SQS India BFSI: Accumulate on declines for 40-50% returns | Fundamental Analysis | Stock Recommendation | Dips | Declines | Target | Accumulate | Buy : IndiaNotes.com
SQS India BFSI Limited, formerly Thinksoft Global Services Limited,is the leading Business Assurance and Testing Specialist focusing exclusively on the Financial Sector. With a successful track record of over 15 years, and more than 14 million person hours of Testing, the company has served 150 plus customers in APAC, USA, UK and Middle East. The Company primarily delivers software validation and verification services to the banking and financial services industry around the world. The Company’s services include quality and risk management, test management, functional testing, non-functional testing, test technology support and business consulting. The Company provides solutions for all aspects of quality throughout the whole software product lifecycle driven by a standardized methodology, offshore automation processes and domain knowledge in various industries. The Company offers its services to banking, finance and insurances; energy and utilities; manufacturing; retail and logistics, and telecommunications industries.
SQS India BFSI is a specialist in financial software testing with over 16-million person hour track records for Global 500 financial and insurance organisations in USA, UK, Europe, India and Asia-Pacific. Through its domain focus, structured testing methodologies, offshore delivery, and test automation expertise, SQS India BFSI helps clients realise ‘business ready software’, compress timelines, and reduce software product life cycle costs. In the last 18 years, SQS India BFSI has established a successful track record of handling large independent functional testing assignments.SQS India BFSI has established a global presence/ footprint in New York, London, Frankfurt, Singapore, Bangalore and Chennai. SQS India BFSI has consistently increased its revenue for the past 10 years by growing at a CAGR of 25%.
SQS India BFSI is now part of the SQS group which is world’s largest independent specialist testing company. Founded in Cologne, Germany in 1982, SQS employs approximately 4,500 staff in Europe, Asia, North America and Africa. SQS (incl. Thinksoft) has offices in Germany, the UK, Australia, Egypt, Finland, France, India, Ireland, Italy, Malaysia, the Netherlands, Norway, Austria, Singapore, Sweden, Switzerland, South Africa, UAE and the US. SQS is the first German company to have a primary listing on AIM, a market operated by the London Stock Exchange. In addition, SQS shares are also traded on the German Stock Exchange in Frankfurt am Main.
SQS has a three decade experience specifically in software testing serving to verticals like BFSI, Retail, Manufacturing, Energy & Utility and Telecommunications. 50% of SQS revenue is derived from BFSI and going forward maximum of it may be delivered through SQS India BFSI due to its deep domain BFSI expertise. With over 8,000 completed projects under its belt, SQS has a strong client base, including half of the DAX 30, nearly a third of the STOXX 50 and 20 % of the FTSE 100 companies. These include Allianz, Beazley, BP, Centrica, Commerzbank, Daimler, Deutsche Post, Generali, JP Morgan, Meteor, Reuters, UBS and Volkswagen. Due to parent’s strong client base, SQS India BFSI is poised for better earnings in the foreseeable future.
Domestic revenue contributes only 7% to SQS India BFSI. Looking at India’s 40% unbanking population and recent bank licenses by RBI, initiatives by PM like “Make in India”, Digital India, Jan Dhan scheme provides huge scope to strengthen its India presence. Growing Internet penetration, growth in e-commerce, growth in online banking transaction & mobile banking and increasing penetration in insurance industry in India may help SQS cards and payments, banking, insurance revenue to grow substantially.
With the acquisition of Thinksoft in Nov 2013, SQS will be able to penetrate in US which is the biggest market for software testing and especially for BFSI space. It will also help to expand international reach, giving a presence to the company in Australia, Singapore, Belgium, Gulf region, and India. With deep domain expertise in BFSI space of thinksoft employees, acquisition further strengthened SQS group’s overall capacity and offshore delivery. With increased size and scale, particularly in terms of Indian Offshore headcount and BFSI expertise, it will help parent SQS to bid for larger Managed services contracts going ahead. Post acquisition of Thinksoft Global Services Ltd by SQS AG (parent), a world’s leading specialist in software quality, SQS India BFSI will benefit from its parent’s BFSI clients and presence across the globe
For the half year ended September 2017, the net profit stood at Rs 16.1 cr.(up 8.4%) on total sales of Rs 131 cr.. Basic EPS stood at Rs 15.30 in H1FY18 as against Rs 14.29 in H1FY17, an increase of 7.1%. An interim dividend of 40% (Rs 4 per share) has been declared. For FY17, the company posted net profit of Rs 23.1 cr. (down 37%) cr. on net sales of Rs 260.6 cr.(down 1.7%) on consolidated basis. On a equity of 10.6 cr.(Promoters’stake-53.83%), the EPS stood at Rs 21.79 and the total dividend declared was 240%(Rs 24 per share). The FY17 P/E of almost 22 times is misleading, as it includes forex losses of more than Rs 6 cr. due to Brexit. The company is fundamentally sound and has excellent long-term prospects. The management is good and the dividend payout is comforting. However, there is a high probability of short-term volatility in the stock price until the growth concerns are cleared up. At the current levels, the stock offers sufficient margin of safety along with good upside potential for long-term investors.
In FY17, the US market was challenging with the changes in the political as well as economic environment. The company has extended its positioning with in Agile, Robotic Process Automation and the development of accelerators. The rampdowns are behind it and revenue from new proejcts from existing clients as well as new clients will help to grow in FY18. Despite a difficult year industry wide, it has maintained its EBITDA at 19.7% for FY17.
At Rs 489, SQS India BFSI is trading at 16 and 13.7 times its earnings for FY18E(Rs 30- Rs 31) and FY19E(Rs 35–Rs 36), respectively. With dividend yield of about 5% and market capitalisation of about Rs 518 cr., this zero-debt cash-rich company is bound to see a expansion in multiple.
Investors can start accumulating the SQS India stock at current levels and add more on declines for decent returns of 40%-50% over the next 8-12 months.
Sanjay Chhabria is an equity analyst and investment consultant based at Raipur (Chhattisgarh). He is a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000001592). At the time of writing this, he doesn’t have any position in the stocks mentioned above. He welcomes comments, feedback & investor queries at [email protected] and at 9893200307.
Sanjay chhabria is bringing a weekly Investment newsletter “Market-View” since April 2001 to help small(retail) investors take an informed investment decision. He invites Readers to send him email/Whatasapp message (9893200307) to get free 1 week trial offer of “Market –View”.
Under no circumstances does the information in this report represent a recommendation to buy or sell stocks. This report has been prepared solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Readers using the information contained herein are solely responsible for their actions and are advised to satisfy themselves before making any investments.