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Nucleus Software Exports (BSE India 531209) concall impressions

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The impression I got was of a somewhat nonchalant and lackadaisical management. I found the company quite average in my interaction with them as well. 

They mentioned the words like trunk, branch (and tags) in investor conference call, which I don’t think someone outside software industry knows. I understood. That explained to me why Nucleus has not been able to scale as well, on the surface Nucleus appears to be a product company but working with various code streams on branches of code served by different human teams. It is a mess in terms of software development. On the positive note, there is room to improve profits without increasing sales, by employing half as many employees.

http://en.wikipedia.org/wiki/Conway’s_law

It states:

organizations which design systems … are constrained to produce designs which are copies of the communication structures of these organizations
—M. Conway[2]

Conforming to Conway’s Law, Nucleus has dozens of teams serving different clientele (150 customers in 50 countries) from various code streams, each working as a different company. It is primarily an engineering and communications problem. I would wager that Nucleus has little horizontal communication channels that do no allow scalability. As per the concall company is re-engineering to build product from single code base, reduce teams, increase velocity, shorten release cycle. This could be a multi-year effort. 

The revenues are stagnant at 300 Crore INR for over past five years at consolidated level. Management bandwidth is lost in managing multiple teams.

Nevertheless, they have built up a niche in retail lending with significant market share. Deal size, although is quite small. 

IBS Sales League table awards are the most prestigious for Banking Software industry and Nucleus Product continues to score 1st in lending software.

http://www.nucleussoftware.com/corweb/images/pressRelease/2014/IBSPublishingAward.pdf 

http://www.bobsguide.com/guide/news/2014/Mar/19/nucleus-softwares-finnonetm-is-the-global-no-1-lending-product-again.html

http://www.livemint.com/Companies/vKQhO3tM66EYYScLzbv9wK/Nucleus-Software-plans-an-aggressive-oneyear-growth-roadmap.html

Company has come out with new products for automobile industry, increased innovation and R&D budget, Mobile space is covered for Nucleus, however, no score yet on the revenue scoreboard, except management being optimistic about future.

The reason I like it is:

a) 103 Rs per share cash in hand (CMP 185), may announce an acquisition in next 2-3 years
b)  If revenues grow 10% CAGR based on new product offerings and re-engineering the releases, profits should compound at 30% CAGR
c)  Boring stable industry with low intensity of competition in Banking, few new entrants, high stickiness for existing solutions
d) Free cash flows 
e) In the eyes of an informed private buyer, as is, the company is worth several fold more
f) Corporate disclosures are excellent. Company has won awards on having the most Investor friendly site.
g) Geographical reach is quite decent


Weakness:

Sales, Engineering, Product divisions of the company are weak. Due to fragmented engineering teams, great features introduced in one code stream do not get released to all existing customers.

The company has been merely lucky, right place, right time in 1980s (35 Crores profits from 50 Crores of Equity, 70% ROE, if cash of 330 Crores is distributed out) to enter banking software niche with low competitive streak. New Seniors hires are yet to prove transformation. Company does have few impressive clients like ICICI Bank, Bajaj Auto Finance, Toyota Financial India etc. but has not been able to invade deeply in India. The company has been a disappointment for over five years for investors and has not utilized cash properly and has been a value trap. 

A paltry 50 Million USD revenue after 27 year of history for a software product company based in India with labour cost arbitrage implies, either the company lacks the broad vision or short on execution and implementation capability or both.


Written by amitdipsite

January 31, 2015 at 8:58 pm

Posted in Uncategorized

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