IT Products - Spark Capitalmailers.sparkcapital.in/uploads/Tech/Products note_final.pdfWe believe...

IT Products Sector Outlook

Neutral

Stock performance (%)

1m 3m 12m

CNXIT 4.8 7.3 4.5

Sensex 1.8 (6.7) (1.6)

Date Oct 5th, 2015

Market Data

SENSEX 26221

Nifty 7951

CNX IT 12032

Relative performance

SRIVATHSAN RAMACHANDRAN, CFA [email protected] +91 44 4344 0039 AISHWARIYA KPL [email protected] +91 44 4344 0040

Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset

Sector Update

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Sensex Index CNXIT Index

Software products: Restart Enterprise technology landscape is undergoing a massive change with heightened focus on digitizing both customer facing and internal process of a business. This shift is providing an opportunity for India based software product vendors to fulfil their respective aspiration of global software product firm. In this note, we explore five India based product firms which has undergone substantial restructuring across business parameters. We believe the opportunity for these products to evolve into global software vendors is true and some of the firms are having the right building blocks. Ramco and Intellect Design in our opinion have a head start to Majesco, Subex and Nucleus across a number of parameters.

Tectonic shifts in enterprise technology provide opportunity: Digital technologies are reshaping the enterprise technology landscape and companies across industries are looking to reinvent themselves with the aid of technology. Mega trends such as Software as a Service, Predictive Analytics and Automation are driving enterprises to bolt on best of breed products. Some of the large incumbents have not made adequate investments in reorienting the products to cater to the changed requirements of enterprises. Other large players such as SAP and Oracle are acquiring newer software firms to catchup with new generation firms such as Salesforce.com.

Large market with leaders having low market share: End-market catered by the firms showcased in this report are predominantly operating in large global markets with no clear dominating players (except for HCM SaaS). BFSI software especially is highly fragmented and with large number of banks still using core systems built in 1980’s the need for bolt-on products have increased substantially.

Indian firms have evolved: Indian products firms have been around for a while either as standalone entity or part of services firm, however have not been able to make a meaningful mark owing to various reason. Over the last three years restructuring have taken place across these five firms in various forms. In Ramco, an external CEO has brought focus to the product and go to market strategy. Majesco and Intellect design were demerged from services companies with management principles different from their erstwhile services avatar. All five firms have been catering to clients in their respective end markets for over a decade, thereby building up significant reference sites, domain, technology and client specific know how enabling an improved competitive positioning.

Early times still: None of the firms researched are dominant players in their category and are much smaller than their rivals. Sustained investments would be need to ensure sustained high growth and this would result in low profitability. Revenue growth would be key driver of value and given low profitability we prefer to use EV/Sales as our valuation metric, We note that valuation differences are huge in comparisons to global players. Sustained and predictable revenue growth would rive multiple convergence in our view


Neutral

Valuation of product companies

Year end M.cap (USD) EV (USD) EBITDA margins (3 yr)

EV/sales EV/EBITDA

CY Y+1 Y+2 CY Y+1 Y+2

Temenos 12/15 Y 2,781 3,229 18.7 6.9 6.1 5.5 17.7 17.5 14.9

ACI Worldwide 12/15 Y 2,488 3,246 13.0 3.2 3.1 2.9 14.4 12.3 11.1

Bottomline 06/16 Y 1,030 1,045 -1.3 3.2 2.9 2.7 25.8 13.8 11.9

Ifs Ab-B 12/15 Y 889 851 8.8 2.4 2.1 1.9 13.4 12.2 11.1

OFSS 03/16 Y 5,087 4,519 35.6 7.6 6.7 6.0 19.2 16.2 14.4

Guidewire 07/16 Y 3,734 3,163 6.5 8.3 7.7 6.9 109.8 43.5 33.7

Innovative group 09/15 Y 732 657 5.9 2.1 1.8 1.7 16.3 9.7 8.7

Cornerstone 12/15 Y 1,789 1,792 -21.4 6.8 5.2 4.1 NM 110.0 73.0

Salesforce 01/16 Y 45,824 45,038 -4.5 8.4 6.8 5.6 80.4 34.2 27.1

Workday 01/16 Y 13,221 11,817 -34.4 15.0 10.2 7.4 NM 172.6 93.3

Ultimate 12/15 Y 5,117 5,012 10.0 9.9 8.1 6.7 68.1 33.7 26.6

Netsuite 12/15 Y 6,632 6,518 -13.4 11.7 8.8 6.7 295.9 133.9 393.3

Intellect* 03/16 Y 281 237 -17.1 2.6 2.1 2.0 NM NM 57.9

Majesco* 03/16 Y 104 98 0.4 1.3 0.9 0.8 NM 8.6 7.1

Subex* 03/16 Y 30 131 18.5 2.4 1.8 1.6 10.2 7.4 6.8

Ramco Systems* 03/16 Y 319 308 9.0 5.5 5.1 3.8 28 20.8 15.0

Nucleus Software* 03/16 Y 114 69 17.0 1.3 1.2 0.9 6.9 6.1 5.4

Valuation

*Spark Estimates, CY is trailing year


Neutral

Reference points: Being part of critical IT infrastructure, it is more difficult for product

companies to get clients on board than service companies. Indian IT product companies have struggled for a long time to gain presence in the developed economies. Overtime, IT product companies have established strong reference points with Majesco and Intellect faring better than other IT product companies in developed economies. Eg. Intellect Design Arena has JP Morgan, HSBC, Bank of Montreal, Barclays as strong reference points for its iGTB product

System integrators play a huge role in markets where Product vendors doesn’t have any significant reference points

Ramco Systems has the maximum SI vendors among Indian product vendors which has been the prime reason for the company’s strong wins in Australia and other developed economies especially for ERP and HCM products.

Internal restructuring: Products companies in India were run with a service mindset and lower

investments in Sales and marketing. Most of the sales people were promoted delivery personnel. Led by repeated failure, most product companies have revamped the entire sales structure by hiring sales people from international peers and customers. They are also voicing out for S&M expenses to be higher than 17-18% of total revenues.

Eg. In the last two years, Intellect has hired > 50 sales guys and established geographies heads (from Fundtech, Lloyds and JP Morgan) to aid the product heads in winning new deals. Majesco and Ramco also have made substantial addition to their sales and solutioning capabilities

State of Technology: With most of the Indian product players having a product refresh / being

launched in the recent years, they have the current SOA while most of the erstwhile global product companies run on 90’s technology. Eg. Guidewire did not have a SaaS based P&C policy admin system until this August while Majesco launched a SaaS based product last year.

Current technology includes − Java/ .Net enabled architecture − Integrated across all OS/ devices including PoS integrations − SaaS or Cloud based product − API’s to make the product technology agnostic and aid data extraction

from every existing system − Raise deployment model flexibility & configurability − Incorporation of Big data Analytics & customer feedback into systems

Changing industry trends: Digital technologies and reduced time to market, are forcing companies

across industries to opt for products that could support the entire spectrum of data without making changes to the core legacy/ existing systems. Increasing necessity to invest coupled with cost pressures have pushed companies to adopt bolt-on software which creates the digital experience and seamlessly integrate data from existing systems.

Demand for package software in the BFS sector alone is expected to reach US$ 10 bn from current US$ 7 bn in the next three years.

With current state of technology coupled with connectors for data integration, Indian IT product companies are well equipped to capture this wave.

Banking products space: Temenos, Finacle, TCS BanCS, OFSS, Fundtech, Bottomline Technologies, ACI Worldwide, FIS, Misys Insurance players: Guidewire, Innovative Group, CSC, Oracle, StoneRiver, Sunguard,FiNeo s HCM/CRM: Salesforce, Workday, Peoplesoft, Netsuite, Advent, Cornerstone, Ultimate, Concur Telecom: Wedo Technologies, cVidhya Networks, Razorsight, TEOCO

Key Global Competitors

Why IT Product stories from India are turning attractive now?


Neutral

Market opportunity for Product companies

Source: Company, Industry Reports, Spark Capital

BFS Insurance

HCM SaaS ERP SaaS

Telecom Revenue Assurance

0%

5%

10%

15%

20%

25%

30%

Indu

stry

Gro

wth

BFS products is the largest market with core banking being the largest sub-market. The US$ 25 bn market is expected to grow 4-4.5% in the coming years

Demand for SaaS enterprise applications exceeds on premise demand by five times and is expected reach US$ 50.8 bn by 2018. The fastest adoption among SaaS is CRM, HCM followed by ERP. HCM SaaS is expected to grow ~25% primarily aided by Core HR and Payroll. ERP SaaS is expected at a CAGR of 20%. Global Aviation M&E market is estimated to be ~ US$ 3 bn and we expect this market to grow at 8-10% in the coming years.

Global Financial Assurance market is a niche segment (US$ 683 mn) which is expected to grow ~13% in the coming years. The largest sub segment in financial assurance is Revenue Assurance followed by Cost & Margin Assurance

Aviation $ 3 Bn

INTELLECT, NUCLEUS MAJESCO RAMCO SUBEX

Industry Size ($ bn)

1 2 3 4

Ranking

$25 Bn $15 Bn

$1.8 Bn $8 Bn

$0.7 Bn

Market opportunity for Product companies

Insurance also is a large market with Policy Admin, at US$ 8.2 bn, being the largest sub market. Insurance industry is expected to grow at a CAGR of 5% in the next 3 years


Neutral

Product portfolio – Having the largest suite of banking products, Intellect leads the pack

Source: Company, Spark Capital

Technological architecture along with product marketability


iGTB, iGCB, iRTM, Intellect SEEC

STG Policy Admin, Billing, Claims, Elixir North America Policy Administration System

Ramco Aviation software, Ramco ERP, Ramco HCM, Ramco Analytics

ROC Revenue Analytics, ROC Cost Analytics, ROC Network Analytics

Finnone Neo® , FinnAxia

Latest Technology SAAS System Integration Strong Reference Points

Intellect JAVA / .NET Minimal Presence Yes Banks – Tier 1 Banks Insurance – Minimal

Majesco JAVA / .NET Billing & Policy Admin Suite Yes Insurance – P&C (U.S) L&A – UK, India

Ramco Systems JAVA / .NET All Products Yes Aviation – Chopper HCM, CRM – Australia & APAC

Subex JAVA / .NET All Products Yes Tier 1 Telecom Players

Nucleus JAVA / .NET Finnone Neo® , FinnAxia Yes Australia, Eastern Europe & MEA

2

1

2

3

2

1

1

2

2

3

Ranking

Product portfolio and functionality


Neutral

Billing rates in developed economies is 2-3x the rates in developing economies. Additionally, winning orders in developed economies requires more higher S&M investments

Source:Company, Spark Capital

SI partnership with IT services vendors is crucial for Product business scalability

Source: Company, Spark Capital, Industry presentations, SI – system intergrators

60%

40%

Intellect

92%

9% Majesco

50% 50%

Ramco Systems

30%

70%

Subex

20%

80%

Nucleus

Developed Economies Developing Economies

Space Product Vendors SI Partners Leading Competitors & SIS Ranking

HCM, CRM, ERP Ramco > 10 Salesforce: > 500, Workday: >30

Banking Products Intellect 1-2

Temenos: > 30, OFSS: > 25; ACI Worldwide: > 10

Nucleus 0-1

Insurance Products Majesco 2-5 Guidewire: >20

Telecom Assurance Subex 0-1 cVidhya:>10

1 1 2 3 3

1

3

2

4

4

Ranking

Geographical presence and Integration Partners


Neutral

Temenos: Segmental revenue contribution and Gross Margin over time


37% 34% 36% 31% 28% 30% 30%

25% 32% 35%

42% 45% 45% 48%

32% 38%

34% 30% 27%

24% 21%

56%

60%

64%

68%

72%

76%

80%

0%

10%

20%

30%

40%

50%

60%

CY08 CY09 CY10 CY11 CY12 CY13 CY14

License Maintenance Professional services Gross margins Decline in professional services

SI partnerships with IT service vendors would bring huge revenue opportunities: Agreement with strong Global IT service players like Wipro, Cognizant

etc. to become product companies’ SI partners would improve the revenue trajectory profoundly as these companies influence client behaviour in procuring application software. Additionally, with Professional services having the lowest margins, outsourcing of this service to SI partners would led to gross margins improvement.

Temenos case study: In CY08, Temenos earned around 32% of its revenues from Professional services. Outsourcing professional services to Global IT vendors like Cognizant aided in reduction of these services to 21% in CY14. This has led to Gross margins improvement of 700 bps during the same period.

Concluding, SI partnerships not only provide a huge revenue opportunity but also help in gross margin improvement.

Few SI partners for major Banking products vendors

Source: Company, Spark Capital Research

Temenos Cap Gemini, Cognizant, Tech Mahindra

Infosys HP,IBM

SAP TCS, CTS, Accenture, Wipro, Infosys

OFSS Wipro, Accenture, Tech Mahindra

TCS Wipro

SI partnerships with IT service vendors would bring huge revenue opportunities


Neutral

License revenues as % of sales

Source: Company, Spark Capital; *Nucleus does not disclose License revenues as % of sales

19%

9%

29%

25%

0%

5%

10%

15%

20%

25%

30%

35%

Intellect Majesco Ramco Systems Subex

Current ESOP outstanding as % of shares outstanding (Basic)

Source: Company, Spark Capital, *Intellect and Subex have enabling resolution for 4-5% of ESOPs to be issued

0.0%

9.0%

4.9%

0.6% 0.0% 0%

2%

4%

6%

8%

10%

Intellect Majesco Ramco Systems Subex Nucleus

Sales structure and quality of sales personnel is very crucial for deal conversion. We believe, Dual responsibility - Product wise + Geography wise (largely held by industry experts) , followed by Intellect, is the most effective way to drive the sales engine. Deal cycles in Products are larger than IT services with deal cycles in ERP and Core banking running more than a year.

License revenues as % of sales and executable order book are key parameters which give near term revenue visibility. Indian product companies (except Nucleus) do not give executable order book numbers.

Higher the license revenues higher are the gross margins. In a SaaS model, there is no significant upfront license fee and has only subscription revenues.

The above parameters 1) Industry growth 2) Product suite 3) State of Technology 4) SI partnership 5) Sales structure 6) License revenues 7) ESOP allotted are key variables that affect an IT product business model.

Sales structure in IT product companies


Product-wise + Geography-wise (Dual)

Geography-wise

Product-wise

1

2

3

3

3

Ranking

Sales structure, ESOP allotted and License revenues as % of sales

1

2

3 4 4

1

4

3

2


Neutral

Snapshot of Temenos’ EBITDA, Cash flow and DSO trends

Source: Bloomberg, Spark Capital

Snapshot of Salesforce’ EBITDA, Cash flow and DSO trends

Source: Bloomberg, Spark Capital, *has a Jan ending year

100

127 123

89 109

153

183

51

110 117 94

81

157 176

50

90

130

170

210

250

0

40

80

120

160

200

CY08 CY09 CY10 CY11 CY12 CY13 CY14

No.

of D

ays

US$

Mn

EBITDA CFO DSO days

158 232 253 238 261 278

560

230 271

459 592

737 876

1,174

50

60

70

80

90

100

110

120

0

200

400

600

800

1000

1200

1400

FY09 FY10 FY11 FY12 FY13 FY14 FY15

No. o

f Day

s

US$

Mn

EBITDA CFO DSO days

Temenos is the largest banking software product company with strong presence in core banking space. Temenos earns ~98% its revenues from traditional license model and ~2% of revenues from SaaS subscriptions. Though margins are high in the Traditional model (39% of sales), they generate lower cash flows (37% of sales). Salesforce is the largest SaaS based CRM software company in the world. The company earns 100% of its revenues from SaaS subscription model. Though Salesforce EBITDA margins is low (10% of sales) CFO generation is high at 21% of sales. Concluding, though movement to cloud results in lower EBITDA margins, cash flow generation continues to be high led by subscription based revenue model.

Though SaaS companies have lower EBITDA margins, they earn strong CFO as subscription based revenue model is followed


Neutral

Why EV/Sales for product companies?

Source:

US$ mn Y Y+1 Y+2

Sales 100 200 300

Sales growth (%) 100% 50%

Cost of Sales 55 100 135

Gross profit 45 100 165

Gross Margins 45% 50% 55%

R&D 20 22 25

S&M 26 40 60

General Administration 18 20 23

EBITDA -19 18 57

EBITDA margins -19% 9% 19%

Why we prefer to use EV/Sales for software product companies? Software Product companies enjoy high operating leverage. During the initial periods, the costs of developing and marketing a software product is high, which leads to an EBITDA loss. License revenues is the most crucial variable for a product company. Higher percentage of license revenues (as % of sales) higher is the operating leverage. Additionally, solely dependent on deal wins, Product companies does not have a linearity in growth (across years) like service companies. Small product companies could grow > 50% yoy. EBITDA growth could be double the Revenue growth as shown in the example. (140% growth in EBITDA from Y+1 to Y+2 for 50% growth in revenues during the same period). We prefer using EV/Sales to value Product companies as these companies enjoy strong operating leverage and sales growth is the key factor influencing their profitability.

EV/Sales for product companies


Neutral

Most of the Product companies in India are still small

Source: Company, Spark capital, * includes Coverall Technologies revenues too

… DSO (billed + unbilled)


Revenue/Employee across companies

Source: Company, Spark Capital, * includes Coverall Technologies revenues too

167

96

189

158

100

80

100

120

140

160

180

200

Intellect Majesco Ramco Systems Subex Nucleus

99 106

60 59 58

40

50

60

70

80

90

100

110

Intellect Majesco* Ramco Systems

Subex Nucleus

US$

mn

Snapshot of Product companies

S&M expense as % of sales


13%

26%

19%

20%

18%

0%

5%

10%

15%

20%

25%

30%

Nucleus Intellect Majesco Subex Ramco

As %

of s

ales

29317

57514

40132

71711

36686

20000

30000

40000

50000

60000

70000

80000


Subex Nucles

US$

Ramco Systems Fair value

Rs.825

CMP

Rs.751

Stock Performance (%)

1m 3m 12m RMCS 0% -4% 83% Sensex 2% -6% -1% CNXIT 3% 6% 3%

Financial Summary Year Revenues (US$ mn) Revenues (Rs. mn) EBITDA (Rs. mn) EPS (Rs.) EV/Sales(x) EV/EBITDA(x) FY16E 76 4895 1201 24.7 5.1 20.8 FY17E 93 5631 1423 33.8 3.8 15.0 FY18E 114 6656 1844 49.4 3.1 11.2

Initiating coverage

Date Oct 5th, 2015

Market Data

SENSEX 26221

Nifty 7951

Bloomberg RMCS IN

Shares o/s 30mn

Market Cap Rs. 22bn

52-wk High-Low Rs. 1,113-377

3m Avg. Daily Vol Rs. 74mn

Index member NIFTY

Promoters 57.0

Institutions 24.0

Public 19.1



Interesting product play

Ramco Systems is a niche enterprise software firm focussed on select sub-segments with in the broader enterprise resource planning market. Ramco’s offerings are both cloud based and on premise based. Ramco’s product suits consists of i) Material management for aviation sector ii) End-to-End Human Capital Management product suite and iii) ERP focussed more on the services business and iv) Tier-2 ERP. Within the various categories, we believe HCM is the most important segment for the long term growth of the firm as it’s a large market (SaaS HCM market is US$ 1.8bn) and Ramco has initial success in this market. Continued entry into new markets and stronger systems integration partnership would be key growth drivers over the medium term. We expect Ramco to be the revenue growth leader within the product’s pack.

Presence in a high growth market: Ramco has strong presence in high growth SaaS market across its product suite. We are positive especially on the growth opportunities for HCM and ERP focussed on the services industry. SaaS is the fastest growth category within enterprise software. Firms such as Oracle and SAP are clawing back their lost positon by acquiring SaaS firms SAP acquisition of Concur and Oracle acquisition of Rightnow are examples. Ramco’s product score well in emerging markets and has established a strong reference with MNC having a large emerging market exposure. Ramco launched its HCM product in US recently and is a crucial market. Given the highly competitive market (over 30+ vendors offer HCM on SaaS) Ramco success could be delayed.

Focus on Systems integration partners: Over the last two years Ramco has strengthened its systems integration ecosystem including firms such as Infosys, Tech Mahinda, Hexaware, Paychex, NIIT Tech. Our channel checks indicate good feedback for their products and increased activity within the I partner ecosystem. Ramco’s management is keen on expanding SI relationship and would like to focus more on product. We believe a robust SI ecosystem would improve sales reach, reduce implementation risk, enable Ramco to bid for large deals and improve margins and return ratios. Option value: Post the capital raise, Ramco’s in a strong position having repaid its debt. Ramco is trading at 4x FY16E and it is the costliest stock in the product pack. However, we note that US listed SaaS firm trade at 5x-10x EV/Sales. We would like to point out few differences and why the discount is justified. SaaS have a negative working capital, however Ramco has not be able to garner similar terms across its customer; Recurring / Subscription revenues are still a small component of the overall revenues with services accounting for ~50% FY15E revenues. Ramco offers high risk reward with success in US HCM market being a key monitor able for Ramco as a stock. Our fair value is based on 4x FY17 EV/Sales.


Rs.825

CMP

Rs.751

Ramco had a strong growth of 33% in FY15 after years of tepid growth primarily led by restructuring efforts undertaken from 2012


37.0

47.1

48.6

45.4

45.4

60.2

-5%

0%

5%

10%

15%

20%

25%

0

10

20

30

40

50

60

70

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

US$

mn

Revenues EBITDA Margins

Description: Established in 1999, Ramco Systems (RMCS) is a part of US$1 billion

diversified conglomerate, Ramco Group of Companies. In 2012, after Mr.Virender Aggrawal joined as CEO, the company underwent a gamut of changes, from its traditional roots of being a core ERP player.

RMCS has three Strategic business units (SBU) operating around three major project offerings – Aviation, HCM and ERP. Each SBU functions as a fully integrated unit taking complete ownership from R&D, pre sales, marketing, implementation and support.

All the three product suites can be hosted in the cloud and have strong reference points in India, S.E.Asia, Middle East and Australia.

Under Aviation, RMCS primarily caters to MRO* companies. In HCM*, RMCS has a strong payroll product and in ERP*, the company is known for its Services, Staffing and Facility management ERP.

Timeline – Key events


Incorporated in 1999

Launch of ERP on Demand 2.0

“ERP on Rent” Saas – band offering

Launch of on demand Analytics & Gateway on Cloud

Launch Saas ERP for Aviation Manufacturing

Virender Aggrawal joined as CEO Launches ERP on Cloud for Australia

Aviation on cloud from Helipad operators Ramco HCM on Cloud goes global 10 Aviation deals won in FY13

Entry into wearable technology Announced right issue @ Rs.155/ share

Raised Rs. 325 crores via QIP with Rs.668/share as floor price

Global payroll on cloud Launched China Cloud payroll software

1999 2010 2011 2014 2012 2013 2015

Company Description

* MRO – Maintenance repair & operations, HCM – Human capital management, ERP – Enterprise resource planning


Rs.825

CMP

Rs.751

Revenue by service lines (FY15)


Revenue by products (FY15)


Revenue by geography (FY15)


46%

19%

35%

ERP

HCM

Aviation

18%

8%

20% 28%

19%

7%

America

Europe

APAC

India

MEA & North Africa

South Africa

Recent deal wins under each product

Aviation ERP HCM

Cobham Aviation Services FreshFood Management Paypartners

Mission Aviation Fellowship Paypartners Bureau Veritas

Sundance helicopters Norske Skog Delhi Duty Free services

Hutchinson Aerospace Tat Hong Nesma group

Kenya Airways Halogen Security Vopak Asia

Falcon Aviation Services Mother Dairy Dabur


Company Description

29%

21%

49%

1%

License

Recurring

Services

Resale of material


Rs.825

CMP

Rs.751

Ramco Aviation Suite: Materials Management & Maintenance are areas where Ramco has strong presence, while Human Capital Management would be key focus area going ahead


Ramco Aviation Software


Rs.825

CMP

Rs.751

Ramco Aviation Software Aviation Software is a differentiated product of RMCS and has strong

presence in Heli operators, MRO, CAMO* and Airlines across India, APAC and Middle East. RMCS has good presence in US as well.

Ramco offers one of the widest range of integrated MRO, finance and EFB* solutions. Ramco’s DecisionWorks® and VirtualWorks® are highly rated by industry experts, built in latest technology and could be seamlessly integrated across various devices. Ramco is also one of the largest vendors in the aviation software industry.

The Malaysian Airline deal (US$ 10 mn) won in 2014 was a deal breaker in the commercial airline space for Ramco, which has been traditional been strong in the heli operators (serves 5 of top heli operators)

Most of the Aviation software is largely on premise due to strict regulations. Deal sizes in Aviation software are typically around US$ 1-5 mn.

Key clients in the Aviation space

Malaysian Airlines Air Tahiti Air bus Helicopters

Republic Airways Good Year Kenya Airways

Spice Jet Indigo Gulf Helicopters

Emirates Air costa Asia Atlantic Airlines

Astra airlines T’way Dan Copters

Air India Hevilift Mission Aviation Fellowship

Alliance Air Safe Air Airport Authority of India


Key competitors’ products in Aviation

Alkym (Volartec) IBM Maximo

Aircraft Maintenance Systems RAAS (Aviation InterTec)

Airline Suite (C.A.L.M. Systems) AMICOS (Cimber Air data)

Dash Aviation software DigiMANT (Aerosoft systems)

Amos (Swiss Aviation software) infoTrak MRO (Infospectrum)

ADOC (AIS Aviation) Inservice MRO (Engima)

Aircentre Movement control (Sabre Group) Integrated Aviation software

Source: Capterra.com, Spark Capital Research

Our view: Aviation has grown 37% yoy in FY15 and currently contributes around

37% of RMCS revenues. Over the last one year, the company has made investments to expand into Europe in Heli Operator segment (in which RMCS has leadership position) and also spread into fixed wings.

The Malaysian airlines deployment went live in March 2015 in a span of 11 months. The landmark project would be a strong reference point for RMCS to grow in the fixed wings space.

RMCS has won significant deals in the last few quarters in this space notable among them being Cohbam Aviation services, Hutchison aerospace etc.

We believe RMCS is a clear leader in Aviation solutions and the segment would continue to grow more than the company average in the short term.

Ramco Aviation Software

* CAMO – Continuing Airworthiness Management Organisation


Rs.825

CMP

Rs.751

HCM Suite: Payroll is the strongest product of Ramco among the HCM suite


HCM on Cloud


Rs.825

CMP

Rs.751

NEAT Evaluation: Payroll BPO (Multi-Country Focus)

Source: Company – Nelson Hall report, Spark Capital Research

Sopra HR

Talent SD Worx

SGWI

ADP NGA

Ceridian

Ramco

Ract

OSV

Capita

High Achievers Leaders

Major Players Innovators

Abilit

y to

del

iver

imm

edia

te b

enef

it

Ability to meet future client requirements

Key clientele in HCM

Dabur RadissonBLU Bureau Veritas

Red tag Avaya Seagate

KPMG Lifestyle Network18

RAKBANK Landmark Group Khimji Ramdas

Bata Kerner Nesma Group

Paypartners Vopak Omega Healthcare


RMCS’ HCM on Cloud: HCM is the new product among RMCS’ portfolio which grew around

113% in FY15 led by strong traction in Payroll system. With an integrated Global Payroll on Cloud for 35+ countries along with IRIS (RMCS Integration services) which aids seamless integration across all other on premise & cloud databases, Ramco HCM has become very popular among MNCs and global conglomerates.

Of the US$ 11.5 mn HCM revenues, Ramco earns ~US$ 7 mn from Payroll services with Indian and MEA being the largest markets.

Ramco has more than 200+ clients in HCM out of which 170+ are based out of India. It’s cloud payroll supports 110+ clients. Along with payroll cloud offering, RMCS also offers managed payroll services and MPRHO services. In 2015, RMCS has forayed into China and Australia.

Ramco partners with Paychex and ADP for U.S and U.K. Payroll delivery.

HCM on Cloud


Rs.825

CMP

Rs.751

US is concentrated with strong global HCM players

Source: Industry reports, Spark Capital Research

Companies Positioning Strategy Market Presence

1 Workday Leader Very Strong Medium

2 Success Factors Leader Very Strong Strong

3 ADP Leader Strong Strong

4 Ceridian Leader Strong Medium

5 Ultimate Software Strong Performer Strong Medium

6 FinancialForce.com Strong Performer Strong Weak

7 Meta4 Strong Performer Strong Weak

Our view: RMCS is the largest payroll provider in India and has become a well

established brand within a short span of time. The reason is not only RMCS superior product suite but also the fact there is no significant player in the these markets. Workday is the only key player which has payroll solutions for India and Singapore.

The recent QIP raised was to aid RMCS HCM’s foray into the US markets and to achieve scale in the next two years. RMCS has a strong team in place and plans to cross sell HCM platform to existing Aero clients.

US HCM cloud market is a very competitive space with strong players like Workday, Success factors, ADP etc. RMCS breaking into US market, though crucial, is a daunting task. Given the highly competitive market (over 30+ vendors offer HCM on SaaS) Ramco success could be delayed.

Revenue & margins of Global cloud vendors

Company Revenues (US$ mn) EBITDA margins (%)

Workday* 788 -17%

ADP* 10,941 22%

Ultimate Software* 506 15%

Cornerstone* 263 -13%

Tableau Software 412 5%

Netsuite 743 7%

Source: Bloomberg, Spark Capital Research, *US HCM players

HCM on Cloud


Rs.825

CMP

Rs.751

ERP on cloud: Ramco’s differentiating proposition is the industry it operates – Services, Staffing and Facility management


ERP on Cloud


Rs.825

CMP

Rs.751

Ramco ERP: Built on VirtualWorks®, Ramco ERP Suite covers the entire spectrum

of enterprise functions through a suite of products – Manufacturing, financial management, Supply chain management (SCM), Human Capital management (HCM), Enterprise Asset management (EAM), Project management, Process Control, Analytics, Advanced planning & optimization and Connectors. Integrated across all OS, Ramco ERP is available both as on-premise and SaaS model.

Largely focussed on the services market, Ramco ERP is highly rated for Facility management, Staffing and services organisation. RMCS also facilities a “Two Tier ERP” as hub and spoke model for channel partners of large enterprises.

RMCS ERP has 800+ customers and is spread across 35+ countries – largely based out of Middle East and APAC.

Few of RMCS clients in ERP

Schneider Electric Pricol Freshfood management

DLF India Mother Dairy Norske Skog

Cavin Kare TVS Tat Hong

TAFE Honeywell Halogen Security

ITC Ltd. Preferred meals MHW limited

Lubrizol Gulf Precast Vedanta

Caterpillar Group 4 Securitas Mulk Holdings


Key Competition in Resource planning

Netsuite Planview software

Financial force CA Technologies

Sage HP

Epicor Innovatas

SAP Changepoint

Oracle Clarizen

KeyedIn® solutions Microsoft Dynamics

Source: Industry reports, Company, Spark Capital Research

Our view: Ramco has strong positioning in Staffing, Facility management and

services organisation (especially consulting) by serving the leading players in this market. Adecco, the largest global staffing firm, is RMCS’ key client.

Recently, RMCS launched Logistics ERP on cloud for Australia and New Zealand.

As of FY15, ERP (US$ 27 mn) contributed 46% of total revenues growing 17% yoy. With marquee reference points in this segment coupled with strong System integration partners, RMCS’ ERP would continue to grow ~15-20% yoy, primarily driven by APAC and MEA.

ERP on Cloud


Rs.825

CMP

Rs.751

Way ahead:

We expect RMCS US$ revenues to grow 29% & 22% yoy in FY16E and FY17E respectively primarily led by growth in HCM and Aviation.

Led by growth and strong operating leverage, EBITDA margins would also increase to 24.8% and 25.4% in FY16E and FY17E from 20% in FY15.

As of Q1FY15, ESOPS contribute ~4.6% of the total shares outstanding (basic). ESOP charge would be significant in the coming years.

Notably, RMCS capitalises most of its R&D expenditure. In FY15, RMCS capitalised around Rs.605 mn including interest cost of Rs.227.4 mn. With expected reduction in R&D expenditure, EBIT margins would come in better with lower amortisation. Other Indian product companies fully expense their R&D costs. We believe RMCS expensing R&D costs would only happen post FY18E.

In Q1FY16, RMCS raised Rs.3.3 bn via QIP at a floor price of Rs.668/ share. Most of the QIP money would be utilised to pay long term debt. We have assumed debt payment of Rs.2.3 bn in FY16E.

DSO of RMCS is high led by receivable issues in Sudan. With most of this being provided for and also led by more revenues from cloud subscriptions we expect DSO days to improve in the coming years

DSO would come better with most of Sudan receivables already written off and better revenues from cloud subscriptions


Research & Development Expenditure (Standalone)

Particulars (Rs.mn) FY14 FY15

Capital Expenditure 0.0 1.6

Recurring R&D

Employee costs 299.0 330.5

Finance costs 271.0 227.4

Other expenses 49 47

Total R&D capitalised 618 605


Financial outlook

128 111 125 118 112 116 112 75

85

95

105

115

125

135

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Day

s


Rs.825

CMP

Rs.751 Financial summary

*Adjusted EBITDA is EBITDA – Capitalised R&D

Rs.mn FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

Profit & Loss Cash flows

Revenues 3,605 4,852 5,601 6,628 Cash from operating 219 954 1,218 1,577

Other Operating Income 48 43 30 28 Cash from investing -440 -620 -570 -520

Total revenues 3,653 4,895 5,631 6,656 Cash from financing 239 855 -125 60

Employee costs 1,620 2,227 2,626 3,104 Free cash f low -228 334 648 1,057

Other Operating Expenses 1,313 1,466 1,581 1,708 Key ratios (%)

EBITDA 720 1,201 1,423 1,844 Revenue grow th 37.0% 34.6% 15.4% 18.3%

Depreciation 449 451 464 473 EBITDA grow th NM 66.8% 18.5% 29.5%

EBIT 271 751 959 1,371 PAT Grow th -153.3% 474.0% 36.8% 46.0%

Interest exp/ (income) 120 -17 -90 -160 EBITDA margin 20.0% 24.8% 25.4% 27.8%

Tax 24 38 52 77 EBIT margin 7.5% 15.5% 17.1% 20.7%

PAT 127 727 995 1,452 PAT margins 3.5% 15.0% 17.8% 21.9%

Diluted EPS 5.7 24.7 33.8 49.4 ROE 7.0% 16.1% 14.2% 17.7%

Balance sheet ROCE 12.8% 20.0% 20.0% 22.8%

Share capital 244 297 297 297 Valuation metrics

Reserves & surplus 2,283 6,208 7,203 8,655 Shares o/s (mn) 21.2 28.0 28.0 28.0

Total shareholder's equity 2,528 6,505 7,500 8,952 Fully diluted shares (mn) 22.1 29.4 29.4 29.4

Long term borrow ings 2,184 118 3 3 Market cap (Rs. mn) 16,615 22,090 22,090 22,090

Other long term liabilities 123 124 126 128 Adjusted EBITDA* 115 601 873 1,344

Current liabilities 1,689 1,708 1,886 2,153 EV (Rs.mn) 20152 24950 21350 20612

Short term borrow ings 540 440 340 240 EV/Sales (x) 5.5 5.1 3.8 3.1

OCL 1,149 1,268 1,546 1,913 EV/EBITDA (x) 28.0 20.8 15.0 11.2

Total liabilities 6,524 8,456 9,515 11,236 P/E (x) 131.2 30.4 22.2 15.2

Net Fixed Assets 2,740 2,910 3,016 3,062 Other ratios (%)

Goodw ill 995 995 995 995 DSO days 118 112 116 112

Cash and cash equivalents 109 1,298 1,821 2,938 Book value per share 114 221 255 304

Debtors 2,379 2,952 3,382 3,940 Cash per share 4.9 44.1 61.9 99.9

Total assets 6,524 8,456 9,515 11,236 FCF per share -10.3 11.4 22.0 35.9

Financial summary

Subex Limited Fair Value

Rs. 14

CMP

Rs.11.2


1m 3m 12m SUBX -3 -17 28 Sensex 2 -6 -1 CNXIT 3 6 3

Financial Summary Year Revenues (Rs. mn) EBITDA (Rs. mn) EPS (Rs.) EV/Sales(x) EV/EBITDA(x) P/BV(x) FY16E 4000 965 0.9 1.8 7.4 0.8 FY17E 4241 981 1.2 1.6 6.8 0.7 FY18E 4727 1171 1.5 1.3 5.1 0.7

Initiating coverage

Date Oct.5th 2015

Market Data

SENSEX 26221

Nifty 7951

Bloomberg SUBX IN

Shares o/s 244mn

Market Cap Rs. 3bn*

52-wk High-Low Rs. 18-8


Index member NIFTY

Promoters 0.5

Institutions 0.3

Public 99.2



Niche Telecom BSS player

Subex is a telecom and cable service provider (CSP) focussed software and solution provider in the area of Revenue Assurance, Fraud Management and Asset Assurance. Subex’s solutions are focussed at the Chief Financial Officer at a Telecom service provider and has presence with over 100+ telecom service provider including the likes of British telecom, Airtel and Verizon. Last seven years for Subex were marred due to the couple of acquisitions not delivering results as per expectation and sharp decline in demand post the global recession in 2008. Over the last three years under the leadership of a professional CEO Mr. Surjeet Singh, efforts have been undertake to solve the debt crisis by renegotiating terms and have a large portion of debt converted into equity and bring the balance sheet under control. From FY16 onwards, Senior Management team at Subex can focus their energy on building the business and this would drive more predictable revenue growth in our opinion.

New solution offering key growth driver: Subex’s capabilities is well positioned in the revenue assurance and fraud management space with the TSP market and is one of the top-3 players in the market. However with the market getting saturated growth opportunities would be due to increased market share and transactions than new installations. Over the last two years ,Subex has launched a new solution focussed on better Capex optimisation at CSP by enabling better asset discovery and reporting. As an extension of its strong understanding of the customer landscape with a CSP, Subex is incubating an analytics practise which could be offered on an managed services basis. We believe this Asset assurance product and Analytics offers substantial scope for growth given Subex’s existing relationship in the communications industry.

Management now focused on growing business than addressing balance sheet issues: Subex ability to add new logo’s and even expand relationship with some of its existing clients would have been hampered due to its weak balance sheet. Reset of FCCB conversion price to Rs. 13 per share would aid in most of FCCB converting into equity shares. With debt overhang done with, we believe management’s efforts underway would bear fruit and drive better revenue growth. FCCB conversion crucial for long term value creation: FCCB to the tune US$ 60mn are outstanding and needs to get converted into equity. We are assuming conversion in our financial model. Post conversion, debt would stand reduced to Rs. 2.1bn, manageable at 2.5x EBITDA. We believe demonstrated revenue growth would be key driver of value as Subex revenues have declined for the past few years. Given its high profitable we believe Subex could trade on par with other firms inspite of operating in a highly competitive end market. Our fair value is based on 2x FY17 EV/Sales.

*Mcap is calculated with 267.7 mn outstanding shares (till current FCCB conversion)


Rs. 14

CMP

Rs.11.2

Revenue has been tepid over the last few years led by spin off of non profitable business and internal restructuring efforts


Description: Established in 1992, Subex Limited is a Bengaluru-based IT company

which provides business and operations support system products for telecom operators and communications service providers. It has 800+ employees and 200+ customers.

Subex has its own platform named Revenue Operations Centre (ROC) – a centralised approach for operational and financial control for its customers. ROC acts as an integrated platform which holds all Subex OSS/BSS products or third party systems and provides real-time and actionable insights to the telecom operator to achieve lower costs, higher margins, higher revenues etc.

Post the appointment of Mr.Surjeet Singh as CEO in 2012, Subex underwent internal restructuring efforts to strengthen the product portfolio and to get through the FCCB overhang which has been hindering the performance of the company since 2008.

Company Description



2006

Acquired Azure Solutions, Revenue Assurance company

Acquired Sotas, Fraud management business

1992

Subex was incorporated

1999

Got listed on the exchanges First non-BT interconnect

implementation - Telenor

2000

• Acquired IV generation – Telecom Software consulting

2001

First International Installation of FMS.

Acquired Magardi Inc., Canada

2004

Acquired Lightbridge Inc., Fraud Management Business Assets

Acquired Alcatel Fraud management group, Fraud management business assets

2007

Acquired Syndesis, Canada. Raised FCCB worth US$ 98.7 mn @ convertible share price of Rs.656/share

2009

Launched Managed services

Restructured FCCB debt

2010 2013

Launched ROC Cloud SaaS model

• Sold off part of the business & rolled over the existing bonds to 2017 & issued new bonds worth US$ 128 mn to mature in June 2017

2015

• Converted part of the FCCB into equity at @ conversion price of Rs.13. Post this conversion, Subex has FCCB worth US$ 60 mn

88

95

105

68

62

59

18%

27% 27%

12%

20%

24%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

FY10 FY11 FY12 FY13 FY14 FY15

US$

mn

Revenue (US$ mn) Margins


Rs. 14

CMP

Rs.11.2

Revenue by product (%)


Revenue by service lines (%)


Revenue by geography (%)


Key Telecom clients

Geography Customers

Americas Bell, Claro, Level (3), Rogers, Sprint, T Mobile, Telefonica, Telemex, Telus, Verizon

EMEA BT, COLT, Orascom, du, MTN, Saudi Telecom, Swisscom, Telecom Egypt, Telekom Slovenije, Telenor, Vodafone, Zain

APAC BSNL, dTac, Idea, Indosat, Airtel, Maxis, Reliance Communciation, STarHub, Telecom Malaysia, Telstra

Source: Company,Spark Capital Research

57%

20%

23%

EMEA Americas APAC

4%

34%

30%

7%

25%

Third Party

Managed Services

Support

Customization

License Addl. License

65%

35%

Fraud & revenue assurance Network Analytics

Company Description


Rs. 14

CMP

Rs.11.2

Subex BSS/OSS Portfolio

Source:

What constitutes Financial Assurance for Telecom operators?

Source: Industry report, Spark Capital Research

Business, Network and Partner/Supplier Operations

Revenue Assurance Cost and Margin Assurance Fraud Management

Internal Process Data Leakage Analysis Partner Data Analysis Revenue Collection Verification for

Accounting and Regulatory Conformance

Revenue Comparison with Cost of Sales “What if” Planning Profitability Optimization Cost Accountability

Define Fraud Processes and Methods Proactive and Reactive Fraud Operations Maintain Fraud Rules, Lists and Tools

ROC – Revenue Operations Center

Revenue Analytics Cost Analytics Network Analytics

ROC Revenue Assurance

ROC Fraud Management

ROC Credit Risk Management

Managed Services

ROC Partner Settlement

ROC Route Optimization

ROC Cost Management

SaaS (Software as a service)

ROC Asset Assurance

ROC Data Integrity Management

ROC Capacity Management

Consulting Services

Subex product portfolio


Rs. 14

CMP

Rs.11.2

ROC Revenue Assurance®: Revenue Assurance is a niche segment which helps in reducing

“leakage” from flow of data between a Communication Service Provider (CSP)’s systems and through its business processes, most notably within the billing and partner management functions. Worldwide around 7-10% of the CSP revenues is lost in wrong billing.

Revenue Assurance is a BSS layer which sits on top of existing OSS/BSS layer. It aids seamless integration among different parts of the IT infrastructure of CSP’s and aids in reducing leakage. There are around 30 Revenue Assurance solution providers in the

world. The top 8 players contribute about 80% of the market. Subex is the market leader in Revenue Assurance around ~20%

market share. ROC Revenue Assurance 5.3 is the most comprehensive which can be hosted on premise/ on cloud/ managed services and provides a first-of-kind auto configuration solution which gives close to real time data.

Financial Assurance market is expected to grow 12% yoy to reach US$ 765 mn

Source: Company – Frost & Sullivan, Spark Capital

470

533

606

683

765

400

450

500

550

600

650

700

750

800

FY12 FY13 FY14 FY15 FY16

US$

mn

ROC Fraud Assurance®: Fraud Assurance is a key sub segment in Revenue Assurance, which

aids to reduces revenue leakage led by wilful attempts to deceive the CSPs. Telecos lost ~US$ 6.1 billion of revenues in fraud last year. Growth in VOIP provider, increase in the number of channel partners, reduced due diligence are key reasons for increase in carrier frauds. ROC fraud Assurance for Wholesale carriers which could be hosted on

premise or on cloud and aids in preventing fraud by removing known threats, identifying new partners, minimizing run time frauds, augmenting internal controls and supporting continuous fraud management process improvements. ROC fraud assurance is known in the industry for its data integration,

processing and real time data reports.

Key Competition in Revenue & Fraud Assurance

WeDo Technologies Cartesian

Cvidhya Infogix +Agilis International

Razorsight Keynote SIGOS

TEOCO XINTEC

Capana Fraudbuster

SAP CR+X

Araxxe Neustar

Source: Industry reports, Spark Capital Research

Revenue & Fraud Assurance


Rs. 14

CMP

Rs.11.2

Network Analytics: Capex optimisation has been crucial for CSPs led by falling ARPUs,

falling margins and increasing number of services which come in the Telecom spectrum. In FY14, worldwide capex spending totalled around US$ 320 bn, 16% of total revenue. An Network Asset management survey report 2014 conducted reports

that 1 out of every 3 operators do not measure return on capex investment led by increasing complexity of network infrastructure. Subex Network Analytics solution – ROC Asset Assurance, ROC Data

Integrity, ROC Capacity management aims at bringing transparent on capex investments, utility and reducing capex burden for Telecom operators. The opportunity in Network Analytics is huge and there are no strong

product companies which provide a comprehensive solution to address capex issues.

With falling ARPUs, capex rationalisation has become crucial for CSP’s survival…

Source: Bloomberg, Spark Capital

ROC Asset Assurance®: ROC Asset Assurance solution is a on premise/ on cloud product /

managed services network analytics based software platform, comprising of three key elements – data discovery, reconciliation, asset assurance and capacity management, aims at increasing ROI for capex investments. The PoC project deployed at a Tier-1 CSP in North America achieved

capex savings of more than US$ 100 mn and reported ROI of more than 700%. TCVs in Asset Assurance are higher at US$ 5- US$10 mn vs. Revenue

Assurance TCVs of US$ 1 – US$ 3 mn. Subex partners with Consultant firms like KPMG, Deloitte and PwC to

sell their products

Network Analytics

115

41.1

36 38 40 42 44 46 48 50

100 105 110 115 120 125 130 135

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

E

US$

Cap

ex s

pend

s in

dexe

d

Capex spending ARPU wireless

…While at the same time, investments are required with increasing requirement of service from CSP

Service Then Service Now

Fixed Voice, Mobile Voice, SMS, Dial up connection then DSL

Internet, Download Music

Fixed Voice, Mobile Voice, SMS, Dial up connection then DSL

Internet, Download Music, Mobile broadband (2G/3G/4G/5G), Content

driven services, Digital TV, Banking, IoT, E-commerce



Rs. 14

CMP

Rs.11.2

What went wrong in history? The FCCB overhang • The company acquired UK based Azure solutions (highest ever Indian Tech acquisition back then) for US$ 140 mn in 2006 and Syndesis (acquired for IP

and had negative margins) for US$ 165 mn in 2007. Led by failed GDR, Subex raised FCCB I worth US$ 180 mn - with a maturity of 5 years at a convertible share price of Rs.656/share – to fund this acquisition. Hit by recession in 2008 and sluggishness in overall telecom spend, Subex financials deteriorated from then and the share price fell from a peak of Rs.726 in 2007 to Rs.26 in 2009.

• In 2009, Subex managed to restructure its debt by issuing fresh equity and repricing the conversion price from Rs.656 to Rs.80. This brought down the outstanding debt to US$ 98.7 mn (FCCB II) post some redemptions due by March 2012.Out of the US$ 98.70 mn of FCCBs II, bonds having a face value of US$ 31.90 mn were converted into equity shares as of March 31, 2010 and bonds with a face value of US$ 12 mn were converted during the year ending March 31, 2011, retaining a closing balance of US$ 54.80 mn outstanding FCCBs II bonds.

• Pursuant to the approval of the holders of “US$ 180 mn 2% convertible unsecured bonds”,[of which US$ 39 mn was outstanding (“FCCBs I”)] and “US$ 98.70 mn 5% convertible unsecured bonds”, [of which US$ 54.80 mn was outstanding (“FCCBs II”)], at their respective meetings held on July 5, 2012 and exchange offers received under the exchange offer memorandum dated June 13, 2012, holders of US$ 38 mn out of FCCBs I and US$ 53.40 mn out of FCCBs II offered their bonds for exchange and secured bonds with a face value of US$ 127.72 mn (“FCCBs III”) were issued with maturity date of July 7, 2017.

• During 2012-13, 2013-14 and 2014-15, FCCB III with a face value of US$ 3.25 mn, US$ Nil and US$ 6.62 mn, respectively, were converted into equity shares of the Company, retaining a closing balance of US$ 81.53 mn as at March 31, 2015. Subsequent to the year ended March 31, 2015 the company has received an intimation for conversion of FCCB’s III of US$ 5 mn, leaving a current outstanding of FCCB III bond of face value of US$ 76.53 mn

• In May 2015 the board approved the reset of conversion price from Rs.22.79 to Rs.13 which would potentially be converted into 329,988,530 shares

Our view: Subex has a good portfolio of products in a niche segment and a space

with concentrated large clients. Additionally, Subex has strong references by major Telecom consultant firms like Deloitte, PwC etc. We believe Subex would show US$ revenues growth of ~13% yoy in

FY16E primarily led by Revenue & Fraud Assurance. Success of Asset Assurance and analytics is crucial for strong revenue growth in the medium term. With larger TCVs and lower competition, Asset Assurance could change fortunes for the company. Margins would fall in the medium term led by investments in Sales &

marketing and ESOP charges ( to be approved by shareholders).

Business outlook

What has changed? In Oct. 2012, the then promoter CEO, Mr.Subash Menon stepped down

and Mr. Surjeet Singh, ex- CFO of Patni computers was appointed as CEO. From then, Subex has been on an internal restructuring process to increase the quality of revenues and also to reduce the FCCB overhang. The shareholders approved the reset of FCCB III to be converted to

equity shares at Rs.22.79 to Rs.13/ share. Post this, Subex would have FCCB outstanding of US$ 2.4 mn. Prior to this, the “available for sale” tag and the question for survival would have made client wary of extending business relationships with Subex. This is also the reason for tepid revenues growth in the last 5 years


Rs. 14

CMP

Rs.11.2 Financial summary

*Assuming FCCB conversion; **M.cap is adjusted for FCCB conversion

Rs.mn. FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

Profit & Loss Cash flowsRevenues 3,598 4,000 4,241 4,727 Cash from operating activities 658 624 708 790 Cost of materials 209 193 224 249 Cash from Financing activities -487 -345 -369 -351

Personnel expenses 1,629 1,828 2,024 2,240 Cash from investing activities -86 -16 11 40

Gross profit 1,760 1,979 1,993 2,238 Key ratiosS,G&A expenses 911.2 1,014 1,012 1,067 Revenue grow th 6% 11% 6% 11%

EBITDA 849 965 981 1,171 EBITDA grow th 25.4% 13.6% 1.6% 19.4%Depreciation and amortisation 40 54 58 56 PAT Grow th NM 378% 26% 29%EBIT 809 910 923 1,115 EBITDA margin 23.6% 24.1% 23.1% 24.8%Interest costs 610 145 169 151 EBIT margin 22.5% 22.8% 21.8% 23.6%

Other income 9 40 67 96 PAT margins 4.2% 12.2% 14.5% 16.8%PBT 207 687 821 1,061 ROE NM 10.0% 7.7% 9.2%Tax 57 199 205 265 ROCE 1.7% 6.3% 6.4% 7.7%PAT from continued ops 150 488 616 796 Valuation metricsP/L from discontinued operations -48 0 0 0 Fully diluted shares (mn) 173 517 517 517

PAT 102 488 616 796 M.cap** 1,988 5,941 5,941 5,941

EPS (Diluted) 0.6 0.9 1.2 1.5 EV (Rs.mn) 8,668 7,180 6,630 5,950

Balance sheet EV/Sales (x) 2.4 1.8 1.6 1.3

Share capital 1,829 5,166 5,166 5,166 EV/EBITDA (x) 10.2 7.4 6.8 5.1

Reserves & surplus 261 2,509 3,125 3,920 P/E (x) 19.5 12.2 9.6 7.5Total equity 2,090 7,674 8,290 9,086 EPS(E) / CMP (%) 5% 8% 10% 13%

Long term borrow ings 5,777 681 681 681 P/BV(x) 1.0 0.8 0.7 0.7

Total Current liabilities 2,487 2,649 2,525 2,492 Interest coverage ratio 1.32 6.27 5.47 7.39Liabilities + Share capital 11,338 11,988 12,480 13,242 Goodw ill/T.assets 76% 71% 69% 65%Assets 82 83 82 82 Per share dataGoodw ill 8,564 8,564 8,564 8,564 Book value 12.1 14.9 16.0 17.6 Cash 567 712 1,062 1,542 Cash 3.3 1.4 2.1 3.0Total current assets 2,435 3,084 3,577 4,340 Operating cash f low 3.8 1.2 1.4 1.5

Total assets 11,338 11,988 12,480 13,243 Free cash f low 3.4 1.1 1.3 1.4

Financial summary (consolidated)

Nucleus software Fair Value

Rs.270

CMP

Rs.232

Financial Summary Year Revenues (US$ mn) Revenues (Rs. mn) EBITDA (Rs. mn) EPS (Rs.) EV/Sales(x) EV/EBITDA(x) FY16E 62 3963 775 21.2 1.2 6.1 FY17E 70 4178 722 20.1 0.9 5.4 FY18E 80 4805 970 26.9 0.7 3.3

Initiating coverage

Date Oct 5th, 2015

Market Data

SENSEX 26221

Nifty 7951

Bloomberg NCS IN

Shares o/s 32mn

Market Cap Rs. 8bn

52-wk High-Low Rs. 353-160


Index member NIFTY

Promoters 60.6

Institutions 10.8

Public 28.5



Play on single product upgrade cycle


1m 3m 12m NCS 0 -4 0 Sensex 2 -6 -1 CNXIT 3 6 3

Nucleus (NCS) is a banking and financial services focussed software firm with strong presence in the products focussed on the Lending market. Nucleus growth trajectory would be hinged on its ability to upgrade a number of its existing clientele to newer products and also penetrate the western market. Nucleus is taking a cautious approach to Go-To-Market and has not invested aggressively in sales and marketing similar to India or global peers. Moreover Nucleus new lending product Finnone Neo® is relatively new vis-à-vis competition in the SOA architected product space. Nucleus has a unique opportunity of having over 100+ installed base for its Finnone new product and can cross-sell to a number of them. We believe the company needs to strengthen its go-to-market and has to step up sales and marketing investments to ensure high success in upgrades from Finnone to Finnone Neo® .

Oldest player with limited product suite: NCS incepted in 1991 generates most of its product revenues from one product Finnone and its newer version Finnone Neo® . Over the last few years new offerings such as mobile banking, portal and transaction banking have not seen the same success as Finnone.

Finnone Neo® an opportunity and threat: Finnone has over 100+ installations with a number of they over 10+ years old. While this is an opportunity, heightened competition could result in NCS not winning some of the upgrades. NCS sales and marketing spend in the lowest among product companies we are covering in this report. High developing market focus: NCS generates ~80% of its revenues from developing markets. Developing markets are more competitive and generate lower revenue per deal vs. developed markets. Further cost associated with a developed market go-to-market strategy is expensive and has a high gestation period. Low growth trajectory : NCS reported revenues of US$ 45mn in FY07 and US$ 61mn in FY15, implying a CAGR of 4% over an eight year period. During this period NCS generated over 10% EBITDA margin and was net cash. The growth for NCS has been primarily driven by increased customisation for existing clients rather new installations. We believe steps are being taken now to address growth concerns however, they are not adequate in our view. Attractive valuation: NCS trades at 1X EV/Sales one of the lowest among our product companies under coverage. NCS has generated cash on a consistent basis however, growth trajectory has been tardy. Fair value for NCS would be 1x EV/Sales in our view. Additionally, we believe given the nature of business, we would prefer valuing Nucleus at EV/EBITDA than EV/Sales. Fair value is arrived by attaching 7x multiple to our FY17E EBITDA.


Rs.270

CMP

Rs.232

Revenue has been tepid over the last few years with declining margins


Description:

Established in 1989, Nucleus software exports (NCS) is a Global Banking products & solutions provider with prime focus in providing lending and transaction banking products to Global Financial industry for the last 20 years. NCS currently has 1512 employees.

NCS has two flagship products – Finnone™ (Product aiding Lending operations) and FinnAxia ™ (Global transaction banking platform) and caters to developing economies across APAC and MEA. With the recent upgrade, the lending product has the latest technology and is integrated across various OS. Notably, Lending product contributes larger part of revenues for NCS.

As of Q1FY15, NCS has an outstanding order book of Rs.3.47 bn executable in the next 2 years.

Company Description



49

72

69

55

53

62

60

63

58

29%

19%

10%

15%

20%

25%

30%

40

45

50

55

60

65

70

75

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

US$

mn

US$ revenues EBITDA margins

2003

FinnOne Live in 37 countries

1989

Nucleus was incorporated

1994

Opened Singapore office

1996

• Got Listed on BSE & NSE

1998

HDFC Bank installs Finnone

1999

First customer in Japan

2006

ACOM Ltd. Japan installs Finnone

2011

Bank of Muscat, ING Vysya goes live with Finnone

2013 2014

Launched Mobility solutions

• FinnOne Neo® and FinnAxia launched

• 22 customers in Africa • ICICI Bank wins Asian

Banker Award

2015

150 customers in 50 countries

Global collaboration with Red Hat


Rs.270

CMP

Rs.232

Revenue by product (%)


Client contribution to total revenues


Revenue by geography (%)


Company Description

16%

17%

22%

10%

19%

6% 8%

3%

India

Far East

South East Asia

Europe /U.K.

Middle East

Africa

Australia

Rest Of The World

72%

28%

Products Project & Professional services

0%

10%

20%

30%

40%

50%

60%

FY11 FY12 FY13 FY14 FY15 Top 3 clients Top 3-5 clients Top 5-10 clients

NCS clientele

Source: The Banker, The Asian Banker 2013 Rankings

11 of the 50 biggest banks in Asia Pacific

5 of the 10 biggest Banks in India

6 of the 20 biggest Banks in Middle East

6 of the 50 Banks in Africa

3 of the 5 biggest Banks in Singapore

3 of the 10 biggest Banks in Indonesia

3 of the 10 biggest Banks in Nigeria

4 of the 5 biggest Banks in the Philippines


Rs.270

CMP

Rs.232

Consumer Vehicle Loan

Personal Loan

Consumer Durable Loan

Educational Loan

Mortgage Loan

Gold Loan

Loan Against Property

Construction Equipment

Commercial Vehicle Loan &Fleet Finance

Business Loan

Inventory Funding

Working Capital Loan Bill Discounting

Murabhah

Ijarah

Istisna Tawarruq

Service Ijarah

Line

of B

usin

ess

Bus

ines

s Ap

plic

atio

ns

Mob

ility

Ad

d-on

Ap

plic

atio

ns

Retail SME/Corporate SME/Corporate SME/Corporate Credit Card

CAS Origination & Credit Appraisal

LMS Loan Servicing

Collections Delinquency & Recovery

Management

FAS Finance Against Securities

mCAS mServe mCollect

Customer Self-Service Securitization Commission Payout

Business Analytics

Finnone Neo® suite addresses the entire spectrum of Loan Lifecycle


Rs.270

CMP

Rs.232

Finnone™ - NCS Lending suite: FinnOne™, the flagship product of Nucleus, is one of the popular

lending products in the APAC and MEA. It is an integrated lending software suite designed to support part or all of the end-to-end lending process of banks, finance companies, captive auto finance companies and retail business.

The lending suite consists 1) customer acquisition system (CAS) 2) Loan management system (LMS) 3) Collections Management system (CMS) 4) Islamic Financing 5) Finance Against Securities (FAS) 6) Forecaster system

Finnone Neo™, launched in 2014, is a brand lending software suite which could be enabled as an On premise/SaaS model.

Nucleus will have traction in the coming years with existing clients coming for an upgrade to Finnone Neo™.

Key competitors in Transaction banking

Intellect

Temenos

Misys

Fundtech

ACI

Avaloq

Bottomline


FinnAxia™ - Treasury banking solution suite: FinnAxia™ is an integrated global transaction banking solution built on

latest Java J2EE technology and mutli layered Service Oriented Architecture(SOA) platform.

The key components of FinnAxia™ - 1) Global receivables 2) Global payments 3) Global Liquidity management 4) Financial supply chain management integrated with mobility solutions

NCS has enrolled 2-5 customers on the new FinnAxia. FinnAxia is a low penetrated product of NCS when compared to

Finnone.

Key competitors’ products in Lending

Loan origination software Fiserv, Corelogic, KwikLoan, Avista Accelerator, Credit Delivery Platform, SMART system

Commercial Loan software Cadence, Captaloans, Ambit Optimist, ARGO

Commerical Lending, CAMS, Unity Loan systems

Loan servicing software Sopra banking suite, Kwik Loan, Loan Assistant, Loan management software, Risksorigins


Product overview


Rs.270

CMP

Rs.232

Nucleus has lower S&M spends than peers


Nucleus Revenue/Employee is lower than peers despite being the oldest software banking products companies


Outlook

29317

57514

40132

71711

36686

20000

30000

40000

50000

60000

70000

80000


Subex Nucles

US$

Continuous to have high developing economies concentration


Our view: Nucleus doesn’t give license revenues as % of total revenues. Lower

revenue/employee and EBITDA margins suggests lower license revenues. Notably, for a mature product company License revenue is 30-40% of sales.

Lower than peers investments in S&M is led by NCS strategy to continuously focus in developing economies. Better pricing and margins is possible only in developed economies. No significant change in geography mix, lower margins, lack of product portfolio expansion, low license revenues suggests that NCS is more a product customization company than product vendor.

We believe Nucleus would have revenue growth of 12.2% & 5.4% in FY16E & FY17E primarily led by Finnone Neo™ upgrade.

13

%

26%

19%

20%

18%

0%

5%

10%

15%

20%

25%

30%

Nucleus Intellect Majesco Subex Ramco

As %

of s

ales

0%

10%

20%

30%

40%

50%

FY07 FY15 India Far East South East Asia Europe /U.K. Middle East Africa Australia Rest Of The World


Rs.270

CMP

Rs.232 Financial summary

Rs.mn FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

Profit & Loss Cash flows

Revenues 3,531 3,963 4,178 4,805 Cash from operating 398 690 493 633

Other Operating Income 0 0 0 0 Cash from investing -170 139 146 194

Total revenues 3,531 3,963 4,178 4,805 Cash from financing -227 -7 -7 -8

Employee costs 2,014 2,244 2,418 2,641 Free cash f low 308 570 373 513

Other Operating Expenses 858 944 1,038 1,194 Key ratios (%)

EBITDA 659 775 722 970 Revenue grow th 2.0% 12.2% 5.4% 15.0%

Depreciation 120 122 121 122 EBITDA grow th -1.9% 17.7% -6.8% 34.3%

EBIT 539 653 601 848 PAT Grow th 0.6% 5.9% -5.2% 34.1%

Interest exp/ (income) 339 263 266 314 EBITDA margin 18.6% 19.6% 17.3% 20.2%

Tax 219 227 217 291 EBIT margin 15.3% 16.5% 14.4% 17.6%

PAT 647 685 650 872 PAT margins 18.3% 17.3% 15.6% 18.1%

Diluted EPS 20.0 21.2 20.1 26.9 ROE 15.5% 14.5% 12.1% 14.2%

Balance sheet ROCE 17.9% 16.9% 13.6% 15.9%

Share capital 324 324 324 324 Valuation metrics

Reserves & surplus 4,060 4,738 5,381 6,244 Shares o/s (mn) 32.4 32.3 32.3 32.3

Total shareholder's equity 4,384 5,062 5,705 6,568 Fully diluted shares (mn) 32.4 32.3 32.3 32.3

Long term provisions 47 47 47 47 Market cap (Rs. mn) 7,514 7,504 7,504 7,504

Other long term liabilities 0 0 0 0 Net debt (2,813) (3,634) (4,266) (5,084)

Current liabilities 1,132 1,441 1,538 1,768 EV (Rs.mn) 4534 4691 3869 3238

Trade payables 259 315 336 387 EV/Sales (x) 1.3 1.2 0.9 0.7

OCL 873 1,126 1,201 1,381 EV/EBITDA (x) 6.9 6.1 5.4 3.3

Total liabilities 5,563 6,551 7,289 8,383 P/E (x) 11.6 10.9 11.5 8.6

Net Fixed Assets 590 588 587 585 Other ratios (%)

Deferred tax assets 13 13 13 13 DSO days 87.4 86.4 88.5 92.0

Cash and cash equivalents 2,813 3,634 4,266 5,084 Book value per share 135.3 156.5 176.4 203.1

Debtors 846 938 1,014 1,211 Cash per share 86.8 112.4 131.9 157.2

Total assets 5,563 6,551 7,289 8,383 FCF per share 9.5 17.6 11.5 15.9

Financial summary


Neutral

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Absolute Rating

Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year horizon

ADD Stock expected to provide positive returns of >5% – <15% over a 1-year horizon SELL Stock expected to fall >10% over a 1-year horizon

Disclaimer


Neutral Disclaimer (Cont’d)

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Disclosure of interest statement ALL

Analyst financial interest in the company No

Group/directors ownership of the subject company covered No

Investment banking relationship with the company covered No

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Associates of Spark Capital’s ownership more than 1% in the company covered No

Any other material conflict of interest at the time of publishing the research report No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:

Managing/co-managing public offering of securities Investment banking/merchant banking/brokerage services products or services other than those above in connection with research report

No

Whether Research Analyst has served as an officer, director or employee of the subject company covered No

Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No

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