MPS Limited (MPSLTD) Earnings Call Transcript

Changes that you are seeing in each of the verticals that you operate?

By technical, do you mean from a technology perspective or...

Yes. Yes. The AI/ML changes, the conversations that you are listening to, and things like that?

Sure. So on the content side of our business, I think the biggest contribution of technology is toward speed of market, and how quickly we're able to make content more available on the publishers platform, on the customer's platform. And here, the opportunity really is to help the customer monetize that content sooner. We've estimated that for some customers, they could produce as much as 10% to 15% more content if they were able to use some of the software that we've developed for them. So with the same amount of spend, they could actually produce 10% to 15% more, if the workflows, the processes and the software were diligently stitched together. On the platform side of our business, here, we are seeing more an opportunity to integrate as well as build on top of existing AI frameworks. And a large reason for that is the platform business is the final stop where -- with the end learner or the end consumer of content, interacts with the content. So the level of risk appetite in this business to experiment is very low. So therefore, the opportunities that are being sought are opportunities where things are not experimental in nature but rather seated and well established. So there are more integration type of opportunities, more building on top of a framework type of opportunities rather than greenfield opportunities. On the eLearning side of our business, what we are seeing is a variety of opportunities. One opportunity is, what does AI mean in learning and development for a large corporate, which is starting to build training and materials around the subject itself as well as to help upskill learning and development teams in this new area of artificial intelligence. The second, again, similar to our content business, how can we build the eLearning that we are delivering more efficiently and at greater speed. And then finally, again, integrating with third-party services. So for example, today, you can create some animations, videos on the fly through some of the AI frameworks. So how can we use some of the frameworks to bring the overall cost of production down, but also improve the speed of the process. Unlike some of our competitors in eLearning business, we have very little L1 type of eLearning. Most of our eLearning is L2, L3, Level 2, Level 3 and some even Level 4. And therefore, from a pricing, from a speed standpoint, we're not getting disrupted as much. If anything, because we don't have L1, we are able to disrupt the L1 space and enter this market, which we're not really been present in. So L1 market approaching it through a software and AI framework implementation that becomes an attractive market share opportunity, something that we previously avoided because the price levels were too low. But now we're looking to attack this market.

Could you please elaborate on the L1 and L2 market please?

So yes. So corporate learning and development, the development of content and technology for -- the learning and development function of large corporates is estimated to be a $250 billion market growing at 10%, 11% every year. There is a lower end of this market where basically a lot of the work that is being requested is because of wage arbitrage and cost arbitrage reasons. We don't play in this market today simply because we don't enjoy the same level of arbitrage that some of our smaller competitors do. We are now looking to enter this market through a software approach where instead of physically getting people to build the eLearning, our software will enable a large end-to-end delivery of the eLearning. So it's going to be a new market opportunity for us.

Okay. Are there any capabilities gap that you have mapped out at MPS currently?

Yes, there are. I think a large part of that is -- our acquisition strategy is a large part of that. Of course, for competitive purposes, I would not provide what those capability gaps are. But yes, we -- for each of the markets that we operate in, scholarly education and corporate, we have capability gaps that we plan to address. And also for each of the business verticals, content platform, eLearning, again, we've done a total white space analysis to figure out what the white spaces are. Wherever we can build things, we're building things and wherever we feel that we can't build and take too long, we're looking to acquire new companies.

Okay. My last question on acquisitions. You said you're looking for greater than $20 million revenue. Is this for 2 acquisitions put together? Or is it that excludes the INR 70 crore platform acquisition that you have mentioned previously?

It's not 2 acquisitions. It's each acquisition. So $20 million for each of the next 2 acquisitions is the base number in revenue.

So the total acquisitions for FY calendar year '24 could be $40 million. Is that what you're saying?

Yes. I think we're talking -- when we say 2 acquisitions, we're talking calendar year, two acquisitions.

Okay. And 20 x 2, is that correct?

That is the aspiration, yes.

The next question is from the line of Keshav Garg from Counter Cyclical PMS.

Sir, I just wanted to know, sir, what has been the experience from the Liberate acquisition in Australia that we did till now, sir? How good is the response and so on?

Yes, I think the short answer is, phenomenal. It's been an excellent experience to be able to partner with an organization that has tailwinds. The business -- their stand-alone EBITDA margin is north of 30%. They're growing. They're a growing company, and we are very, very satisfied with this development. We also -- as we had pointed out in our briefing when we had acquired Liberate that this is a combination of -- this is an acquisition that also has a combination of stage buyouts and earning, there's also some short-term earnings milestones. We are pleased to report that they seem to be on track, if anything, better than on track when it comes to their milestones. So very, very pleased. Usually profitable business and also growing.

Sir, so -- sir, since we have acquired 65% in our consolidated numbers, sir, there is no minority interest that we have subtracted from our profits. So why is that?

I'll let our CFO respond to that question.

Yes. So we do that. We consider that. But in the consolidated financials, we consider because we are going to acquire 100%. So we account for the 100% and minority share is also being suitably adjusted there. So it is considered both ways. So revenue and profitability 100% is considered. And for the 35% margin, we consider the profitability of the minority, which is not reported separately.

Okay. Sir, also, sir, regarding -- sir, since we already have a clear path in front of us till FY '28 wherein, we want to reach INR 1,500 crores top line out of which INR 60 crores will come from -- roughly from acquisitions. Sir, so even if there is no acquisition for the next 6 months or even, let's say, more than that, sir, still, it makes sense to convert the cash because it's clear that ultimately, we are going to do that acquisition. So it really doesn't make much sense that you pay today dividend and shareholders pay 35% tax on that dividend. And then 2 months down the line, then the company goes for capital raising. Sir, so that just jolts the investor confidence on the capital allocation side. And sir, as far as the concern about the funds being there in the subsidiaries, due to which we are considering dividend. Sir, so why can't that subsidiary make the acquisition or part of the acquisition proceeds, the subsidiary can pay. So that will resolve that issues of cash remaining in the subsidiaries?

Yes. So to answer that question, again, we haven't shared anything definitive. We were basically sharing all the thoughts that were deliberating on in all the arguments that we are discussing. There's obviously pros and cons to everything. I just presented additional information on the foreign subsidiary bit so that everyone has equal information. It was more for information sharing. And of course, please respect that, we have subsidiaries in Germany, in Switzerland, in Australia, in India, in the U.S. So it's not that all the monies are sitting in one subsidiary. So there is that element. And of course, beyond a certain point, cross-border transfer of funds, et cetera, especially when it's in the form of debt, can be more complex. To put it simply, I think our core competency is content, learning and technology. Our core competency is not treasury. It's not cash management. We want to make sure that as a business, we are focused on our core competency. And like I said, our allocation policy is very straightforward, which is as long as we don't have visibility for 6 months or even 12 months, we will distribute the surplus fund. We just don't see value in sitting on excess funds. Even today, if you see the amount of cash we're sitting with on our balance sheet, the only reason we have that cash is because we want -- we see an acquisition or to eminent in the near future. Otherwise, we would not be sitting on that cash. So I think, if anything, it's good corporate governance to not sit on excess funds for more than -- for more than 12 months, and that's all that we're doing. As you will note, we are also -- we also have a relatively higher-margin business. So we are generating upwards of INR 100 crores in cash every year. So the business will continue to generate cash as well. It's not just a snapshot where this is the level of cash. So -- and also from an integration standpoint, we don't see ourselves doing more than 2 a year, maybe 3, but we don't see ourselves doing more than 2 or 3 acquisitions a year because of management bandwidth, integration, you also don't want a situation where you're acquiring businesses, but the stand-alone business is not growing. We want all -- we want organic and inorganic growth, not just inorganic growth. So we're only looking at it from that perspective, that we're not sitting on surplus funds for no good reason.

The next question is from the line of [ Jalaj ] from Svan Investments.

Rahul, I have just one question. So if I were to break -- if I were to break down the INR 300 crores target, which we are targeting in FY '27. You said that 40% would come from organic -- organically we will grow. So that comes out and stands with a CAGR of almost 15%, 15.5% -- 15%, 16%. So could you talk a little about what would lead to that growth or what would be the driver? Because have things changed historically or the industry structure has changed? Because even if I were to see the phase from FY '22 to FY '23, where we had a CAGR of similar range. There were acquisitions we were -- which were involved in it. So has anything structurally changed or there's some other drivers that would -- that gives us the confidence for this growth?

Sure. I think if I could divide -- so I won't talk about the inorganic piece. I think we've covered that, pretty comprehensively in the previous questions. But focus on -- for your question, I'll focus more on organic growth. I think that there are 2 ways to think of this. One is what has changed in the structure and the second is what has changed in terms of our strategy and execution as a company. So from a structure standpoint, with respect to -- there are a few things that I'd talk about here. So first, from a structure standpoint, our mature -- most mature part of our business, which is the content business, has seen a very major structural change. In fact, a few structural changes. First, with the Chennai floods and the pandemic being -- following in such close succession, our customers have now started to revisit their supply chain choices, looking for more resilience. Looking for scaled partners like MPS that have a continuous improvement mindset and resilient infrastructure that makes sure that their revenue generation through content is not disrupted. So as a result, it's not just MPS, other scale partners like MPS as well have seen this lift on the demand side coming in because our customers are being more sensitive to how they manage and orchestrate the supply chain rather than just finding the cheapest solution. So on the content side, that's one big structural change that's taken place. On the education side of our business, there is this new emergence of disintermediation, where traditionally, our market share from our target market ended as a publisher. Increasingly, we are seeing that our partnerships are now extending to educational institutes, but also some of the new ed tech companies, learning companies. And that has created a whole new demand side of business for us. The third structural change that we've seen is our customers are slowly becoming subscription businesses. And therefore, the speed that they need in the production of -- and the volume that they desire, can only be achieved by partners that have significant technical expertise but also have IP that can deliver on their promise. And as a result, again, we're seeing a significant increase on the demand side as a result of that. The fourth thing is, of course, on the eLearning side of our business, which is a corporate learning and development side, again, we are seeing corporates now understanding the need to consolidate the supply chain with a few suppliers that can actually take over a large part of the learning and development function almost in a managed services format rather than outsourcing individual eLearning modules to individual eLearning vendors. So that's like a fourth big change. And then the fifth big change we're seeing is more on the platform side of the business, where, again, it's more around companies like MPS that are actually not just -- don't just have the best technology today, but future-proof them against disruptions like AI and ML as they exist today. So we are, for example, investing heavily through our MPS Labs division, incubating new products and new innovation. So it's mostly around future proofing. So those are the kind of the structural benefits that we are getting from the market. So those are the secular tailwinds that exist in the marketplace. From a strategy perspective, I think we are doing -- we are pulling many more levers now. We're launching on average, 4 to 5 new capabilities/products every year, which is resulting in a higher share of wallet for us. We are following now -- today we service over 500 customers. And so we are following now what we call a star account strategy, which basically covers 10% to 20% of our customer base. Where we're trying to basically unlock all the IP that we have acquired over the years for that customer base and trying to give them efficiencies and returns. So going deeper across a strategic customer base. The third thing we're doing is from a geography standpoint, we expanded -- we are trying to become more global. We expanded into Australia through the acquisition of Liberate, through the acquisition of EI Design, we strengthened our position in India as well as the Middle East. So there's also a geographic play that's taking place. So I think it's a combination of being in a market that has tailwinds and having the right strategy to unlock opportunity, but most importantly, having the right teams, the right culture of ownership, that is able to unlock the combination of excellent strategy and excellent opportunity. And we are creating that culture of ownership by actually recognizing that. So last year, we identified about 50, 55 people that were awarded ESOPs. That list will only grow in the coming April. So it's a combination of market opportunity, strategy, but most importantly, execution.

Just on the follow-up on to that, so are clients able to or ready to shell out more money for the same services. So that structural change -- it gives me -- it gives us a fair idea of how things are changing or -- and where we are positioned in that change? But are the customers ready to spend more of what the services or the new services say, platform or even on the content side, are they ready to spend more? And secondly, how do you see the competition evolving over there?

Yes. I think the answer -- the short answer is the customers are willing to spend more. Yes. The answer is, yes, but not -- they're not being silly -- they're not being silly about it. So as the spends have grown, the line of questioning and the detailing around that spend has only increased. So they are being very, very, very detail-oriented in terms of -- are we actually providing the value that we're promising. Or are we just charging higher for the current service that we provide. So yes, I think our customers are spending more with existing suppliers, but they're also getting more value out of the partnership, and they are ensuring through their Q&A, through their processes that the value is increasing at a greater pace than the spend. And they're exceptionally good at this. Of course, we have limited view or vantage point on what is their value for them. Of course, we understand that it is a combination of speed, which results in monetization of content quicker, plus it's, of course, the advantages that you're saving that you get from a more resilient supply chain.

Got it. And then quickly, I'll squeeze in one last one. How do you see the industry growth rates for all 3 verticals, if you could talk a little about them, content learning, eLearning and platform?

Yes. I think I'd like to stick with my original guidance despite the minor blip in eLearning, like I said, this is a marathon, not a sprint. I'm equally disappointed that this quarter here quarter there is a bit of [ recarpet ]. It is what it is. You just power through and make sure that this is not systemic. And we bounce back very quickly. And I know we're going to bounce back quickly because I have that information with me. So I'm very comfortable with where we are today as we're delighted if we were reporting a different set of numbers, but I'm feeling very comfortable because it's only a matter of time where we will be on this very call, reporting something different. So from my perspective, content will get back to the double digit. In fact, Q3, we grew at 8%. It's just that we have this ripple in the education business that pulled us back, but content, we expect to be between 10% to 15%, revenue growth platform at 15% and eLearning have been 15% to 20%. And yes, eLearning, I understand that it is difficult to swallow in the short run, but we're pretty confident that the 15% to 20% is highly achievable based on the information we have today.

Got it. So this is the -- this is your -- this is the -- from a perspective of the company, but the industry growth rate also in the same swing or is it higher or lower?

So on the corporate eLearning side, depending on what industry report you read, it tends to be 10% to 12%. We, of course, had a combination of a few premium assets, that's why we feel confident that our growth rate will be higher. On platforms, it's pretty similar to what the market is growing at. So nothing extraordinary. And then on content, again, it depends whether you look at the total market or whether you look at the opportunity available for scale players like MPS, I think total market would be lower. But if you look at scale players like MPS, we're pretty consistent with how other players are growing.

We'll take the next question from the line of Rahul Jain from Dolat Capital.

Yes. Sorry to go about on the same thing that the INR 40 crore thing. Just to understand your thoughts that, what are the readings out of it in terms of why that someone would have gone into that process? And what are the opportunities in terms of recouping some of it at a later point? And what are the potential such risks that may come because of the macro uncertainty that we're living into?

Yes. Just to clarify, the project has been delayed. It's not been canceled. And I obviously can't go into their individual reasons why because it's -- all I can say is that a strategic partner is delayed. We believe them. We've been working with them. We believe them. I have no reason to question why they've delayed it. They've given us very good reasons to the extent that they've given us more information than what we needed. So it's delayed, and we will wait for the project to start up. We're not giving up. We do have a signed piece of paper. So that gives us some comfort. So like I said, minor blip. These things happen in life. And I think the biggest learning, of course, is to make sure that when you're in a situation like this where you're expecting a major scale up, you also have other eggs or other players available to you rather than having so much dependency on one project. But again, would I have not chased this project? I don't think -- it's just such a good opportunity to scale our Experience Center business. There's no reason why we should have not proceeded. Again, it's got little do with the macroeconomic environment. It has more to do with their corporate and communication strategy, very, very customed to their situation, and it's more delayed. It's not been canceled.

Right. And did you somewhere said that this would have ideally contributed around roughly INR 10 crores in this quarter, if this was on track?

So I was actually thinking more INR 30 crore, INR 10 crore but again it's difficult to predict because the number in total is INR 40 crore. It was supposed to start late October and early March. Now it's difficult to predict how it would have gone, but that is the total number INR 40 crores to be start late October and early March.

And since there's no timeline, as you said, you have also curb back to some of the costs which you were kind of building into it. So what is the reversal of a cost savings that could come into next quarter, assuming this is not ramping up in this quarter as well?

Yes. I think for competitive reasons, I wouldn't want to get so granular on those numbers. I'm sure, with some intelligence, you can arrive at what those numbers are. I can share a high-level Experience Center business is a 30% margin business for us, unlike the eLearning business, which is more like 20%, 25%. So I'm sure you can do some back of the envelope calculations. We do know this center is not going to be launched in this fiscal year, that much information we have. But we are also aware that this project has not been canceled.

Right. Right. And on the LLG, you said that, its shaping up well. So is it safer to assume the run rate that we saw in the previous quarter for one month in Q3 is actually is what we might have done or there's a seasonality to it?

Sorry, couldn't you -- what was the -- sorry, Rahul, I couldn't hear you. Could you repeat again?

So since we had a higher number of days of consolidation in the LLG transaction, is it safe to assume it would have trended on the similar lines in this quarter? Or is there any seasonality for which this could be higher or lower in this quarter?

So I think when you say LLG, are you referring to Liberate?

Yes. Yes.

Sorry, we didn't knew the acronym. So Liberate is the strongest -- Liberate -- in Australia, the financial year is July 1 to June 30, and their strongest quarters in their terminology are their Q4 and their Q1. So there is some seasonality. But yes, the business is performing well.

The next question is from the line of Yashi Lohia from Ayush Agarwal Research.

So I had a question. So can you provide me your profit margins that are associated with -- like your Content Solutions platform and eLearning?

Sure. I think -- so if you look at our investor presentation, Slide 4 provides that information. So rather Slide 5 provides that information. Content Q3, our EBIT, our margin was 43.08%, platform, 42.45% and eLearning 16.15%.

Okay. And also, I was going through the presentation, I saw that in the eLearning segment the headcount numbers have reduced from 425 to 357. Can you provide us an insight about the same?

Yes, like I was sharing, we were about to get a pretty massive project worth INR 40 crores from a premier energy cooperation. That project has been delayed. So we had to disassemble that capacity and that's the reduction I'm saying.

Okay. Okay. So just one more question I had. So are we planning to -- like we have recently diversified in Australia. So are we planning to -- from the other 2 acquisitions that are going to be there in financial year '24, are we planning to diversify where are we exactly planning to diversify?

So one of the acquisitions is focused on the platform business. At this point I feel slightly uncomfortable given its forward-looking price sensitive to share more detail. Having said that, it is one of our goals to continue to expand geographically is definitely one of our goals.

The next question is from the line of Karan, an individual investor.

Yes. Am I audible?

Yes, sir.

Yes.

Okay. Perfect. Actually sir, I have a couple of questions for you. On the annual report, I have noticed that there are 2 property names, in the name HMG Ambassador Property Management Private Limited. And the second one is Brigade Marketing Company Private limited. So I want to know, are these a couple of companies, are they subsidiary of MPS? Or what are these entities?

So these are properties that came to us from with -- they're partly owned by MPS. They came to us from the -- when the ADI Group acquired MPS back in 2012. We have, over a period of time, tried to monetize these assets, not had good luck. And are always -- and on these calls, I always say, if you have any leads, please send them to our CFO, we're very, very interested in monetizing these assets.

So are you looking to sell these assets or like do you want to use them?

Both options are open to us as long as we can get a good return.

We take the next question from the line of [ Shubham Shingala ], an individual Investor.

Am I audible?

Yes, you are.

So, sir, I have 2 questions. One is on your long-term growth guidance side. I'm sorry, I joined a bit late. So you have a very aggressive long-term guidance. And in the current economic environment, like how do you view that long-term guidance? And what are the steps that you are taking to ensure that we are on track on that guidance?

Yes. I think the -- if you look at our overall guidance that we gave last year, it was a step up from INR 500 crores to INR 1,500 crores. INR 500 crores to INR 900 crore organically, INR 900 crore to INR 1,500 crore inorganically. As you know, given the current macroeconomic conditions, we are in a situation where it's a -- I hope I don't get quoted on this. But it is a buyer's market when it comes to acquiring new companies. So we are going to double dip on that strategy and use the macroeconomic conditions to -- in the short term acquire more as much as we can because we have the right conditions in which you want to be a buyer. So that's definitely -- we're feeling very confident about our inorganic. And we feel that it's going to be more near term in the short term rather than the long term when it comes to inorganic. On the organic side, I think we're doing 2 things. One, overarching, if you look at it, the aspiration is only -- it represents roughly 12% growth year-on-year. So it's not like -- it's not unachievable. It's very, very achievable. The market and the industry that we are operating in are growing at the industry percentage. So as long as we can grow at the industry percentage, we'll get there. And of course, the other thing that we're making sure is that the company we're acquiring are company that are growing at 10%, 12%. So that gives us some comfort on the organic growth as well. But I think this is an opportune moment for MPS to use its impressive balance sheet. And we get more aggressive on acquisitions in the short term.

Okay. And my second question is regarding your acquisition strategy, only, right, in the last call, you mentioned that you're looking to follow a model, very similar to PDS Limited or you're at least thinking in that direction where you onboard entrepreneurs who are having some vested interest in growing the company. So what are -- do you some concrete steps that you have taken in that direction. Like, have you onboarded some people on your team who are looking particularly in that direction? Like your inorganic strategy direction, which have you formed the team for that -- like some steps in that direction?

Yes, I think -- so we have a pretty efficient corporate development team and rather than having -- we don't fall -- we're not following a mass market strategy here. We are following a thoughtful targeted strategy where we have deep relationships with -- I think 4 investment banks that make sure that any -- they know our criteria that any of those type of deals come to us. The second thing we're making sure is, we know the promoters who we want to work with, who we think we will have a collaborative future together. We have already approached most of them. I personally have good relationships with most players in our community and we have other than the senior management team like Tony Alves, who's a thought leader, Kelly Lake who's a thought leader, others as well, so -- David Goodman, who's joined recently in our education business. So we have these personalities that are considered thought leaders in the space, and they then in turn are connecting us to promoters and entrepreneurs as well. In fact, one of the more recent deals that we've been working on was brought to us by someone from our senior management team. So lot of it is organic word of mouth. And from a overall approach standpoint, again, the goal is to partner up with entrepreneurs. And sometimes it's not entrepreneurs, it's management teams because, we could have a management team that is part of a very large company. The large company does not think of this particular division as a core asset and therefore divest from the core asset. And then you just takeover the management team. So it's a combination of owners, promoters, but also some management teams that we've known over the years that are part of large companies that don't really feel this is the right type of business or division for them and this was the market -- under this market condition, the power in the buyer-seller relationships sits more with the buyer. And we recognize that there's a small window of opportunity we have over 6 to 12 months and we're trying to convert this window of opportunity into something pretty real and pretty significant for MPS.

Okay. And so if I can sneak one more. Like anything on your buyback side, do we have a buyback strategy as well, like if the stock price dips then you do a buyback or is it just like yearly stuff? That will be the last one.

Yes, of course, the MPS Board and management team is fairly confident about Vision 2027. Like I said, the small blip aside, we're racing and charging towards that vision and are feeling even confident that we'll get there sooner rather than later as we have pointed out because there's new window of acquisitive opportunity that certainly presented itself to us. So yes, we're not speculators, but of course, if we are good -- we've been pretty decent in our capital allocation over the last 10, 12 years. So we see a window of opportunity, we will jump at that opportunity, absolutely.

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Mr. Rahul Arora for closing comments.

Thank you for your active participation in our earnings call for being supportive in quarters like this one and for being patient with us. We appreciate your thoughtful questions. You make us learn and improve. Outside in this perspective is very helpful. Again, I want to thank all the stakeholders who have contributed towards our success and thank them for their continued support, their respect. Our journey together over the years has been truly remarkable. MPS has a very unique opportunity, specifically in 2024 to build serious scale. I think our theme for 2024 is really supercharging scale. And with yours's kind support and patience, we will use this calendar year to build and unlock that serious scale. Thank you again for your continuous support, feedback and partnership mindset.

Thank you. On behalf of MPS Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.