RETAIL RESEARCH Small cap Stock Note 01 Jan 2018 Compuage Infocom Limited RETAIL RESEARCH Page | 1 Industry CMP Recommendation Add on dips to Sequential Targets Time Horizon Distributor of IT Products Rs.48.6 Buy at CMP and add on declines Rs.42-44 Rs.56 & Rs.69.30 4 - 6 quarters Company Description: Compuage Infocom Ltd. (CIL) founded in 1987, headquartered in Mumbai, is an information technology distribution company that distributes computers, computer peripherals, networking, software and mobility products. CIL also provides support services for IT and Mobility Products. Over 30 years of its operations, CIL has grown and maintained its reseller network partnership with more than 10000 resellers selling close to 32 brands in more than 800 cities in India. Among the listed space, it competes with Redington. Investment Rationale: Strong presence in the IT products segment and increasing number of brands in mobility segment to propel revenue growth. Greater focus on reseller partnership base expansion to help company achieve higher growth levels. IT and Mobility products’ sales to keep growing as portion of consumer consumption. GST to auger well for company helping in improving cost efficiencies. Strong inventory and debtors management helps company insure itself from shocks of write-offs. Strong balance sheet, appropriate leverage and growing income statement constitute good financials for the company. Concerns: Delay in achieving expansion of number of brands marketed and in number of resellers may delay the growth in financials. Obsolescence of inventory distributed may erode profitability. Promoter driven management (as in all family owned companies)could be a concern. Leveraged balance sheet may pressurize margins if stagnation in revenue is witnessed. View and Valuation: CIL has had a good track record in terms of revenue growth and profitability with the company being able to double its turnover in last 5 years and not having incurred loss in the past 10 years. CIL has been aggressive on increasing its reseller reach in Indian market and also add sufficient brands to its portfolio of products on an annual basis so as to maintain and improve its profitability. Catering to the growing IT and Mobile (Smartphone) market in India, its revenues are expected to rise in proportion with the number of resellers and brands it adds. Further, with advent of GST, company is optimistic about cost efficiency by consolidation of warehouses from different states. CIL has set a target of crossing $1 Bn (~Rs.7000 Crs) revenue by 2020 driven by more mobility brands added to the portfolio and increasing the reseller reach substantially. With good financial discipline of negligible long term debt, strict credit policy, prudent inventory management policy and improving debt servicing metrics make company a dependable bet. CIL, as a whole, is expected to improve its profitability from increased turnover levels and marginally improved OPM over next 3 fiscals. The stock is currently trading at 7.4x FY20E EPS. We feel investors could buy the stock at the CMP and add on dips to Rs.42-44 (6.5x FY20E EPS) for sequential targets of Rs.56 (~8.5x FY20E EPS) & Rs.69.30 (~10.5x FY20E) over the next 4-6 quarters. HDFC Scrip Code COMINFEQNR BSE Code 532456 NSE Code COMPINFO Bloomberg CPGI IN CMP (29/12/2017) Rs.48.60 Equity Capital (Rs crs) 11.8 Face Value (Rs) 2.0 Equity Share o/s (crs) 5.9 Market Cap (Rs crs) 285.5 Book Value (Rs) 19.6 Avg. 52 Wk Volumes ~95000 52 Week High 63.95 52 Week Low 21.35 Shareholding Pattern % (30 Sep 2017) Promoters 61.5 Institutions 9.4 Non Institutions 29.1 Total 100.0 Fundamental Research Analyst CA Arpit Bhatt [email protected]
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RETAIL RESEARCH Small cap Stock Note 01 Jan 2018
Compuage Infocom Limited
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Industry CMP Recommendation Add on dips to Sequential Targets Time Horizon
Distributor of IT Products Rs.48.6 Buy at CMP and add on declines Rs.42-44 Rs.56 & Rs.69.30 4 - 6 quarters
Company Description: Compuage Infocom Ltd. (CIL) founded in 1987, headquartered in Mumbai, is an information technology distribution company that distributes computers, computer peripherals, networking, software and mobility products. CIL also provides support services for IT and Mobility Products. Over 30 years of its operations, CIL has grown and maintained its reseller network partnership with more than 10000 resellers selling close to 32 brands in more than 800 cities in India. Among the listed space, it competes with Redington.
Investment Rationale:
Strong presence in the IT products segment and increasing number of brands in mobility segment to propel revenue growth.
Greater focus on reseller partnership base expansion to help company achieve higher growth levels.
IT and Mobility products’ sales to keep growing as portion of consumer consumption.
GST to auger well for company helping in improving cost efficiencies.
Strong inventory and debtors management helps company insure itself from shocks of write-offs.
Strong balance sheet, appropriate leverage and growing income statement constitute good financials for the company.
Concerns:
Delay in achieving expansion of number of brands marketed and in number of resellers may delay the growth in financials.
Obsolescence of inventory distributed may erode profitability.
Promoter driven management (as in all family owned companies)could be a concern.
Leveraged balance sheet may pressurize margins if stagnation in revenue is witnessed.
View and Valuation: CIL has had a good track record in terms of revenue growth and profitability with the company being able to double its turnover in last 5 years and not having incurred loss in the past 10 years. CIL has been aggressive on increasing its reseller reach in Indian market and also add sufficient brands to its portfolio of products on an annual basis so as to maintain and improve its profitability. Catering to the growing IT and Mobile (Smartphone) market in India, its revenues are expected to rise in proportion with the number of resellers and brands it adds. Further, with advent of GST, company is optimistic about cost efficiency by consolidation of warehouses from different states. CIL has set a target of crossing $1 Bn (~Rs.7000 Crs) revenue by 2020 driven by more mobility brands added to the portfolio and increasing the reseller reach substantially. With good financial discipline of negligible long term debt, strict credit policy, prudent inventory management policy and improving debt servicing metrics make company a dependable bet. CIL, as a whole, is expected to improve its profitability from increased turnover levels and marginally improved OPM over next 3 fiscals.
The stock is currently trading at 7.4x FY20E EPS. We feel investors could buy the stock at the CMP and add on dips to Rs.42-44 (6.5x FY20E EPS) for sequential targets of Rs.56 (~8.5x FY20E EPS) & Rs.69.30 (~10.5x FY20E) over the next 4-6 quarters.
(Source: Company, HDFC sec) Company Profile: CIL is India’s leading IT and Mobility Distribution Company offering Global Products and Services to its resellers through strong distribution network across India & SAARC nations. CIL also provides products support services for Information Technology and mobility. CIL was founded in 1987 and has its headquarters in Mumbai. The company also has a non-operating subsidiary in Singapore. Over the last 30 years CIL has developed a strong network of over 10000 channel partners across 800 cities & is currently associated with 32 marquee brands with 40 warehouses & 65 service centers across pan India. Company’s evolution as a large distributor in Indian domicile can be summed up as follows:
Year Evolution over the period 1987 Commencement of business of Computer Consumables as a Corporate Reseller 1992 Expanded scope of business to include Peripherals. Became Authorized Dealer for several Peripherals Brands 1995 Commenced Imports of IT Hardware and started Regional Sales Offices at Delhi, Kolkata and Bangalore 2001 Foray into Distribution. Branch expansions Continues. Got listed by merging with a listed entity 2007 Launched and executed 60 City India Campaign, a campaign showcasing our products to over 6000 Resellers across India 2012 Establishes operations in Singapore to serve SAARC Region (Dormant Subsidiary) 2017 Completed 30 successful years with 38 Branches, 40 WHs, 65 Service Centres, 32 global Brands, with resellers presence in 800
cities (Source: Company, HDFC sec) Currently company’s board comprises of 5 directors bringing good level of experience and helping CIL improve itself on operational and financial parametres.
Name Of Director Designation Qualification & Experience
Mr. Atul H. Mehta Chairman & Managing Director
B.Com and MBA in Finance from USA. Founder Member of the Company with focus on Strategic Planning and Financial Management
Mr. Bhavesh H. Mehta Whole Time Director and Chief Operating Officer
B. Com and M.Com with specialization in Marketing. Associated with the Company since two decades with expertise in sales and marketing.
Mr. G. S. Ganesh Independent Director CA, Investment Banker with experience of over 25 years having expertise in Financial Restructuring, Mergers and Acquisitions and Project Financing
Mr. Vijay Agarwal Independent Director M.Com and CA by qualification and being in practice for more than 25 years.
Ms. Preeti Trivedi Independent Director CA with more than 25 yrs of experience in Corporate Finance and Management Consulting
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Company as a distributor adds value to the entire process of selling the product/service to the end consumer by the manufacturer by making available the products from the manufacturer to the resellers. Following flowchart shows company’s role in the business flow:
Manufacturer (Brand Owner)
→ Distributor
(Distributes to reseller) →
Reseller (Sells to final consumer)
→ Final Consumer
↓
↓
↓
↓
Samsung, CISCO, HP, Lenovo, Apple, Microsoft, Asus, etc.
CIL, Redington, Ingram Micro, HCL Infosystems, etc.
Small traders, Large retail formals (Croma, Reliance Digital, Ezone, etc), E-retailers.
Retail consumers (Individuals) & Corporates
CIL’s product mix is spread across three product category groups which includes the IT Product Vertical, Enterprise Product Vertical and the Mobility Product Vertical. IT Product Verticals includes products like PC Components like TFT Screens, Optical Drives, Peripherals, Flash Drives, Accessories, Laptops/Desktops Enterprise Product vertical includes products like passive networking, active networking, Digital Signage and Software, cloud management services, Vertical solutions and Business Applications. Mobility Vertical Solutions Group includes products like SmartPhones, Tablets, Mobile Accessories.
The company has been historically catering distributorship services to the IT & IT components industry and has in the recent few years turned its focus over the mobility sector i.e. the smartphones, mobiles and tablets market. CIL generates around 85% of its Topline from the IT Product Verticals which includes Enterprise products also with the rest 15% coming in from the Mobility business vertical. Over the years company’s revenue share has been as follows:
(Source: Company, HDFC sec)
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CIL is associated with 32 brands featuring in all of the above three sectors. Company’s major clients over the years have been Microsoft, Cisco, Samsung and Toshiba contributing more than 10% of the total revenues generated by the company. Following are the major companies whose products are distributed by the company:
(Source: Company, HDFC sec)
CIL has over the years expanded its reach with 38 sales offices, 40 warehouses, 65 service centres in more than 800 cities and towns of India covering grade A, B & C cities in India. It has increased its reseller partnership number from 3850 in FY12 to >10000 in FY17. The following map shows CIL’s reach in India through its various offices:
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(Source: Company, HDFC sec)
Investment Rationale: Strong presence in the IT products segment and increasing number of brands in mobility segment to propel revenue growth: Company’s business consists of purchasing the products from manufacturer and selling it to resellers. However, here, the purchase and sale works out as a long term relationship where the manufacturer promises to distribute its particular brand of product through CIL and the resellers maintain the policy to source the product through the same distributor for better prices and good credit terms.
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In view of above, company’s revenue growth is invariably dependent on how many brands it is assigned to distribute and the quantum of partnerships it can develop with resellers to distribute those brands. With more and higher value brands addition to the portfolio for the company, company’s revenue per re-seller is expected to increase where the number of resellers directly propel the revenue up. Company plans to increase the number of brands its sells and the products that sell at higher value in the coming fiscals. Company’s commitment towards this goal is evident from the fact that company added 14 new principal relationships in FY17 which include the following:
Extreme Networks (Complete Networking)
Hanwha - Samsung (Security and Surveillance in CCTV)
Xerox (Printers)
Sandisk (Flash and SSD Products)
Linksys (Networking Products)
LG (Signages)
Emerson (UPS) Company has recently tied up with Apple in May 2017 in its mobility segment to distribute Apple accessories. Currently, Apple distributes Iphones and Ipads through five players in India which include Redington, Ingram Micro, Rashi Peripherals, Brightstar & HCL Infosys. If CIL is able to build a good relationship with Apple on such terms that a distributer partnership for its mobile phones can be established, CIL can meaningfully improve its revenue per reseller. However, this being a hypothetical scenario has not been built in the projections enclosed herewith in this report. The company’s aspiration to cater to more and more products and brands and serve more than 50 brands by FY20 combined with its track record of improved and increased relationship with same as well as new market participants in the IT and Mobility segment, induce confidence in company’s ability to grow in line with its targets.
Particulars FY12 FY13 FY14 FY15 FY16 FY17
Number of brands under
- IT 23 25 23 21 20 30
- Mobility 1 1 2 2 3 3
Total 24 26 25 23 23 33
Names of Brands contributing more than 10% of topline.
HP, Samsung, Microsoft.
HP, Microsoft, Samsung.
HP, Microsoft, Samsung.
HP, Microsoft, Samsung, Cisco.
HP, Cisco, Samsung.
HP, Cisco, Samsung.
Greater focus on reseller partnership base expansion to help company achieve higher growth levels: Over the years, CIL has been in a position to increase its re-seller network exponentially. CIL has increased its strength of reseller network to more than 10,000 during the year from 7,800 in the previous year. This network includes 105 System Integrators that address the enterprise segment, with the addition of 40 in FY2017.
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CIL has also expanded its reach to nearly 800+ cities/ towns. The proportion of B, C and D category cities/towns in the total reach of CIL has increased considerably. In the coming years, CIL is further planning to expand its reach and connect with more B, C, D cities/towns through its network, as the Indian consumption landscape in the small towns is dramatically changing. Deeper reach into such smaller markets growing rapidly is a key differentiator for CIL which is investment for future growth and is surely expected to help CIL penetrate new markets which are likely to grow exponentially in the next 3-4 years. It has also helped the company in forging partnerships with many principals who are keen to expand their product reach in smaller towns and cities. CIL is looking at the domestic market as a big opportunity over the next 5 years especially from the smaller Tier 2 and 3 cities where it has been building a strong reseller network and where it expects business to grow at a solid pace over the medium to long term. CIL has vision of reaching more than 1000 cities through its 15000 reseller partnership in next three years, which does not look very unrealistic given CIL’s past record of relationships. The following chart portrays CIL’s reseller reach expansion over last 5 years:
(Source: Company, HDFC sec)
As can be seen, company has been able to increase its reseller network by approx. 3000 in preceding 3 years, the same can be repeated with increased investment and higher focus. The company follows a defined policy to hunt newer opportunity wherein it sets a plan at the beginning of the year spelling out enhancement of city and reseller penetration numbers which are then broken down zone wise based on their potential and monitored quarterly.
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The increasing number of products and brands coming into CIL’s distribution portfolio and increasing reseller network could cater well for company’s growth plan in terms of revenues which plans to cross Rs.4200, Rs.5300 & Rs.7000 Crs of revenues by FY18, FY19 & FY20 respectively. IT and Mobility sectorally to grow as portion of consumer consumption:: With the increase in disposable incomes, shift towards e-business, increasing awareness about IT and its applied uses, especially from the Tier 2 and Tier 3 cities entails good and continuous growth in said industry. In comparison to global peers, India lags behind drastically and the same entails good demand prospects for the years to come for this industry. Market for electronics (inclusive of IT and Mobility) is expected to expand at a CAGR of 66% during 2015–20. The demand for electronics hardware in India is projected to increase to USD139 billion by 2018. Demand from households is set to accelerate given rising disposable incomes, changing lifestyles, and easier access to credit. Government and corporate spending will also contribute to growth in demand. In FY2016-17, the overall IT hardware and packaged software market recovered from the sluggish growth in the previous year. As per the NASSCOM estimates, the revenue growth for the IT Hardware segment picked up from 2% in FY2015-16 to 5.4% in FY2016-17 and that for the packaged software went up from 4.5% to 10.4%. Considering the growing market potential for digital technologies in India consumer demand for digital technologies is going to be primarily driven by the need to access the internet. According to IAMAI-IMRB report, the number of internet users in the country is expected to go up from 432 million in December 2016 to more than 500 million by 2018. Urban India at 60% penetration is starting to get saturated, but rural India offers a significant opportunity with only 17% Internet penetration. India is an extremely value-conscious market, and as a result, one can see that the smartphones have disrupted PC market for the consumers, and Cloud Computing is similarly disrupting the enterprise market. Samsung which gives CIL more than 10% of FY17 business, grew at more than 27% in FY17 and is expected to maintain this run for coming two fiscals as well (despite high market penetration by players like Xiaomi & OnePlus). Similarly, HP which provides high levels of revenue to company have grown close to 12.5% in FY17 over FY16. GST to auger well for company helping in improving cost efficiencies: Company has a total of 38 sales offices, 40 warehouses and 65 service centres spread across India. The management is optimistic that once smooth GST implementation is carried out, company will be able to decrease the number of warehouses it operates (each in one state at least) domestically and bring down the consequent fixed cost. With the ‘One Nation, One Tax’ slogan materializing, the interstate transfer of good will be easier and tax efficient not making it necessary for company to maintain office in each state and instead adopt a hub-spoke model wherever possible and improve on cost fronts. This can help company as it is extremely difficult for the company to improve its gross margin considerably (being a distributor, margins are wafer-thin) any reduction in above mentioned costs could help improve its operating margins.
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Stringent Working Capital Management to help company in long term: CIL has been following a stringent working capital management over the years with its cash conversion cycle being stable at about 32-35 days. CIL states that it does not allow a credit period of more than 45 days on an average to its resellers and post that there are charges which help it recover for the carrying cost of debtors. Also, company states that it does not hold more than 30 days of inventory at any time. This helps company to safeguard itself from the obsolescence of stock. Also, company has also taken 100% insurance cover for its debtors which reduces the risk of write-offs for the coming fiscals. Strong balance sheet, appropriate leverage and growing income statement constitute good financials for the company Over the years, company has witnessed good growth in its revenues which has in turn grown its PAT. Being in distributorship business, company has a very low asset base which shows a very high FA T/o ratio. This turnover ratio also combined with high leverage present on books, drives the return ratios despite extremely low PAT margins. Company shows good working capital management with cash conversion cycle not fluctuating much over the years. Company has high cash on books which may yield benefits in future for the minority shareholders (in absence of requirement of capex).
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(Source: Company, HDFC sec)
Concerns: Delay in expansion of number of brands marketed and in increase in number of resellers may delay the growth: A reduced pace of brands/product expansion and slow addition to the number of reseller partnerships would bring down the revenue growth possibilities. Since, revenue growth is the biggest factor propelling growth in bottom line, any slowdown in these two variables could bring down the profitability growth. Obsolescence of inventory distributed may erode profitability: Despite strong inventory management in place, owing to the type of business the company is in and the kind of products it distributes, the fear of obsolescence always prevails and may bring down the profitability in some cases/products.
Promoter driven management (as in all family owned companies) could be a concern: CIL has been set up and run by Mr. Atul Mehta with ample authority vested in him. This may be a concern although the company has a leadership team of 9 members which includes Mr. Atul Mehta as well and the entire team is with CIL for over 10 years.
Competitive market with players like HCL Infosystem challenging CIL’s position: Company faces major competition in the organized space from Redington, Ingram Micro, HCL Infosystem, etc. HCL Infosystem has over the years transformed itself into a consumer and enterprise product distributor and recently took a huge stride in this business space by signing a distributorship contract with Apple Inc for its flagship product, the Iphone. With such increased competition, company may face high risks
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Leveraged balance sheet may pressurize margins if stagnation in revenue is witnessed: Company’s balance sheet is already loaded with debts majorly short term in nature to finance the working capital. If CIL is unable to grow its topline, company may experience effects of negative financial leverage on its returns. This is a downside which generally is attached to any leveraged company.
Slowdown or technological upheaval in the sector company serves in: This situation, though not very likely, may bring down the level of activity in the overall industry. In this case, since company majorly derives its income from a demand in these segments, the company’s sales growth may be negatively impacted. Peer Comparison: CIL’s peer, Redington (India) Ltd. (RIL), is considerably big in terms of its operations both considering the brands under its coverage and the number of resellers catered to. Although the revenues on the consolidated basis look more than 10x CIL’s revenues and PAT being more than 20x that of CIL, RIL’s more than~63% of revenues are generated outside India, where CIL is not present. In its Indian operations, RIL recorded a sales of close to Rs.7488.2 Crs and a PAT of Rs.96.3 Crs. CIL trades at lower multiples mainly due to its lower scale of operations, exposure to just one geography and comparatively leveraged capital position.
Name of Peer
Company
Equity Capital
No. of Shares
Fundamental Values Market
Cap
Price Multiples (Annualized)
Sales OPM PATM Earnings Net Worth P/E P/BV P/Sales
View and Valuation: CIL has had a good track record in terms of revenue growth and profitability with the company being able to double its turnover in last 5 years and not having incurred loss in the past 10 years. CIL has been aggressive on increasing its reseller reach in Indian market and also add sufficient brands to its portfolio of products on an annual basis so as to maintain and improve its profitability. Catering to the growing IT and Mobile (Smartphone) market in India, its revenues are expected to rise in proportion with the number of resellers and brands it adds. Further, with advent of GST, company is optimistic about cost efficiency by consolidation of warehouses from different states. CIL has set a target of crossing $1 Bn (~Rs.7000 Crs) revenue by 2020 driven by more mobility brands added to the portfolio and increasing the reseller reach substantially. With good financial discipline of negligible long term debt, strict credit policy, prudent inventory management policy and improving debt servicing metrics make company a dependable bet. CIL, as a whole, is expected to improve its profitability from increased turnover levels and marginally improved OPM over next 3 fiscals. The stock is currently trading at 7.4x FY20E EPS. We feel investors could buy the stock at the CMP and add on dips to Rs.42-44 (6.5x FY20E EPS) for sequential targets of Rs.56 (~8.5x FY20E EPS) & Rs.69.30 (~10.5x FY20E) over the next 4-6 quarters.
Cash and Bank Balances 88.3 101.4 111.8 128.1 149.7
Short Term Loans and Advances 27.3 26.3 27.5 29.5 35.6 Debt-Equity 2.79 2.83 2.59 2.38 2.24
Other Current Assets 2.2 1.4 1.4 1.5 2.3 Interest Coverage Ratio 1.62 1.62 1.63 1.78 1.89
Current Assets: 640.1 903.4 1029.5 1164.8 1353.6 Total 675.3 938.4 1068.0 1206.4 1399.2 (Source: Company, HDFC sec)
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18 Months Daily Closing Price Chart
(Source: Company, HDFC sec)
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Fundamental Research Analyst: CA Arpit Bhatt ([email protected]) HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066Website: www.hdfcsec.com Email: [email protected].
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