accelya kale solutions

Download Accelya Kale Solutions

Post on 10-Nov-2015

20 views

Category:

Documents

0 download

Embed Size (px)

DESCRIPTION

Accelya Kale Solutions

TRANSCRIPT

  • Kks

    1

    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

    the world.

    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

    airline operators.

    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:

    IATA).

    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.

  • Kks

    2

    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

    concentration risk.

    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

    gains.

  • Kks

    3

    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.

  • Kks

    4

    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

    months basis.

  • Kks

    5

    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.