Ultra cheap Indian Software services company?? Potential to make 5 times of your money??

Infinite Computer Solutions (NSE: INFINITE)

Business:

Infinite Computer Solutions is a global service provider of Application Management, Infrastructure Management, Product Engineering and Mobility, and Messaging Products and Solutions. It has a focus on Telecom, Energy & Utilities, Media & Content, Healthcare, and Banking & Finance industries. Our strength stems from the alignment with client business objectives, even as we engage with clients across multiple engagement models to align better with your business needs. With a global headcount of around 5000 professionals and offices spread across India, US, UK, China, Malaysia, Singapore and Hong Kong. This includes delivery centers in the US at Maryland, Illinois and Tennessee, and in India at Bangalore, Delhi, Hyderabad and Chennai. Established in 1999, Infinite today is a publicly listed entity headquartered in Bangalore, India, with an span across three continents, a diverse employee base and over 50 premier clients, including several leading Fortune 100 companies.

The company went public in 2010; the shares were oversubscribed by 43 times. The shares went public at 165 Rupees/share.

Revenue mix:

Applications Management Services – 68%

Infrastructure Management Services – 15.6%

Management:

Upinder Zutshi is the CEO and managing director of the company; he is the nominee & close in race for the 2013 CEO of the Year Award in India. The company was listed in Forbes Asia 200 Best under a Billion in 2011.

Clients:

Verizon, IBM, Fujitsu, Xerox, Alcatel-Lucent, Motorola/Nokia Siemens, Western Union, Iron Mountain & Tellabs.

  

Ownership:

Founder (Sanjay Govil) & Chairman owns about 60% of the shares outstanding. So we have an owner manager, whose interests are highly aligned with passive shareholders. Employees own about 10% of the stock. T. Rowe Price International owns little more than 5%.

Selected figures from financial statements (in Cr Rupees):

Year	FY 10	FY 11	FY 12	FY 13
Revenue	664.3	883.28	1,055.81	1390.61
EBITDA	121.34	147.89	183.49	218.42
EBIT	107.66	136.24	158.33	158.54
PAT	79.17	107.18	120.71	130.75
No. of Shares	43,959,995	43,959,995	42,559,995	42,559,995
EPS (in Rs.)	20.18	24.38	28.05	30.05
Net worth (in Rs. Crores)	326.95	416.28	508.84	596.26
Total cash (in Rs. Crores) *	118.04	94.62	156.54	171.81
Debt(in Rs. Crores)	47.7	46.1	59.13	85.86
Return on net worth	24.20%	25.80%	23.70%	21.90%
Cash per share	26.85	21.52	36.78	40.37

Valuation & Analysis:

The company trades in the market for around 475 Cr. Rupees (Rs. 112/share). If we exclude the excess net cash (about 100 Cr), it is trading for about 2 times annual profit & 2/3 of the stated book value, as the RONW is over 20%. The company has a huge tail wind in terms of market opportunity as the market for various software services grows globally. The company’s board recently announced a buyback of ~10% of the shares outstanding. This is great capital allocation at work. The company also has a policy of paying out ~30% of the profit as dividends to the shareholders. In today’s stock price, the dividend yield is more than 8%. The buyer of this stock at these prices risk of losing the invested capital is almost zero; the business is earning healthy profits on the invested capital and excess capital in the balance sheet. At some point the market participants will come to their senses, and bid up the prices relative to the company profitability. At that point the shareholders will realize huge profits via share price appreciation. If we are right about the assessment/prospects of the company, the capital will compound at very high rates. If this company trades at the valuation of many software services companies(both in India and global), the stock will be worth more than 10 times of annual earnings which will be 5 times more than the price it trades today.

Risks:

Client concentration:

Top 5 clients contribute 75% of the revenue, top client being 34% although the concentration is reducing over the years. It is quite common in a small size company like Infinite computer solutions. Most of the revenue is from the repeat business as the contracts with existing customers are long term in nature.

Geographic Risk:

US customers accounts for 76% of the revenue mix.

Disclosure:

I own shares of this company.

Owner Operated Business - Biglari Holdings (NYSE: BH) - Excellent Entry Point??

Business:

Biglari Holdings Inc. is a holding company engaged in a range of diverse business activities. The Company, along with its subsidiaries, is engaged in investment management and the franchising/operating of restaurants. As a capital allocating vehicle, it is also in the business of owning other businesses in whole and in part.  The portfolio companies are:

Steak n Shake restaurants (414 owned, 87 franchised) (100%)

Western sizzlin restaurants (5 owned, 92 franchised) (100%)

Biglari capital/The Lions fund (100%)

Cracker Barrel restaurants (621 owned, 0 franchised) (~20%) – Ongoing proxy war for last 2 years to be on board

Unico American Corporation (~10%)

CCA Industries (~10%) – Board member

ITEX Corporation (~8.4%)

Situation & Valuation:

Currently the company is selling in the market for ~$510M (Enterprise value of 625M), which has a look through operating earnings/cash flow of more than $85M & likely growing at a reasonable clip for years. The company is in excellent financial condition by both ample cash on the balance sheet & credit facility. There is a lot of flexibility with the capital structure; they can issue cheap interest bonds (as the case right now) or if the stock gets priced high, they can issue stocks to acquire other companies wholly or in part. There is a huge opportunity of franchising SNS both domestically & abroad. Recently the company is working with partners in middle eastern countries on its franchising efforts as it has a potential of achieving high returns on invested capital.

Market Cap – 510M

Debt – 115M

Look through earnings from portfolio companies – 85M

EV/FCF – less than 8 times

Management:

Sardar Biglari is the Chairman & CEO of Biglari Holdings, solely responsible for capital allocation decisions. He was running a hedge fund called Lion fund with over 20% annual return for 8 years just before he took a control position in Steak ‘n Shake. Phil Cooley (Vice Chairman) is a sounding board to the CEO and also his teacher in his business school days. CEO is incentivized properly to increase the per share value/book value of the company.

Catalyst:

There is no catalyst/situation/timeline to unlock the value of this business. Current value is its own catalyst, and an efficient way of deploying capital in the right business will increase the value of the company immensely. If value gets higher due to the combination of retaining earnings, investment in right areas/subsidiaries will ultimately unlock the value in time.

Reasons Why Opportunity Exists:

Complicated holding company structure, no analyst coverage, no guidance from the management on the quarterly/annual results from the company, unconventional CEO pay structure, high share price & low liquidity.

Risks:

Aggressive/confident CEO can run into a situation where he bets the company on a single acquisition by taking on excess debt, although it is highly unlikely.

Public market participants late to realize the opportunity.

Final Comment:      

The company is a wonderful platform for owning companies in part or full to increase the net worth of any investor. CEO Sardar Biglari is being young (36 yrs) & unconventional is great asset to the company.  I own shares of Biglari Holdings.