accelya kale solutions
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DESCRIPTIONAccelya Kale Solutions
Accelya Kale Solutions
Buy above Rs.690/- 14th Mar, 2013
Find the right auxiliary business
If there is one industry that Warren Buffett has been most critical about it has to be
the aviation industry. The problem with the industry is that there are high fixed costs,
competition is intense and bargaining power with various stakeholders is low. This
results in a cost structure that is very vulnerable to macro headwinds. No wonder
then that historical y, investors have lost a lot of money in the airline industry across
While airlines may have been a bane for investors, it would be a big mistake to
overlook the fact that aviation has been one of the most important inventions of the
20th century. By providing fast and efficient connectivity across the globe, it has been
a vital aid to globe trade and commerce and has been a catalyst for social and
economic progress. Ever since airplanes came into existence, global passenger and
cargo volumes have grown at a phenomenal rate irrespective of the fortunes of
This is the reason the industry has not just survived but has continuously grown in
size over the last 100 years. What started with one passenger in 1914 has now grown
to over 3 billion annual passengers. In 2013 the total passenger volume stood at
about 3.1 billion. And this is set to grow to 3.3 billion in 2014. Thats a whopping 44%
of the worlds population! Each year, about 50 million tonnes of cargo is transported
by air. This comprises 35% of the value of goods traded internationally (Data source:
So if your returns were linked to passenger and cargo growth and not to the
profitability of airline operators, you could have made handsome money.
This reminds of an interesting episode from the past. During the California Gold
Rush that started in 1848, about 300,000 people flocked to California to make
fortunes by mining gold. While few emerged very wealthy, many made little or no
gains out of this gold hunt. But irrespective of whether those miners found gold or
not, pick and shovel suppliers did make a lot of money.
This brings us to an interesting point. Even within not-so-profitable main industries,
there can be auxiliary ways to build wealth if only you set your vision at the right
opportunity. So how must one go about investing in auxiliary businesses?
Here are some key attributes of fundamentally-strong auxiliary companies:
Products/services of the auxiliary industry must be critical to the main
industry and not discretionary.
Auxiliary industry must have favourable cost structure, strong balance sheet
and bargaining power.
Growth and profitability of the auxiliary industry must be linked to the output
of the main industry and not its profitability.
Auxiliary industry must have a fairly diversified client-base to avoid
So the airline industry may continue with little or no profitability, but if you find an
auxiliary business with the right attributes, you could be in for some handsome
About Accelya Kale Solutions Ltd.
I prefer to stay away from stocks and sectors which suffer from bad economics. Such
investments are unlikely to be long term wealth compounders. This is why I would
never touch aviation stocks even with a 10-feet pole. There is hardly any airline
operator in the industry that enjoys a strong moat and most do not generate
commensurate returns for shareholders.
Accelya Kale Solutions Ltd. (formerly known as Kale Consultants) is a small software
company based in Pune and Mumbai. Incorporated in 1989, the company has chosen
to be a niche IT service provider to the aviation industry. Accelyas competitive
advantage stems from its strong domain expertise and long term track record in the
airline industry. It has developed world class software products for airlines that are
critical for their business. These include products for revenue accounting, billing,
audit, business analytics, cargo handling and early warning systems, among others.
The company markets these products as an outsourced platform based service. This
means that airlines use Accelyas products on a pay-per-use model, while Accelya
handles the back-end services related to the product. This is beneficial for both
parties. Accelya benefits from a stable revenue stream that increases with the
number of passengers. At the same time, the airline is relieved of investing huge
amounts of money on capital expenditure relating to its in-house IT infrastructure.
Accelyas industry expertise and the quality of its products can be gauged by its long-
standing relationships with marquee clients like US Air, Thai Airways, Gulf Air, Air
Canada, Etihad and Cathay Pacific, among others. This is where we believe Accelyas
economic moat lies. As the aviation industry as a whole becomes cost-conscious and
adapts to a low-cost business model, Accelya is very likely to be among the strongest
contenders for handling their software requirements.
In addition to this, the company has a strategic alliance with the International Air
Transport Association (IATA). It has developed products for the airline industry
under this partnership. Accelyas products are used by IATA to settle disputes
between airlines, record customer and flight data, monitor and measure performance
of travel agencies, handle settlements between airlines whenever passengers change
flights on long distance routes and many other applications. This means that Accelya
stands as a neutral third party in the airline industry. This has enabled the company
to develop deep domain expertise as well as to cater to the different needs of many
airlines around the world. The company has successfully used its knowledge to
develop products that have found wide acceptance by large global airlines. This is
amply demonstrated by the fact that the companys revenues are very well spread
out. No single geographical region contributes more than 30% of its revenues.
To find out more, we met the companys management. The company is owned by
Accelya Holding World SL, a leading airline software solutions provider in Spain,
Europe. The parent company is owned by a private equity firm, Chequers Capital
which specializes in acquiring companies in partnership with its management. The
financial performance of the company has improved significantly since the new
promoters have taken over. The parent company has most of the large airlines as its
clients and this has benefited Accelya Kale. Due to the promoters focus on keeping a
tight lid on costs, the operating margin has improved from 20% in FY11 to 43% in
FY13. The company has paid out more than 100% of its net profits as dividends in the
last two years. The business model of the company is very asset-light, i.e. Accelya
does not need to spend too much on capex or continuous product development. This
will help the company maintain its strong financial health.
Accelyas revenues and net profits have grown at a compounded annual growth rate
(CAGR) of around 23% and 45% respectively over the last six years. The gross
margin has improved from 41% to 61% during this time while the Return on
Invested Capital (RoIC) has grown from 10% in FY07 to 148% in FY13. The
companys balance sheet is very strong. It is debt-free and has a cash balance of Rs
345 m as of FY13. The dividend yield also stands at an excellent 10% on a trailing 12
How Accelya Kale Solutions will improve its fortunes
A well-established presence in a niche market
Accelya Kale Solutions is a company focused on only one industry- Aviation.
It has exited from all other verticals like hospitality and logistics. This has
enabled the company to focus al its resources to develop high quality software
products for its customers. This approach has held the company in good stead.
Its products cater to the entire span of an airlines operations. Accelyas
products have achieved industry leadership positions global y, in the areas of
revenue accounting, streamlining of receivables and payables, audit
operations, card bil ing and cargo handling.
Accelyas clients use these products on pay-per-use or lease basis. This means
that every time a passenger books a ticket, or every time a cargo shipment is
successfully delivered, Accelya receives a small fee. This steady revenue
stream lends stability to the topline. About two-thirds of the companys
revenues come from such annuity-based revenue. This model helps airlines to
significantly cut down on their capex. As airlines around the world operate on
thin margins, Accelyas products play an important role in maintaining their
profitability and competitiveness. Accelya has pioneered this business model.
Around 60 airlines from around the world use Accelyas products.
Strategic partnership with IATA
Accelya has partnered with the International Air Transport Association
(IATA). As per this partnership, the company provides IATA with software
that is used on an industry-wide scale.