DSIJ Mindshare

Stock Pick from IT Software Products

Here Is Why:

• Market leader in providing IT solutions to the US retail micro lending industry.

• Currently trading at an attractive valuation of around half of its book value and FY15E PE of 5.25x.

• The company plans to aggressively tap small and mid-level retail micro lenders in the US.

The massive rise in mid and small-cap stocks over the past year is attributed to an expected revival in growth and earnings of these companies. This doesn’t mean that all the scrips have discounted their future growth in the current prices. This time our pick is from the IT sector viz. Virinchi Technologies (VTL) primarily because it is not only currently trading at around half of its book value and TTM PE of around 9 but has also reported strong results in the first half of the current financial year with a strong balance-sheet and net debt equity ratio of 0.23x.

VTL is a global leader in providing IT solutions to the retail micro lending industry mainly in the US with its flagship product ‘QFund’. It has another product called ‘QPawn’ which is a similar IT solution for the needs of the pawn-broking industry. The company claims that QPawn is a market leader in North America and the UK while QFund is a market leader in North America, where 12 out of the top 20 players in the short-term loan industry use their software.

Apart from this, VTL has acquired a majority stake in Bangalore-based Asclepius Consulting, which develops IT products mainly for hospitals. This acquisition was central to its pursuit of a broad-based cross-industry growth strategy across IT products and services, IT-enabled business services in the domains of healthcare, education, media & entertainment, and financial services. Till last year the company served only that client which crossed the threshold limit for the value of transactions.

The total market size of retail micro lending in the US at any given point of time is about approximately USD 15 billion with around 20,000 small and mid-level players contributing to it. This is a vast opportunity and the company plans to aggressively tap this pool of potential users. KSoft Systems is a fully owned subsidiary of VTL and has been providing the services. The company aggressively plans to expand its service business in the future.

On the financial front, VTL has reported 22.56 per cent growth during the first half of the current financial year in revenue at a consolidated level of Rs 61.28 crore as against Rs 50 crore in H1 FY14. On the EBITDA front, the company posted healthy growth of around 35 per cent at Rs 11.96 crore as against Rs 8.87 crore in H1 FY14 due to improvement in the margins by 178 bps to 19.52 per cent. During H1 FY15 VTL posted an EPS of Rs 2.90 as against Rs 1.46 in the same period last year.

We believe that VTL’s topline would continue to grow at 25 per cent CAGR during FY14-16 and at the bottomline level the company will earn Rs 10.5 crore in FY15 and Rs 13.5 crore in FY16. In terms of valuation, VTL is trading at 5.25x its FY15E earnings of Rs 5.8 per share and on the price to book value it trades at 0.53x its FY15E book value of Rs 58 per share. In the last one month the stock price has become double, which is purely based on the fundamentals. We strongly believe that the stock price deserves more valuation than the current level and therefore would like to recommend buying this scrip with expectation of 100 per cent upside from the current level in the next one year.

DSIJ MINDSHARE

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