(Kolkata’s Arun Mukherjee, who dropped out of college to turn a full-time investor at an early age, and Soumya Malani, a London School of Economics alumnus, have come to be known as smallcap aficionados within India’s investor community. They would show up at most AGMs, visit the remotest factories of a company and go chasing end-users to understand their experience with a product in their passionate hunt for good smallcaps. Arun and Soumya share their experiences with such companies from the ground in this space every now and then.)
This company has become a six-bagger over the past 4-5 months. There’s suddenly tremendous interest in the company with several investors setting sights on it. So, what has really changed over this short period? What’s the story here? Let’s dig deeper.
About the company
Xelpmoc Design and Tech is focused on building next generation technology, especially in the artificial intelligence and machine learning space, with a keen interest in natural language processing & data analytics. Xelpmoc has four sources of business: startups, corporates, government and products. Currently, 85% of its revenue comes from the Indian market and the rest from overseas markets.
The overseas revenue share is increasing every quarter and the company aims to increase it further going forward to diversify and minimise overall risks and uncertainty.
The company also invests in startups at a seed stage. It usually doesn’t put in cash for these equity investments or ownership, but provides tech support and works with startups as co-founder and CTO. Their total cost of investment in startups would be around Rs 3.5 crore and the fair value of the same as on FY20 stood at Rs 35 crore.
Promoters’ Background: Sandipan Chattopadhyay was the tech brain behind Moneycontrol and Just Dial. That’s pretty much known. It was Sandipan, who wrote Mundu stack in Erlang in the earliest part of 2000. He had a company called E-Dot, which supplied technology to Geodesic. Mundu Messenger was pretty famous during those days, and had clients like Indiatimes.
Geodesic’s lack of marketing budget and unscrupulous means of conducting business squandered the company, and India missed out on its own Whatsapp and Tiktok. Few years later with same stack and same tech Tiktok and Whatsapp were born, but the country of origination was different.
Corporate Governance: We speak highly about corporate governance in a company and the market loves it to the core when it is good, which in turn can help companies attain premium valuations.
A few months back, Sandipan Chattopadhyay set a precedence. He was a part of a startup called MIhup, where Xelpmoc owned 9% and Accel Partners invested Rs 45 crore for a 20 per cent stake, giving it a valuation of Rs 225 crore. MIhup and Sandipan Chatterjee owned 2.4 per cent.
To avoid even slightest chance of conflict of interest, Sandipan sold his 2.4 per cent stake to Xelpmoc for Rs 43 lakh. He could have ethically milked Rs 5.5 crore (Rs 225 crore * 2.4%, considering what Accel paid MIhup) and Xelpmoc had the money to pay for the same. But he showed his commitment to the company.
What Works: It is a unique business with no peer in India. In a conference call, the management said YCombinator is one such thing, where we can find some sort of a similarity with what Xelpmoc does. “Xelpmoc being an IT company, salary is the biggest expense. But the top management pays themselves peanuts. It’s with that smart frugality that they have turned around the business, earning a re-rating from the market. Why the heck pay fat salaries when savings can lead to higher profit, a.k.a. higher market-cap? When you are tiny, you ought to be a miser.
Xelpmoc differentiates itself from other IT services companies and is trying to grow into a product company with differentiated offerings. It has two unique product offerings, namely ‘DocuX’ and ‘xERP’. ‘DocuX’ is an AI engine, powered by natural language processing that uses OCR (Optical Character Recognition) to convert documents into machine-readable formats. Its second product ‘xERP’ is a state of the art modular ERP system for restaurants. The company is also working on some futuristic concepts like ‘sensitive-content detection,’ which could be a money spinner going forward.
As per market buzz, Xelpmoc replaced Microsoft in servicing a client in the education arena. We had a look at all the startups it has invested in and the standout ones included Woovly, MIhup, Slate, Snaphunt and Fortigo etc. These companies are doing pretty well and have seen big investments from renowned investors such as Nandan Nilekani, Accel Partners. Xelpmoc’s best bet so far has been Fortigo, where a mere Rs 11,000 has multiplied to almost Rs 20 crore.
What doesn’t Work: It’s early days and the solutions they have seem to be pretty much hitting the bar, but it needs to be verified how much depth do their solutions have. Besides if a company is high on innovation and if that innovation is led by interns, it’s a bit much too swallow.
By targeting Indian companies, they will hardly get a high margin business. Startups would rather prefer to in-source all the ‘innovations’ in the early stages and outsource only the rudimentary stuff.
Also it may have a stunning product, but until it’s marketed well (which requires a solid marketing budget), it may not mean anything. India is not known for its products. We hardly have a few of them, and the rest of the technology is actually plain vanilla labour arbitrage, which our companies play on.
Xelpmoc also seems to be a one-man show, where Sandipan Chatterjee probably is the lone wolf. With scale effect, the bandwidth of the top guy can get affected and hamper business growth.
Dreaming Big: When we had a first look, it confused us. This looked like a perfect private equity play and most people wouldn’t have come out with an IPO clocking Rs 4-5 crore sales. It would have gotten much more valuation in that segment. The promoters must be appreciated for listing a first-of-its-kind firm and giving a chance to investors.
Average retail investors have long been deprived of this kind of a play. It’s a medium to participate in the global startup takeoff. The company along with all of its startups, dreams to cater to 50-70 crore Indians and then the 500 crore global population. There’s aggression, intent and high corporate governance. Let’s wait and watch how much all these translate into actual numbers.
Numbers: The company closed FY20 with sales of Rs 8 crore and losses of Rs 2 crore. The company smartly turned around in the first quarter of this financial year and posted Rs 1.67 crore profit on Rs 3.5 crore sales. It’s a debt-free firm having Rs 12 crore in liquid investments. They have cumulative losses of around Rs 15 crore in the books, which will be carried forward and will get cancelled out when similar profit figures are achieved.
So till Rs 15 crore profit, the company is not going to pay any taxes. Ebitda, till then, would be your PAT.
Conclusion: It’s still early days and the valuation is already hitting the roof. While the company looks promising, it is yet to prove its scaling up and execution capabilities. A futuristic business model along with a great visionary pedigree, limited floating stock and its exciting startup ventures would always keep the company in the reckoning. A low base effect may actually help it grow pretty fast and that it something the market will take notice.
Consistent growth in quarterly numbers over each quarter is what the street is expecting from the company. If that gets delivered, it’s not going to get cheap anytime soon. Happy investing!
(Disclaimer: The writers are individual investors. They along with their family members may have position in the company discussed above.)