Ramco Systems an emerging company in the red hot cloud erp space

Ramco Systems - An Emerging player in the Red-Hot Cloud ERP space

Content Index

• Ramco Systems – Investment Snapshot :- Slide #6

• Our Research Head’s Investment Note on the Stock :- Slide #7

• Cloud ERP Market – Industry Overview :- Slide #28

• Ramco Systems – Company Overview :- Slide #45

• Concerns & Reasoning :- Slide #69

• Conclusion :- Slide #71

“ Specialists in discovering Multibagger stocks “

HBJ’s BIG Multibagger Winners over the Years


HBJ Investment SBU – Key Highlights


• Average Returns of our Multibagger Ideas (adjusted for Time & Quantity )

= 110%

• Strike Rate (Win : Loss Ratio) of Multibagger Ideas – Since Inception

= 93 : 7

• Portfolio/ Investment Fund performance (Since Inception)

• 1 Rs invested in HBJ Portfolio four years back is now 3.24 Rs. This outperformance has come with far less Risk taking and much lower volatility.

Ramco Systems – Investment Snapshot (as on Jun 20, 2014)

Recommendation :- BUY

Maximum Portfolio Allocation :- 4%

Investment Phases & Buying Strategy

1st Phase (Now) of Accumulation :- 60%

Current Accumulation Range :- 250 to 350Rs

2nd Phase (can increase allocation based upon the execution of the company) :- 40%

Since it’s a low volume counter, Investors can slowly accumulate the stock over the next 2 Months. Even with a higher buying price, the investment thesis still holds good as we are expecting a multiple time Exit over the next 5 years.

Core Investment Thesis :

Ramco Systems is a turnaround bet that despite the significant risk of permanent capital loss is worth betting on, considering the large expected value arising out of attractive Risk-Return characteristics. In case the company executes well, we are speaking about a Multi-year Multibagger Idea.

Current Market Price – Rs. 244 Current Dividend Yield – 1.74% Bloomberg / Reuters Code –RMCS. IN/ RMCS.NS BSE / NSE Code – 532370/ RAMCOSYS Market Cap (INR BN / USD Mn) – 5.50 /91.1 [1 USD – Rs. 61] Total Equity Shares [Mn]– 22.4 Face Value – Rs. 10 52 Week High / Low – Rs.244 / Rs.66 Promoter’s Holding – 70.71% FII - 4.48% DII - 1.81% Other Holdings - 23.01%


[HBJ CAPITAL - RAMCO SYSTEMS MULTIBAGGER] July, 2014

Dear Members of Multibagger,

One of the reasons for bragging about our Investment Performance at the start of this report (other than publicity) is to highlight a

key notion surrounding this Month's Multibagger idea. Most Investors (including us) tend to shy away from "Turnaround Ideas",

considering the amount of Risk involved. While we believe in the maxim, "Turn around companies rarely Turn" - there are certain rare

occasions, in which you go and bet on Turnaround Ideas for the sheer Returns potential of that Idea.

If you look at our big winners list, the stock with the highest returns is - Symphony Coolers (20X Returns). It was a company with a

very poor track record, Capital Misallocation issues, consistent write-offs etc. A few years back, we believed that the company is

transforming itself and on path to create a strong leadership position in Global Air coolers market. Real Indicators for transformation

coupled with a leap of faith held us in good stead to prepare an Investment note at a time when most Investors were skeptical on the

stock.

We certainly are not positioning Ramco Systems here as the next Symphony Coolers, but we certainly believe that there are similar

Real Indicators of transformation in Ramco and similar Investor skepticism on the stock based on Ramco's previous track record. This is

offering us healthy Risk-Reward characteristics on this turnaround bet, enabling us to go ahead with the bet . As we had written in the

Introductory mail on the Idea sometime back, only Investors with strong risk appetite need to enter this stock. There are real chances of

permanent capital loss in this Idea and hence Clients not willing to take such a risk can certainly skip this recommendation.

We are looking at this Idea as a "Low Probability - High Expected Returns Bet". In case the company transforms itself as we foresee,

we are looking at big Multibagger returns. We generally prefer a low Position sizing initially in these kind of bets. As the story plays out

as expected and as conviction levels improve, Investors can add on the stock (even if it means - buying at higher prices). We believe that

Ramco Systems could be a good kicker to Portfolios with suitable Risk characteristics. (Disclaimer : HBJ Hedge Fund Portfolio has been

accumulating Ramco Systems from 195 Rs levels).


Before we get into the details, let me go through the broad Idea on why Ramco Systems looks interesting to us,

- Indian Equity Market ecosystem doesn't understand Cloud ERP Space and it continues to have no respect for loss making companies,

even if the future potential for profitability is huge.

- Company would benefit from huge Global tailwinds that is disrupting a big Market place and opening exciting growth opportunities

for Cloud ERP companies.

- The company's new Management team (from 2012) has initiated an internal transformation that we believe is already showing good

initial results across the board.

- Company is chasing a huge Market (Multi-Billion Dollar Opportunity) and any positive traction would result in disproportionate

returns to Investors.

- Ramco Systems has a good Product in place, has developed a right go-to-market strategy and has started getting strong Order book

traction from several new Markets & Verticals.

- Company's cloud business provides a strong scalable business model, recurring and predictable revenue base, attractive margins and

large operational leverage to boost company's future financials.

- Ramco systems at the current valuations of less than 100 Million $'s offers a good Venture Capital styled bet with potential for rapid

Business Scale up and Pricing Revaluation in markets.

- As with most of our Big Winners, Ramco Systems has NIL Analyst Coverage as of now and little Institutional Investor interest.

Since, there is very little data on this company - we had to resort to large amount of Primary information to prepare this report. We have

had chances to speak with company's clients, ex-employees, current Mid-Level employees, Top Management, Competitors etc. We


believe that the there are enough indicators to believe that the company is getting strong traction for its products in the Global markets

and has a decent probability of making it BIG in specific Niches of cloud ERP space.

Let's get a Broad understanding on the Red Hot - Cloud ERP space :

The above three companies are NASDAQ listed SaaS companies operating in similar segments as Ramco Systems. The reason for the

above table of US listed SaaS players is not to equate Ramco with those companies, but to understand the market dynamics that is

leading to such crazy multiples (>15X Price/ Sales) for companies that are still posting huge losses.

Global Technology enthusiasts would point that the biggest reason for such crazy valuations is that SaaS market for Enterprise

Solutions has reached a tipping point/ tornado effect. You can understand about Cloud ERP market and the reasons for Cloud ERP's

replacing Traditional ERP's in Slide - 33. Here, I am just trying to point out the current Market forces and how it could dramatically alter

the large Enterprise ERP market in a few years from now. Cloud ERP is getting good traction now because of the rapidly evolving Partner

ecosystem, success stories of early adopters, Reducing costs and Disruption from mobiles, wearable devices etc.


" I think if we’ve been in the market with a SaaS ERP product five years ago, there would not have been a buyer for that

product, no matter how good the product was, because enterprise CIO’s were not ready to buy SaaS ERP five years ago.

There’s been a progression in the thinking and the psychology of SaaS, the acceptance of SaaS in the enterprise. That’s

certainly been helped by sales forces success, by the success of products like Success Factor, other products in other

areas in the enterprise has made everybody get more comfortable with SaaS and so I think we’re in a very nice place to

be ready with the product at the same time as just sort of a marshes kind of opening up to the idea." - CEO of a listed

SaaS company.

We are speaking about a huge Market that is getting disrupted and opening up several opportunities for companies with modern

Technology solutions. The legacy Enterprise companies (leaders being Oracle, SAP, Epicor etc) who have had a hugely profitable ride

over the last several years are now starting to fact the heat from small competitors who are disrupting their markets in a rapid manner

with little time to react.


Why are usual traditional ERP players unable to capitalize on Cloud ERP in a Big way ?

Most legacy players had been dismissing the positives of Cloud and didn't invest early enough to build a futuristic platform focused

on cloud solutions. They continue to operate on Legacy platforms and cater to the big deals which are still happening in the On-Premise

ERP space. Companies such as SAP & Oracle are playing the cloud market through acquisitions. They are gobbling up every possible

Enterprise Cloud business and trying to integrate with their platforms. Even though this has had limited success, the lack of an organic

cloud platform product makes it extremely difficult to compete with new age Cloud ERP players. As usual Institutional Inertia makes it

more difficult for these legacy companies to shift at a rapid pace to Cloud ERP solutions, considering the differences between On-

Premise and Cloud ERP businesses from the mindset point. (Check what disruptions can do by comparing success of Ecommerce players

Vs Offline Retailers).

"It's really hard to build what we built is the business model. It's the do I take my sales guy who is used to getting $3

million on Day 1, how do I turn that into an average $50,000-a-year sale? So the business model doesn't really allow

them to make the transition that we've made. And the good news for us is we started -- and that's why technology

always moves from the bottom-up, right? Every time I sell to an SAP customer, my margins expand. Every time they

sell to a NetSuite customer, their margins contract. Nobody likes contracting margins. That's why technology never

comes down, it always moves up. So we feel pretty confident about our technology position. The biggest impediment in

those large institutions is institutional resistance to change, particularly around the system. But they have so much on

their plate, we're going to penetrate around the edges." - Listed SaaS player in one of its Analyst ConCall.

Hence, markets believe that Cloud ERP companies have a long run way for growth. Markets are valuing cloud ERP companies at

various ranges based on its probability of emerging as winners in that space. Companies in sub-segments that are growing at faster rates

such as Cloud - HCM solution providers are getting higher range of the Multiples. Another important reason for the valuation multiples

are the nature of Revenue and Cash flows to Cloud ERP companies.


Cloud ERP is a high operational leverage business in which the economical benefits are back ended in nature. Once a product gains

traction in the Market place, only Sales & Marketing costs are incremental to the company as bulk of the development expenses are

sunk cost. Most of the Global SaaS players operate with almost 85% Gross Margins. Each and every new client addition comes with little

variables costs and improves the overall operating Cash flows.

Cloud services are billed on per User/ per Month basis, thereby providing scalability of the solution to customers. This leaves Cloud

players without any significant upfront Revenues and dependent solely on the monthly Subscription revenues. Hence, the cloud

companies take a while to break even on a new order. The faster they grow, the higher is their accounting losses. A quantitative graphic

on this can be found in Slide-37. Hence, there is a lag effect from Order booking to revenues trickling in. While operational cash flows

become healthy, accounting profits take time.

Companies generally get Cloud ERP orders for a 3-5 year duration and they get paid in 36-60 monthly installments. Cloud ERP is a

sticky business and companies on an average have about 6-8% attrition rate (92-94% Dollar Retention rate). This basically means that

the majority of the subscription revenue stream is almost perpetual in nature, leading to strong operational cash flow base. So any

incremental order booking, just adds on to this base. The quality of just a predictable revenue base is one of the key attractions for

Investors.

Cloud ERP solutions not only provides huge cost benefits and flexibility to the customers, but also provides Vendors with higher LTV's

(Life time customer value), making it a win-win situation. Once SaaS vendors get an opening, they are able to Up-Sell (Increased

Volumes) and also Cross-Sell (different Modules) to clients. All these sales are hugely Margin accretive and provide solid profits to

Vendors.

" The “Land and Expand” strategy of Up-Sell and Cross-Sell has most famously been used by Salesforce — two thirds of

their revenue is believed to be derived from up-selling and cross-selling into their base accounting for the majority of

their revenue base. Customer Engagement Analytics only feasible with SaaS offerings allowing vendors to much more


readily determine expansion sales opportunities by tracking the engagement of their SaaS subscribers providing

essential insights into additional revenue opportunities with their customer base. Now Analysts believe LTV values of

SaaS customers are almost 50% higher than traditional customers".


Let's understand as to how Ramco Systems fits into the Cloud ERP story :

Ramco has been one of the rare Indian IT products company in a country filled with IT service companies. Ramco has always been an

Enterprise Solutions company since inception and has a product development experience of around 20 years (Ramco evolution in Slide -

46). It is widely understood that the company has always made good products but has never been able to market or sell them well. This

along with poor financial discipline has resulted in a string of losses for the company.

Company's past has been full of continuous disappointments. Ramco was able to bring on board Mr. Bill Gates in 1997 to launch a

ERP product called Marshal 3.0 which was highlighted as a note of confidence on the company's product capabilities. However, Ramco

was never able to get its Go-To market strategy right and had to struggle in Global markets. It was never able to build a Global sales

network or the necessary brand strength to crack these markets. Even in Indian markets in which Ramco Systems has a decent brand

name and a low cost advantage, the company has roughly only around 10% Market share, while Global leaders such as SAP dominate

with 35%+ Market share. With such track record, it's naturally difficult for Stakeholders to believe that Ramco with its new Cloud

Strategy will be able to crack it to the top league of Cloud ERP players.

We believe that the story this time may be different because of a few primary factors : A changed Market place (Cloud), Increased

Aggression from Ramco under the new Management, Good Competitive Products with latest features and functionalities and a focused

Go-To Market strategy. On the products side, Ramco had recognized trends on the Cloud pretty early on and had started building ERP

products, leveraging on this technology as early as 2007-08. Ramco has been able to build a strong suite of Cloud products on an organic

platform (Ramco Virtual works and Ramco Thought works) over the past few years.

Ramco has launched these Cloud products in Indian over the past few years and based on Market/ Customer feedback, has

consistently kept of improving it. Company has incurred substantial Research and Development (R&D) expenses of over 200 Cr Rs over

the last few years on developing and re-iterating these products. It currently has very futuristic products that are Contextually aware,


Geo-Spatially aware and are available across new platforms such as Mobile, Wearable devices etc. While product improvements are a

continuous process, it is safe to believe that most of the forward changes would be incremental in nature and that Ramco currently has

products that are adding significant value to its customers. You can read more about Ramco's products in Slides : 50-55.

Ramco has moved to harvest stage over the last 2 years and based on the confidence it had gained in Indian markets, it has

launched its products in Global markets in a phased manner (Cloud - HCM was the last big launch in Mid - 2013). Some of the USP's of

Ramco in global markets include,

- Ramco's new-age Organic technology platform helps it to experiment and add new features to its products at a very fast rate.

Company's products are built with a philosophy of MUSIC (Mobility, User Interface, Social, In-Memory and Context aware) and have

extensive features such as Google Maps integration, Memory computing capabilities etc.

- Ramco competes with new age SaaS players in terms of functionalities and breadth of services. Ramco's systems are easily

interchangeable between cloud ERP and On-Premise ERP with almost no extra cost to customer. This enables Ramco to provide a mix of

solutions that can't be done by many of these SaaS companies.

- Company low cost Offshore R&D capabilities is a big advantage. Company's cost dynamics provides it with a definitive competitive edge

in Global Cloud orders in the range of 250K-500K which is usually under the radar of big boys.

Understanding the Impact of Change in Management :

Ramco Systems was able to get on board Mr. Virender Agarwal (VA) as the company's CEO in May-2012. It is a significant shift for a

company that has had its Promoter (P.R. Venkatrama Raja) driving its business for a long time. Mr. Agarwal has had a strong track

record of building HCL Technologies emerging market business to half a Billion Dollar revenue stream. We have tracked the changes that


Mr. Agarwal has instituted in Ramco systems over the past couple of years and are convinced that Ramco's future would be distinct

break from its past.

VA has been able to make sweeping changes across the board - Products, Company Culture, Financial Discipline and Go-to Market

strategy. He has been able to instill a sense of urgency to carry out these changes and has also brought a sense of direction to the

company.

On Products : Though Ramco's products were generally considered to be technically good, they scored low on Usability. VA had brought

in over 25 Usability experts to improve the User interface and make the products more User friendly. The feedback loop from the Sales

team to the Product development team has also been strengthened, thereby reiterating products (or) adding functionalities based on

Market demand. There has also been a strong focus on building cloud products for Global markets under three broad verticals - ERP,

HCM and Aviation.

Company Culture : VA has brought in a lot of aggressiveness and Market orientation to the company culture. There has also been a

strong focus on inducting fresh blood into the company. Almost the entire top Management team has been reshuffled and new

professionals have been brought across all levels. These changes has predictably caused heart burn among old timers and has also led to

some good people from the old guard quitting the company. This shock to a once laid back organization has enabled the Management to

bring back a aggressive mindset to the company. Just look at the Slide below,


We hear that sometimes this aggression has gone overboard with quotes such as - "Humbling a Workday" being used internally, but

that is fine as long as the company doesn't fall back to its old culture of being laid back on the Market place.

Financial Discipline : As with most legacy organizations, Ramco had a bad cost structure. VA has been able to bring Financial discipline by

cutting costs across the board. There has been tremendous improvements in Organizational productivity. Though the number of people

on the company's payrolls has not changed much (1400), there has been a healthy churn with several Non-performers asked to leave the


company. There has also been a significant shift in Operating expenses, with more allocation to Sales and Marketing (We believe that

S&M costs would go as high as 25% going forward).

Go-To market strategy : The biggest and most welcome change for Ramco has been the increased focus on cracking the Market. It is

generally said that building a product is easy but to sell it is the most difficult part. Ramco is improving its go-to Market strategy by

improving customer responsiveness & sales productivity of its internal team, investing tactically on Marketing, partnering with Global

giants across the Cloud spectrum and emphasizing strongly on building a Global partner network (Business Partners, System Integrators,

Force Multipliers etc).

The traditional ERP space had become commoditized overtime and it was extremely tough for a small player to attack the Goliaths. The

current Cloud Market with differentiated Products/ Technologies has opened up opportunities for nimble global players to challenge the

established leaders by partnering with giants across the cycle (Technology Partners, Cloud Computing Partners - Google , Amazon etc).

Unlike the Client-Server ERP applications, Cloud applications rarely provide any significant advantage to the Legacy players except for

their Brand strength, Sales network and Customer connect. In addition to the existing Market, Cloud applications have also significantly

expanded the overall ERP market by becoming affordable to several Small & Medium sized enterprises.

Ramco's strong Partner Network Focus : Company's understanding on the need to improve partner network to crack the market has led to strong internal restructuring on the Sales front. Company has designated that certain businesses should be done only through partners. Currently 15-20 % of sales is coming off from such partners. They expect this to increase to over 40% going forward. They are focused on winning more partners on White-Label platform business (existing - Schneider, WNS, Airbus-Helicopter) as well as the big System Integrators (existing - Accenture, Dell, Tech Mahindra, Infosys). Some of the efforts that Ramco has taken to attract and grow a quality Partner network is, - It shares almost 30% of recurring revenues with Partners.


- Lot of efforts on improving Ramco Development kit (Automation and Ease of Implementation for partners). Company's cloud product has this feature - Any changes that Ramco makes to the cloud solution is Global and any changes that the Clients make are local to the solution.

- The entire Customization/ Implementation bucket is shifting from Ramco's bucket to Partner's bucket. This is attracting a lot of Partners and opening up a lot of geographies.

Ramco's revenue mix from services will continue to decline in favor of IP revenues. Netsuite kind of companies still have a 25% revenue mix from professional charges. With limited revenue from these lines and more focus on IP subscription revenues, it would take a while for the company's financials to reflect the order booking growth that we are currently witnessing. The force multiplier deals such as (Schneider, WNS etc) will ensure that company's gets new clients, every time their partners gets a new customer. A strong Partner network is a necessity to crack the global Cloud market. As a result of this focus, Ramco Systems is adding about 1 new Partner/ Every Week. Ramco currently has over 150 global Partners. In addition to these changes, Ramco has also had some changes in its Go-To market strategy of attacking large clients. Company may not

target core SAP deployments, but are ready to come in and fill in the missing pieces. Ramco is ready to target few modules that can

augment existing SAP deployments. This gives it an entry point with the large Fortune 100 customers. Company's products can be easily

customized to SAP/ Oracle deployments.

There has also been a significant Two-Tier ERP phenomenon that is fast getting traction in the global markets. Nimble players such as

Cornerstone on Demand have been capitalizing on this to add new large clients. A Two-Tier ERP is one in which a large customer may

have an On-Premise ERP and is not ready to tinker with it, but is ready to BUY cloud solutions for its International subsidiaries, Vendor

network, Supply Chain partners etc and integrate with its existing ERP network. Ramco systems has also been focusing on this Two-Tier

ERP strategy to bring big clients on board.


With all these changes, we believe that Mr. Agarwal has made a tangible difference to Ramco and its not correct to compare today's

Ramco with its previous versions. We also need to understand that Promoters have fully backed this transformation. The well respected

Billion $ Ramco group with interests in Cement, Real Estate, Textiles etc has consistently funded the company (over 40 Million $ of

Equity infusion) and has also increased its shareholding from 60% to around 70% in the last 2 years. Group company - Ramco Cements

has also lent Debt capital at 12% interest rate to Ramco Systems. We understand that, Promoter and MD of Ramco - Mr. Raja is product

centric and has a lot of passion to take this company to the next level. We don't think Capital should be a big issue while scaling up.

We would urge Investors to read excerpts from one of Mr. Agarwal's interview in Slides : 64-67 to have a better understanding about

the current Management's thinking.

Ramco's early signs of Revival & Impacts of Transformation :

There would be a significant lag effect in the Transformation translating into both Revenue growth (Subscription Revenues and minimal

Professional Charges) and Profitability (In built Operational Leverage) for Ramco Systems. This has enabled the stock to be under the

radar of most Investors. Leave aside the Institutions, even the usually nimble Investors (Stock Forum members, Intelligent HNI's) seem to

have given the stock a skip.

Since Financials will not reflect the transformation for some time, does it mean that we need to have a blind faith in the process changes

and bet on the company ? No, we believe that there are several early quantifiable signs that helps us make a better prediction of the

things to come.


Gaining early traction among key customers and in new geographies will enable Ramco to achieve bigger targets. The company's Cloud

division has seen strong Order book growth last year and recorded roughly 27 Million $'s worth of orders. Incrementally at least 60-70%

of its orders should be on Cloud solutions. Company's focus on Partner network is certainly paying off.


How can a company with shoestring Marketing budgets be able to crack the market when even the pure SaaS peers are spending

somewhere around 100 Million $'s every year on Sales & Marketing ? I think the key to success is in finding and exploiting Niches. We

understand that Ramco has got a superior cloud product offering in Global MRO space and also in ERP for construction industry.

Company can certainly become a leader in these areas. Other than these Niches, Ramco has been able to crack new Sub-segments with

the recent order wins. To understand the importance of what it means to get a toe-hold in a segment, read quote of Netsuite's CEO.

"One piece comes into play is cloud products needs become very vertical, very quickly, and the sales process becomes

very vertical, very quickly. If I go to sell to Goldman Sachs, you say, "Show me some other investment banks using

NetSuite." I don't care that John Deere dealerships are using NetSuite. So the sale becomes very vertical and the

functionality becomes very verticalized. So that's another challenge in moving upmarket is how do you verticalize

software for all these different industries? So we've spent the last 5 years verticalizing the product, verticalizing our go-

to-market strategy, verticalizing our services strategy around a number of industry groups, number one. And number

two, we were lucky enough to find in 2008 a horizontal problem to solve in ERP, which is almost impossible to find. And

that was with our OneWorld product, where we were able to do multi-company consolidation. Every multinational has

the challenges, how do I run my international subsidiaries as separate instances, U.K. and that in pounds. Japan in Yen

and Tagata and on and on and on, but then consolidate results across those. And when we built OneWorld, suddenly we

tapped into a horizontal ERP problem and that was a big accelerator to our growth"

We believe that Ramco with its HCM on Cloud product has got strong traction from global markets with new orders from several clients

across different verticals (Horizontal Growth product). Company's focus on Two-Tier ERP has also enabled it to acquire large enterprise

customers. We believe that proper execution of these orders would enable the company to strengthen its position and accelerate

growth going forward. The company seems to be doing well on this parameter - "Astra airlines, a LCC from Greece went live with

Ramco's aviation solution in 8 weeks against 3 months taken by Cloud peers and 12 months taken by On-Premise players".


- Ramco's average deal size is roughly about 250K $'s. The company's high profile deals are in the range of 2 Million $'s. The recent Krezemer deal was a 1 Million $ deal. Company continues to aim at 1-5 Million $ deals. With the increasing nature of Cloud deployments with large companies, the average deal size continues to inch up. - The company's average selling price has been increasing at a satisfactory rate. The current Per User/ Per Month subscription charges are 65$'s in case of India and around 245 $'s in case of Global deals. A couple of years back, they were around 46$ in India and 180$'s in global orders. Ramco would be generating around 75% Gross Margins on these deals, slightly lower compared with Global peers. The average Per User/ Per Month subscription charges for the US based SaaS companies hover around 500 $'s. Ramco still has a lot of headroom for growth on its average selling price. We believe that it would be extremely difficult for the Global players to compete with Ramco at a 65$ level in India and hence we can expect Ramco to completely dominate the Indian Cloud ERP market. Other than India, Ramco is also getting good traction in Middle East and APAC regions.

“In the next five years, SaaS ERP is expected to grow by 28% CAGR in India and 37% in China over the next 5 years. In

line with the global trend, end users in India and China deploy SaaS ERP because of the benefits of faster deployment

and the perception that it is cost effective,” said Gartner India Research Director Sunil Padmanabhan.

So all in all, Order book is not only growing but is also becoming better with increasing shift towards Cloud revenues and increasing % of orders from new customers. In totality, we have enough evidence to start believing that "This time will be different for Ramco". How do you value Ramco and what is a fair price to Pay ?

When you are investing in a less than 100 Million $ company that is trying to compete with Multi-Billion dollar giants in a large and

dynamic Market place such as Cloud Enterprise solutions, there are simply too many variables involved. There is definitely no certainty in

any of the conclusions that we may arrive to. High uncertainty combined with attractive Risk-Reward characteristics offer profitable bets

for a disciplined Investor. We believe that an attractive Risk-Reward is essentially arising out of the huge Expected returns that could


come with Ramco breaking into the top league of global SaaS players (Venture Capital style bet). As we had mentioned earlier, Investors

can take a low allocation at current prices and increase their bet as we see further business progress.

For fence sitters, we would like to remind that, "In Investing, Unobtainable precision should not come in the way of Workable

approximation". Investors in most cases need to learn taking decisions with Incomplete information. Lack of finer details doesn't make a

big difference, as Information follows the law of Diminishing returns in which 80% of available information is found in first 20% of the

time spent. As several studies show - In most cases, proper Investment decisions can be made with just 7 important points of

information. Higher amount of information would only lead to higher confidence in Investor's predictive ability and that leads to poor

decision making. We believe that there is enough data on Ramco to go ahead and take a small position in the stock.

While it's almost impossible to arrive at a value for the stock, we can at least try predicting the parameters that drive the Price of the

stock (This is what Valuation expert Aswath Damodaran does when analyzing companies such as Ramco systems). The most important

driver of pricing is the Topline number. Let's understand how Topline growth would be with relatively conservative assumptions. Let's

discuss only about the company's Cloud revenues and forget about its On-Premise revenues (Recurring + Incremental). Let's start

working with a base year revenue of 20 Cr (approximate Ramco's cloud revenues last year) and Cloud order booking of roughly 35

Million $'s. We are assuming a 30% order book growth on Cloud for the first 2 years and 20% growth for the next 2 years. Let's also build

in a Dollar Retention rate of 94% and a order spread of 48 Months (in line with Global averages). At the risk of being over simplistic, let's

try predicting the cloud revenue numbers

Year 0 - 20 Cr + 210 Cr of Order Booking

Year 1 - 18.8 Cr + 52.5 (210/4) = 71.3 Cr

Year 2 - 67 + 68.5 (273/4) = 135.25 Cr

Year 3 - 127 + 88.7 (355/4) = 215 Cr


Year 4 - 202 + 106 (426/4) = 308 Cr

Year 5 - 290 + 128 (512/4) = 418 Cr

These predictions are just for understanding the Revenue growth in Cloud mode . For all practical purposes, there will be a delay

between order booking and revenue recognition. With our predictions - we are speaking about 420 Cr Rs of highly profitable

subscription revenue which can yield 315 Cr Rs of Gross Profits, both of which would decay at a slow rate of around 5-10% YoY. This

revenue comes with very little incremental development/ maintenance cash outflows. You can try valuing this highly predictable annuity

stream and then think about the current valuations of around 550 Cr Rs to understand the potential that we are speaking about.

We know that Ramco's future price will be much more dependent on perceived Future value at that point. Company's success in the

Market place, Up-Selling & Cross-Selling revenues, Competitive positioning etc would be bigger drivers of the company's valuation going

forward. Just see the differences in Price/ Revenue multiple (5X-50X) of other SaaS companies as shown in Slide - 42. If Ramco is able to

get these things right, the stock appreciation would be significant even without accounting profits. In fact, if the company is able to crake

any big market - growth rates on Order booking would only accelerate going forward, irrespective of the base size. The company's

accounting profits would continue to be un-predictable with amortization charges of Capitalized R&D expenses and shift in expenses

profile from R&D costs to Sales & Marketing costs.

But we broadly believe that Ramco Systems has entered an "Harvest Mode" in which company can generate strong Operating cash

flows relative to its cash outflows. With increasing recurring revenues (Cloud - Subscription, On-Premise - BPO, AMC charges), we believe

that there would be significant value creation. Tracking the deferred Revenue on the company's balance sheet (50 Cr last year) would

give a good indication of things to come. We have also requested the Management to share Billing Run rate (Revenues + Deferred

Revenue) and Dollar Retention rate, in line with Global practices.


Changes in Top Management (CEO) or disruptive technological changes which are medium probability events can certainly cause a lot of

value destruction, especially if the company is not able to adapt to the changes scenario. Despite these negatives, the payoff looks so

attractive that Investors should position themselves in the stock. To sum it up, we would like to quote Mr. Agarwal from one of his Public

interviews to the media - “There is nothing to guarantee it will work out. But there is a tectonic shift in

technology and we are at the right place at the right time”. We hope that Ramco uses its capabilities to capitalize on

the huge opportunity that is unfolding in front of it.

Regards,

Gokul Raj. P - Director & Head : Investments.

Industry Overview


What is an ERP Solution ?


ERP helps businesses manage different Processes


Traditional (or) On-Premise ERP players are the Big Boys


Traditional ERP come with lot of Issues


Cloud ERP solves these problems and brings more benefits


Cloud ERP can grow the overall Enterprise Market


Success in Cloud needs a new Mindset


Cloud has high Operational Leverage and a Revenue Lag Effect


Faster a Vendor grows, higher is the losses in Short Term


Key SaaS Parameters


The theoretical value of the customer to the company (CLV) is equal to the discounted cash flow (DCF) of the payments to the company minus the Cost of the Service. The Cost of Service for both SaaS and Licensed Software vendors includes any licenses or subscription fees they pay and their customer support. Additionally, the SaaS vendor will incur significant hosting system operations costs. Since cash received early on is vastly more valuable than cash received in the future, it is important to use DCF to compare Licensed and Subscription models.

Lifetime = 1/ Churn. For example, if you have a 5% monthly churn, your lifetime will be 1/0.05, which is 20 months. If you have a 25% annual churn, your lifetime will be 1/0.25, which is 4 years.

http://www.cloudstrategies.biz/wp-content/uploads/2013/09/CLV-Formula-2a.png

Important Parameters that need to be tracked


Overall Lifetime value of a SaaS customer is higher than traditional ERP customer !


The examples below compare the CLV of the SaaS and Licensed Software models. Both models use 10% Cost of Capital and 8% annual Attrition Rate.

The SaaS monthly subscription fee is $4000. The SaaS Cost of Service (hosting and support) is equal to 18% of the subscription revenue (which is the Cost of Service reported by both Salesforce and Demandware. The gross profit of the SaaS offering is 88%. The Licensed Software customer cost is $100,000 with 18% annual (1.5% monthly) software support and maintenance fee ($1500/month). The Licensed Software Cost of (Support) Service is 9% of the license fee ($750/month) yielding a 50% support/maintenance gross margin).

With these parameters, the SaaS model’s CLV discounted for the Cost of Capital is 50% greater than the Licensed Software model. These model comparisons are sensitive to changes in any of these parameters: the SaaS Subscription Price, Churn rates, Cost of Service, and the Cost of Capital.

SaaS Players have been growing at a rapid pace


Range of Revenue Multiples for SaaS layers


In order to capitalize on the Opportunity, SaaS players have been spending heavily on Sales & Marketing


HCM – fastest growing Cloud sector - is highly competitive


Ramco Systems – Company Overview


Ramco System - Evolution over the years


Ramco Systems - Current Snapshot


Ramco Systems – Broad Overview


Ramco’s Cloud solution – Game Changer


Ramco Cloud advantage


Ramco emphasizes on Data Security for Clients


Scalable Multi-Tenant Architecture


• The yearly costs of hosting Licensed Software are typically 7% to 15% of the total License Software costs for the IT organization (and 10% to 20% of the yearly SaaS Subscription costs). SaaS vendors’ hosting costs should be lower than their customers’ IT costs due to economies of scale of running a multi-tenant operation. This brings strong advantages to Cloud solutions. Ramco partners with the best Platforms to derive strong advantage from scale.

Technologically advanced Products in ERP, Aviation & HCM


Ramco – Organic Cloud Platform (A Big USP)


Ramco can Re-Iterate products and add Features/ Functionalities at a very fast rate compared to its peers !!

Ramco – A One Stop solution provider, unlike SaaS Peers


Ramco’s increasing focus on adding Partners


Ramco Systems – Global Partner Network


Strong Traction in Order Booking


Ramco Aviation – A Niche to Dominate


Strong Traction in the 3 Billion $ Aviation & MRO space


Ramco Aviation – Wide Range of Customers


Strong Product profile on HCM


Healthy Customer Addition on HCM


Ramco CEO’s Interview – Interesting Insights


We’re a nimble-footed David in ERP By D Govardan Jan 24 2014 Tags: News It’s been a little over 18 months since you took over as the CEO of Ramco Systems. How has the experience been so far? It has been the most challenging and rewarding 18 months in my entire career. When I took over as the CEO of Ramco, I realized we had world-class products but difficulty in positioning and marketing them. We were opportunistic in our outlook and had developed multiple flavors to address every business opportunity that came our way. Also, we were heavily focused on the domestic market, which is highly cost-sensitive. Earlier all our energies were engineering-focused. After taking charge, I have channeled the workforce to think from a market/customer focus. There are very few successful product companies from India and this is because we underestimate the power of marketing our products. It is this change that I am instilling within the system. The other change we are bringing in is running everything we have on cloud. We run our internal operations on the cloud, whether it is our emails (moving to Office 365), ERP or our EPABX system. When you joined the company, you would have certainly had a plan of action to run it in the best possible way that you thought fit. Have you been able to implement the same? If so, how far have you been successful? Any hurdle still to overcome? My initial focus was to meet customers, understand their needs and build that feedback back into the product. Also, in order to address the global market, we needed to offer a radically different product, which was functionally comprehensive sans the negativities attached to a legacy application. We found our niche in the cloud and packaged it with mobility, Gen-Y user interface, social, in-memory processing and context-aware features to give us the differentiation in the market. We also consciously decided to focus on three major product suites — ERP, HCM and aviation MRO from a go-to-market perspective.

http://www.mydigitalfc.com/reporter/D-Govardan

http://www.mydigitalfc.com/reporter/D-Govardan

http://www.mydigitalfc.com/news

Ramco CEO’s interview


From an employee perspective, we had to bring about a cultural transformation. This starts with simple things like demolishing the cabin-culture and breaking the hierarchy and building a performance-based culture rather than a seniority-based culture. We needed to attract the best and the brightest and have our solution ready for the next generation. And this needed more and more Gen Y workers to be a part of our team. Enterprise cloud is the hottest market in the world with everyone having a chance of occupying the space. We have seen companies like Saleforce.com dominating the CRM space completely. We think HCM and ERP are white spaces on cloud and a nimble player can dominate the space the way Salesforce dominates CRM. We have a relatively small window before the big boys muscle their way in the enterprise cloud market and thus we need to carry the change in the organization in a hurry. On interacting with customers and partners, I realized our products were functionally strong, but lacked a customer-focused approach. For instance, our screens would have all the fields that are needed to run a transaction, but a user (who is relatively new) would get lost in the maze. Like any other legacy ERP, we were also giving way for ERP failures. One of the first things I did was to hire designers who could give an aesthetic look and feel to the screens. We reduced the number of fields to the minimum with an option to drill down and add more fields, when necessary. With ample number of new-age workforce entering the market, we realized most of the standard transactions would need to be carried out on mobile, and hence, coined a philosophy ‘mobile first, rest later’. When getting the product take shape, we had in parallel put in place a strong field force and an ecosystem of partners to take that product global. Also, with limited cash flow, we needed to look at innovative ways to market our products globally. We started heavily focusing on digital marketing and events. Today, we are in every trade show across the globe and actively bid for ad words across geographies. The cultural change is slowly, but surely, seeping into the entire organization. Success is a relative term… the market will brand us successful once our revenues start to grow rapidly. As for hurdles, there are many more to cross… We are in a hurry and have to capture the market before competition comes in.



Having worked with a larger and a more aggressive company (HCL Tech) before taking up your present role at Ramco Systems, what were your initial thoughts and how do you feel now? I knew this company needed drastic changes, both culturally and structurally, to compete and get its rightful place in the global market. This included instilling the mindset to be responsive and quick. We were in a hurry and were moving at a scorching pace. Some of them who were uncomfortable with this change chose to move on. We now have a team of like-minded people, who are aggressive and are gearing for growth. I can visibly see the company becoming a name to reckon with in the global cloud space. To the larger market, Ramco Systems was always known as a good product company with a laidback approach. Of late, the market has been seeing a lot of aggressiveness in the company’s approach towards markets and opportunities. Your comments? It is one thing to be one among the players and another to be a leader. From being an underdog to taking the competition head-on requires us to be aggressive. We have a short window to succeed and will remain restless till we get our rightful place. If we are not aggressive, someone else will take our place. You are betting big on anything to do with cloud – be it aviation software or HCM or other verticals. How big really are these opportunities and how well Ramco Systems is placed to tap that potential? Gartner says enterprise software buying is increasingly shaped by the nexus of forces (social, mobile, cloud and information). In order to get a share of this burgeoning cloud market, legacy vendors are either acquiring cloud products or creating a layer of cloud cover to compete in the market. Cloud has given nimble-footed Davids, such as Ramco, a sling to take on the Goliaths of ERP. This is the time for even large vendors to sit up and start looking at smaller players who can turn the tide in their favor.



The company has also been aggressive in its recent partner-centric approach to reach out to the global market. How successful has that approach been and will this continue going forward? To amplify our growth and reach newer markets quickly, we need an active ecosystem of partners. Our global partnerships, whether it is with Airbus Helicopters (earlier Eurocopter), Amazon, WNS, Google or Dell, have sent out a strong message to the market. Today, we have a strong network of partners and also work with leading SIs in bidding for specific opportunities. We are seeing visible changes today; there are large IT players wanting to partner with us. After several years, the company has been successful in cracking opportunities in the Americas as well as Europe. Your comments? Yes, we are excited with this success as it reaffirms our belief that our products today have a global appeal and can compete against established players. Our focus is on taking this initial success and building the momentum across these geographies. As one analyst recently mentioned in his article, “It looks like SAP and IFS should be looking over their shoulders now that Ramco is in their backyard.”

Concerns & Conclusion


Concerns & Reasoning


1.) Risk of CEO stepping down :

Since a large part of our Investment thesis rests on the turnaround brought out by Mr. Virender Agarwal, any changes here would be a big risk. Since, Mr. Agarwal is a professional with less than 1% Shares in the company, we can’t say for sure – if he would stay in the company for a long time. While some of the impact would be long lasting beyond his term, Company would require to find a suitable replacement to ensure that the story stays alive. 2.) Increasing Competetitive Intensity :

The competitive intensity in Cloud ERP space has been increasing rapidly over the last few years. As the company competes with large organizations with significantly higher resources, there is a high chance that the company may not continue to grow its order bookings. 3.) Execution of larger deals :

In case the company slips up on Execution of some of its large projects, it could lead to a large phase of no growth. Company would also require significant Financial and Human resources to fight it out in the larger deals space. Any let up here would make sure that Ramco doesn’t enter the big league. 4.) Client Concentration :

Ramco’s top 10 Clients contribute to about 35-40% of its overall revenues. Hence, any slip up on these accounts can certainly have a disastrous effect on the company’s financials. With Cash flows getting disrupted, Ramco would not be able to invest aggressively for its growth.

Price Chart

• There has been increase in Institutional Holding in the last 2 quarters as a UK based FII – Johcm has bought aggressively into the stock . • Volumes in the counter are low and hence there would be a large impact cost for Institutional Investors. Any significant buying pushes the stock into circuit limits. • Stock has been in a range for a long time and only recently has the stock been able to break out.


Share Holding %

June Mar Dec Sept

2014 2014 2013 2013

Promoters 70.7 70.7 68.54 68.73

FII 4.48 3.53 0 0

DII 1.81 1.56 2.15 2.16

Others 23.01 24.21 29.31 29.11

Conclusion

Most of our Multibagger bets have been stocks that have clear moats, scalable business model, managements with strong track records and predictable Earnings growth for several years. In such a scenario - Ramco systems is totally an unconventional Multibagger bet, considering the huge uncertainties that are surrounding the stock. We have no idea on the earnings growth or on how the Industry would look 5 years from now. Yet, the Idea merits attention for the simple reasons that in case it works – we are speaking about real BIG Multibagger returns. (Remember the Quote :Market Cap is created by Innovators & Disruptors) Broadly we understand that that the company has a scalable business model which would be extremely capital efficient as the company builds volumes. We also know that the Management has taken several efforts that have started showing results now. The company’s product features, partner network focus, competitive advantages, increasing traction with customers etc makes us believe that the probability of the company succeeding is healthy enough. Ramco is well capitalized and it continues to raise Funds (other than the recent Rights Issue in May -2014) which makes us believe that the Management is confident of scaling up its business. Even for a company that could dominate only Indian Cloud ERP market, a less than 100 Million $ valuation looks unreasonable. The “Snow Ball” build of orders over the last few quarters makes us believe that the Revenue needle would start moving faster going ahead. The company’s Razor Blade approach of selling Modules on top of commoditized platforms and Cloud solutions would lead to higher quality of revenues for Ramco. For a company that has always had large ambitions (It has been advised by C.K. Prahalad, Boris Rosyberg – Organizational behavior professor from Harvard), execution has always fallen short. We believe that this time its different, as a new Management team is purely focused on execution at the market place. We continue to think of Ramco bet as a Venture styled bet that comes with large enough Pay-Offs that even if the probability is lower, the expected Returns are healthy.


THANK YOU


Ramco Systems an emerging company in the red hot cloud erp space

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