to get maximum gain with margin of safety in bull market and minimum or low impact in bear market if your initial capital is less than 1 milions dollar. Once capital grows above 1 milions dollar we should focus more and more safe game even in bull market .
You have mentioned "I am reading through their financial reports and one of the observation was the performance 12-13 and 14-15 was almost close while 13-14 was a bad which made 14-15 look way better !!! any knowledge on why 13-14 was bad ?"
I thing you are referring to incorrect data or may be you are referring standalone . I am more focus on e-commerce division (consolidated )
Total consolidated Income from last 5 years starting from FY11 is 49.11 71.92 106.22 171.12 347.02 crores .
I don't see you point is valid in consolidated result .
As far as price is concern , I can not predict but if business grows there will be takers and we can see price appreciation . Obliviously , It can't grow like 2015 again in 2016 but it will beat all the indices if business grow with same speed .
Indian E-commerce Platform Shopclues Claims $1.1B Valuation After New Funding, Plans IPO
ReplyDeletehttp://techcrunch.com/2016/01/12/indian-e-commerce-platform-shopclues-claims-1-1b-valuation-after-new-funding-plans-ipo/
Intrasoft has touch as low as 325 , scene is just scary . Business point of view nothing to worry . It has given us good return . I am sure 90% of the investors who brought around 45-60 range after our discussion on the blog has already sold it.If not then you may decide to starts booking some partial profit . Because , we should cash in this multibagger as well .
ReplyDeleteBusiness point of view it will continue to perform good but price appreciation will depend on triggers and market condition.
Sir what are ur picks for 2016
ReplyDeleteHi There,
ReplyDeleteAfter your post around Dec 15 Intrasoft was trading at the levels of around 420's and has now come down to levels of 320. I do understand that the market has corrected and probably shall continue to do so till about the budget time ( I guess ). I would like to know that how are the fundamentals of Intrasoft holding up in a tough economy like this and how would you rate them going forward.
I understand that your initial investment must have been around the 40 - 60 levels, and hence you are already sitting on the multibagger. But for someone who would like to enter at the current CMP would it be advisable or rather wait till you provide us with another stock pick.
As such I have have slight doubts in buying Intrasoft at CMP. cant buy Olympia or Technvision. So now I am left with nothing but to wait till you come out with an interesting next pick, or an update on the existing one.
Cheers
Hi,
ReplyDeleteI am impressed with your research. But looking at the latest march, 2016 results, although they have doubled the revenues but EIDTA is not justifying the share price. FY2015-2016 total profit is 41cr, if you deduct special gain (selling shares of worth 33cr), then effectively their profit would be 8cr, which will make the EPS of 5.4 Rs. That will give the PE of 70. They OPM of only 1%, which seems to be very less, and even if they improve the revenue double and with the current OPM, current share price is expensive. What do you say??
Hi Pranav ,
DeleteWe can't use same matrices for valuation of every company . We can't give same EBITDA formula for Eicher and Bajaj Auto . I hope you agree . Similarly you can't give same formula for young growing company vs old saturated company .
Our valuation should also based on business model . Since , Intrasoft is following top line based growth model . So , most weightage should be based on topline instead of EBITDA . E.g A company with EBITDA of 10 cr with top line of 200 crs can't have same valuation with a company B with EBITDA 10 cr with top line of 5000 cr . Can we ? No . Because If I had expectation of normalized 6% EBITDA margin after say n years in B company then after n years it will have say 10000 cr top-line and 600 cr EBITDA . Which will be far ahead of company A . So , this expectation build up in valuation of B that's why B trade on more valuation even both has same EBITDA and profit.
Above figures are illustration purpose , and not the expectation from Intrasoft . You can read Aswath Damodaran articles for valuation techniques .
I may use your formulas for Olympia Industries valuation instead of top-line . Because Olympia is not focusing on topline growth . It makes sense to first achieve scale and then profitability but they have not chosen this path, may be because of inpatient shareholders and fund raising constraints compare to non listed peers like cloudtail.
I believe Intrasoft management is doing good job for achieving growth . Since , I give most weightage to top-line so I compare numbers based on topline . I was expecting little slowdown in topline growth due to base effects . June quarters again should be around 100% (suggested by feedback counts) but base affect will again kick in for festivals quarters . I will expect higher two digits growth .
Hi, Thanks for the detailed reply.. But there is some thing that need to be looked upon.. on the revenue of 717Cr, there is expenditure of 700Cr.. If that expenditure includes some asset building which is going to benefit the company in longterm.. then i would have agreed with you that company has a great future.. but if you are into a business which commands only 3%margin, then it is a considerable risk to won that business. Due to the variation itself this can any time be -3% also. I am not convinced that company at least by looking at balance sheet that it is worth taking the risk. I am really curious to know what silver lining you are looking in the company apart from the topline growth.
ReplyDeleteHi Pranav ,
ReplyDeleteIntrasoft business model is asset light business model , it has scaled from 12 cr GMV to 700 cr GMV without much dilution and funding . They requires fund to hold inventory before some big sales in USA . Yesterday (12 th July) was such a day when Amazon had prime day sale .
Stock Market exist because of differences in opinions . I respect your decision . If you look at Amazon then from last 15 years you will find more than 95% investors had opinion against investing in it but still it had made empire of 350 billions dollars .
Hi,
ReplyDeleteAmazon provides the market place where other companies can put their items on sale for which it takes some fees, the same way flipkart is growing. However they themselves sell some of the items as well.
In stock market there is no final decision, we change our view with new new information and facts.
What is your view on Microsec Financial Services. It owns too websites:
http://www.sastasundar.com/
http://www.foreseegame.com/
Hi there
ReplyDeleteWhen I look at Cashflow statements from moneycontrol.com (there is no consolidated cashflow on that site). It is very low when I compare NP vs OCF.?
Thanks
GreyCells
You can view consolidated from site like valueresearchonline.com
Deletehttps://www.valueresearchonline.com/stocks/Finnance_Annual.asp?code=20727&dtype=cons
Thank for your reply. I calculated the CFO/NP consolidated and it is at good 80%.
DeleteI have done calculation based on my gathering in excel. Here is the sharable link of image https://drive.google.com/open?id=0B6x9Q9IqIE4eTlVjTjFHdkoxWXM