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Monday, July 13, 2015

Ramco Systems ltd:- Can the cloud player take your portfolio to cloud 9?

 Quote: I have tweeted about Ramco Systems innumerable times. Let';s pen down why am a fan of this particular company. Its an old note which was mailed to close mates and cohorts,a good couple of months back. Sebi has ensured tough life for the gullible investors. Even updating the blog ones in a month requires a lot of pre-thoughts,say mostly about the vagaries of the regulator.

Ramco Systems ki Kahani: Started as an R&D division of Ramco Industries in 1992, Ramco Systems is part of over 75 years old Ramco Group. Boasting a turnover of over Rs.6500 Crore, Ramco Group has become one of the most reputed business houses in India and has achieved international recognition for its quality products and services. Ramco Systems is a cloud enterprise software company focused on providing multi-faced enterprise software to corporates in the verticals of HCM (Human Capital Management), ERP (Enterprise Resource Planning) and M&E (Monitoring and evaluation) for Defence and Civil Aviation. They also provide associated services like consulting and implementation of its products to clients. Headquartered in Chennai, the company has 20 offices spread across India, USA, Canada, Europe, Australia, Middle East, South Africa and APAC. Ramco Systems has over 150,000 users from 1000+ customer organizations. Some of its clients are Bata, PUMA, Mother’s Dairy, Dabur, Emirates etc.

Industry Overview: Tailwinds for the cloud-based enterprise software: The global software industry is now in the middle of a radical change. Surge in the number of mobile and tablet devices, growing broadband connectivity and the increase in customization of IT-services has made the cloud based enterprise applications one of the most desired segment in IT. The growth in global IT industry is led mainly by enterprise software. As per Gartner, at least 30% of service-centric businesses will aggressively adopt cloud-based ERP solutions by 2018 (Gartner). Total market size of the cloud-based enterprise software is estimated to be around lakhs of crores and is growing at a rapid pace. Small and mid-sized organizations are embracing the cloud based systems which are followed by large organizations. Leading cloud-based enterprise software providers such as Workday, Cornerstone on Demand and NetSuite are growing in the vicinity of roughly 50% per year.

Human Capital Management (HCM) on fire: Ramco’s HCM software digitizes HR processes throughout the life of an employee in the organisation. It has integral analytics solutions that can be used by HR professionals and senior management to make the right HR decisions. This is currently the fastest-growing segment for the company with a revenue growth of 113% YoY. It currently targets companies with an employee base of less than 10,000. The company charges about Rs.5000 per employee per year for its cloud-based HCM solution which are lower than a lot of its competitors like Workday, Oracle Fusion etc.

Aviation segment: Small and medium sized airline operators who were earlier not able to adopt enterprise-class software due to complexity and fixed costs involved, now have started exploring Cloud based systems. This has opened up a new market opportunity in itself. Ramco is especially strong in the area of helicopter fleet management. Five of the ten largest helicopter fleet companies in the world are their clients. Revenue growth in this segment was 36% YoY. However, overall addressable market is relatively small as compared to HCM and ERP.

ERP Software – The management is less focused on this segment as compared to HCM and Aviation. However, they have focused their energies in a sub segment of ERP for Services industry named as Services Resource Planning (SRP). It closely incorporates key functions such as the ability of an organization to hire, train and retain workforce, implement projects efficiently, manage finances comprehensively and provide superior customer service levels. Ramco has a huge room to catch up and fight against a fierce competition in this segment.

How it is better than competition:
• Ramco’s solution provides the advantages of new age platforms such as Workday and Netsuite and also provides the functionality of traditional on premise ERP solutions such as SAP and Oracle.
• Unlike many of its competitors, Ramco’s applications have been built on a common platform making it more favourable over the competition.
• Unlike Ramco, not all players in the industry are providing end to end solutions to their clients. They have partnered with IT services vendors such as Infosys, Tech Mahindra, Dell Services and NIIT to aid the consulting and implementation part of its products to clients.
• Simplicity of implementation and integration coupled with its competitive pricing gives Ramco an edge.

Why can';t Oracle,SAP catch up:-

• Mr Virender Aggarwal (ex-HCL Tech and ex-Satyam) joined the company as the CEO in 2012.
• He has proactively restructured the organisation by increasing focus on sales outside India, improving sales partnerships, and focusing on product innovation. Sales from outside India now constitute around 72% of the overall revenues.
• The new management that joined three years ago, has increased accountability of the sales team and has fired poor-performing staff.
• The company has also recently linked staff salaries to performance and has paid out excellent bonuses to the top performing employees.
• Promoters owns almost 59% of the company.

Number Crunching:
• The company';s revenue growth has been accelerating on a sequential basis in the last four quarters. Margins have improved significantly over the same period.
• The new management joined three years ago has invested heavily in sales and marketing and in the product. These increased spend led to cumulative losses of Rs. 63 Crore over past 2 years.
• Presently, the revenue growth has accelerated to 35% YoY basis with a 109% growth in order wins from new clients. The company is now turned profitable since the last four quarters and the management indicates that going forward it would calibrate investments in-line with its top line.
• Ramco is trading at 5.5 x EV/sales. Given its emerging scale and strong product offering in a large market, its current valuations may not be comparable to peers.
• Peers trade at significantly higher multiples: Workday (20.4x), Netsuite (15.4x), However Ramco’s future valuations may be driven by continued momentum in revenue growth and the scale it achieves.

Key risks: risk of poor adoption of the products by the market, Increase in competitive intensity from the fierce deep pocketed rivals.Resigning of the CEO maybe?

Conclusion: According to the management, its product development phase is almost complete and the company is now focused on strengthening its sales and marketing. As the company’s costs are largely fixed, strong revenue growth would likely result in an expansion in profitability due to operating leverage. Also as the oil prices have come down leading to increase in disposable income for airline industry is a positive for Ramco as airlines are likely spend that on improving their IT infra. To become a successful IT Product Company, it needs to be backed by a good product, strong brand and a committed management. It needs to relentlessly execute its sales and product development strategy in order to achieve meaningful scale. The promoters and the management also need to have the right mind-set to lead such a venture to a success. Ramco appears to have all the ingredient in place, but will it turn out to be the multibagger is the story yet to be unfolded.

 For 5th graders:-

A lot of you may not understand the IT or above stuff. Allow me to explain in simple language. Am not even talking about the other two divisions.Lets just talk about it payroll software.

We as a county ain';t famous for our products.I mean how many products we have?There';s Finacle,tally,the onmobile product and what else? Need to google up as there';s hardly anything else popping up in mind. That';s where our Ramco and its payroll software counts. It';s a product which is already making waves all over the world. Even the likes of Infosys,dell and several others are reselling its product.

They are softwares with an annual charge,business model can be compared to our consultancy services. Target companies with 10000 employes,charge per employee some 500 bucks monthly and you make a million USD yearly business. Think about the margins folks. You sell the same thing time after time with no incremental costs. Say we sell our stock ideas to 10 clients or 100 clients,our costs would be fixed but we will make 100% margins right? That';s how lucrative Ramco';s business is. Addressable market is nearly 1 lakh crores.

No other player in the world got as robust a product as ramco. The new CEO is the game changer for the company. As long as he is at helms,company will continue to grow heights. If the company can market its product well-Sky will be the limit for the company. Global peers are crazily valued with 15-20-40x of their sales.

Also they recently got a big deal in Australia through a partner/SI called Megasoft. Now they have 150 more SI folks. Think cumulatively what all those can result into? Sky is the limit for the company.

BTW:For different stock market related services and also for techno-Funda tutorials,rush a mail at my mail id to know more about it.

Note: The above is not a research report but assimilation of information available on public domain and it should not be treated as a research report.
Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that I might have Ramco in my portfolio and hence my point of view can be biased.Readers should consult registered consultants before making any investments.

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