Fortune Scrip     

Published: November 15, 2023
Updated: November 15, 2023

Ksolves India Ltd

Small cap IT stock with multibagger potential

This fortnight we have decided to change track in picking the Fortune Scrip. Instead of a wellestablished company, we have selected a very small and rather new company with a market capitalisation of around Rs 1,200 crore, sales turnover of less than Rs 100 crore and depreciation of Rs 25 crore (in fiscal 2023). In fiscal 2021, it earned a net profit of just Rs 1 crore on a sales turnover of Rs 8 crore. But thereafter, the company has made rapid strides with sales turnover advancing to Rs 77 crore for the year ended March 2023, on which it earned a net profit of Rs 25 crore.

The company floated its issue in June 2020 at a price of Rs 100 – today, the current market price is around Rs 1,098. The stock has becoming extremely popular, what with the board of directors declaring bumper dividends. In fact, it spends most of its earnings on dividend payments, and – hold your breath – the payout rate for fiscal 2023 was 74 per cent! For FY23, it paid a dividend of Rs 15.50 per share of a face value of Rs 10. And for the current year, it has already announced the first interim dividend of Rs 7 per share. No other small company on the Indian exchanges pays such bumper dividends.

Headquartered in Noida, Ksolves is a small cap infotech company that specialises in providing a range of software development and IT consulting services to various industries, including ecommerce, healthcare and finance. It refers to itself as a ‘true software development partner’ to its customers. It curates and develops the best possible software solutions while keeping the customer’s original brief and business needs in mind. It comes with a proven track record of servicing clients across several countries, and has 40+ in-house technology experts.

While it is a 360-degree software development provider, it is known in the industry for its expertise in Big Data, (Apache Kafka), Apache Nifi, Apache Spark, Apache Cassandra, Data Science (Artificial Intelligence and machine learning), Sales Force, Devops, Java and Micro Services, Open Shift Penetration, testing etc. The company also has a strong presence in developing and distributing apps on the Adoos and Magento platforms.

SALES SKYROCKET

Though the company was incorporated 10 years ago, its operations in the real sense started from fiscal 2020. During the last four years, it has put up an extra-ordinary performance with sales turnover advancing from Rs 8 crore in fiscal 2020 to Rs 77 crore in fiscal 2023, operating profit shooting up from Rs 1 crore to Rs 33 crore, and the profit at net level surging from Rs 1 crore to Rs 25 crore. But we have not picked this small cap company as the Fortune Scrip on account of its past laurels. We strongly feel that its future prospects are all the more promising. Consider:

• The company is a darling of dividend- loving investors. Though it is a small cap company with a relatively small turnover and profit, it pays hefty dividends. For the last year ended March 2023, it paid a bumper 155 per cent dividend. At a time when the interest rates on savings in various investment avenues range from 4-5 per cent to 9-10 per cent, such a fantastic return is definitely a tremendous attraction.
• Interestingly, though the company is paying fantastically high dividends, they are covered by both profit and cash flow. This suggests that the dividends are sustainable as long as earnings do not drop. It is encouraging to see Ksolves India growing its earnings in the last five years. The company has raised its dividends by approximately 78 per cent a year on average for the last four years. Interestingly, the company’s earnings per share has grown rapidly over this period and the dividend per share has grown alongside.
• zThe company’s fundamentals are quite healthy. It has delivered good profit growth of 234 per cent CAGR over the last five years. It has a handsome return on equity (RoE) track record for 3 years of 120 per cent, and it has been maintaining a healthy dividend payout of 57 per cent. Ksolves India is a debt-free corporate entity with zero borrowing and zero interest payment. The company’s RoCE was 138.30 per cent in fiscal 2023.
• zThe company’s earnings per share (EPS) is remarkably improving year after year. From Rs 6.64 in fiscal 2021, it almost doubled to Rs 13.02 the next year and went up to Rs 20.98 in fiscal 2023. As the stock price is generally linked to the EPS, the company’s share has zoomed from the issue price of Rs 100 to Rs. 1,448 before settling at around Rs 1,075. What more can investors who crave regular and attractive returns want!

SHARE STRUCTURE

• Ksolves India has a significant insider ownership. Ratan Shrivastava, CEO of the company, is the largest shareholder with a 32 per cent stake, while Deepali Verma, a senior executive of the company, is the second largest shareholder with a stake of 27 per cent. FIIs have just entered the company with a fractional holding, while domestic institutional investors have not been attracted to it. The balance of around 32 per cent is held by retail shareholders. The past performance of the company, along with its ownership, gives a good idea about its business prospects.
• zKsolves has opened its 4th delivery centre at Ahmedabad in Gujarat. This new delivery centre is expected to support the company’s growth plans by giving access to high-quality talent from Gujarat and nearby areas. This is part of a hub-and-spoke delivery model adopted by company.
• zThe share price of K Solves has now shot past the Rs 1,000 mark. In view of the company’s rising profitability and improving EPS, the share price is also expected to rule strong.

LIKELY HICCUPS

But there may be two disturbing possibilities. The huge dividend payouts will not leave funds for reinvestment in growth projects. Secondly, if the profit growth slows down or drops, bumper dividends may not be possible. Discerning investors should be watchful about the company’s performance in the coming years.