Accelya Kale: Fly High

NameReco DateReco priceTargetProspero RatingReport Date*
Accelya Kale Ltd02May2014 Rs. 350 – Rs. 400Rs. 800 – Rs. 10007 / 1017Nov2013

We had first recommended Accelya Kale Ltd to be bought at Rs. 350 – Rs. 400 range. However. this is the first time we are sending a report on the same. Even at this point, we recommend to Buy Accelya Kale. The reasons for the same are mentioned below.

A) Company background:

Accelya Kale is a leading financial software provider to airlines industry across the world. Its software helps airlines manage their financial processes and gain insights on their business performance. Two main products of Accelya Kale are:

a) Passenger revenue accounting (PRA)

b) Cargo accounting software

Both these above softwares help airlines to simplify tedious financial processes and help manage revenue leakages and control costs. This eventually improves the cash flows, profitability and risks of Airlines using these softwares.

B) Revenue segmentation:

C)   Investments arguments:

1. Market Leader & Strong Domain Knowledge: Accelya Kale has a very strong knowledge of the workings of Airlines Industry over last 25 years. It has a very strong niche and unparalleled domain knowledge. Accelya Kale’s product ‘Revera’ is the market leader in the field of Revenue Accounting.

2. Huge Market Opportunity: Airlines, globally, spend Rs. 10,000 cr to Rs. 12,000 crores on their IT systems. A large share of these spending is done for systems catering to the functions of Revenue accounting and settlement between airlines. Till today most of the companies have in-efficient in-house IT systems and are slowly moving to independent vendors like Accelya Kale. This creates a huge market opportunity for players like Accelya Kale.

3. Shift in Business Model: Before Accelya took over Kale Consultants, the company used to sell its software product as a license for a larger one time income and very less recurring income. However, after Accelya came on board, the company shifted its strategy and linked the revenues to the number of passengers flying in the client airline and very low one time implementation costs. Due to this, there has been a major shift in the revenue trajectory. As per the new business model, its revenues are now dependent on 2 aspects a) increase in airlines passenger traffic and b) Addition of clients –Both of which are seeing good traction.

4. New Client Additions: Airlines across the world sell their tickets through travel agents. IATA, a strategic partner to Accelya, started a settlement service between airlines and travel agents called “Bank Settlement Processing” or BSP. With this service, airlines get payment for all tickets sold by hundreds of travel agents as a single cheque every month. Similarly, travel agents need to pay a single cheque for their dues to all airlines. BSP does the work of settling the accounts of the travel agents on one hand and airlines on the other. Accelya, as a partner to IATA, provides these services to airline industry in 104 countries (out of 171 worldwide). Due to Accelya’s exceptionally strong relationship with many European airlines and deep domain knowledge, there is a very high possibility of more clients getting enrolled. Any new client addition will dramatically increase sales and further increase profits.

5. High Visibility in Earnings due to Long Term Contracts: All the clients of the company have contracts anywhere from 5 to 8 years. Usually, if an airline starts using one software, it is not too easy for them to change the software provider and the renewals are very high. This makes the cash flow visibility for Accelya extremely comfortable.

6. Operating Leverage: Like any other IT company, most of its costs are fixed in nature. Even a small new order will directly flow down to the profits and can make the profit growth look extremely higher.

7.  Asset Light Model: The business does not require any significant capital to run. This is evident from its very low fixed assets and near zero assets additions in the last few years. The company turnover is 10 times is assets. The company is a debt free company with decent liquidity on the Balance Sheet.

8. Super High Dividend Payouts: The company pays nearly everything that it earns to its shareholders. For the last 2-3 years, the Dividend payouts have crossed 100% of its profits. After the acquisition, the company has paid a dividend of Rs. 106 per share in the last 2 years. To put this in perspective, the company was acquired by Accelya for Rs. 162 per share in FY11. We expect the company to continue to pay dividends of Rs. 35+ on a sustainable basis indicating a minimum of 6% tax free returns.

9. Valuations: At the CMP of Rs. 575, the company is trading at a market cap of Rs. 855 crores. This year too, the company is expected to generate minimum net profits of Rs. 80 crores (conservative). There could also be a large upswing based on new client additions.

10. Potential Takeover Candidate: As the ultimate promoters of Accelya is a Private Equity player, there is a strong case that it is looking to sell the entire Accelya Kale group. As per our analysis, there is a very strong possibility that Accelya Kale will be sold in a very short while. This further helps our buy decision. We recommend to Buy in 2-3 tranches between Rs. 500 to Rs. 575.

D) Financials at a Glance

E) Key risks:

1. Existing Client Attrition: If any major client plans not to renew the contract, it can lead to a sharp decrease in revenues, affecting the company in a very severe manner. For a company like Accelya, it can be quite time consuming before the new clients compensate for the loss of old ones. However, we are continuously evaluating the progress of the business and are extremely comfortable about this for the near future. Apart from this, we don’t think there is any major risk that can be significantly damaging to Accelya Kale.

*Report Date may sometimes be different from Recommended Date as drafting of reports can take time.

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