Subex @ Rs 11  & thus available around par of FV Rs 10 ~ Five Questions that come to mind?

First a bit of background of Subex that got grounded bad from a high of Rs 887 in 2005 to a low of Rs 4 in 2013 before sputtering to show some life crossing Rs 18 in 2015 & again correcting sharply to below Rs 10…. It’s showing some life again with Market Cap moving up to @ Rs 550 crs & huge Volumes .It’s in the Telecom Software Products space providing Business and Operations Support Systems (B/OSS) to Communication Service Providers (CSPs) across the Globe.

If you’re training with me you’d know how to look at it now…. just listing in brief the five points I’m looking at :

1. Management ~ Its now 48 year old Surjeet Singh, ex CFO of Patni Computers managing Subex.He’s the CEO & MD & has a Cost to Subex Group Package of over Rs 5 crs. Till September 2012 it was the 1992 Founder Subhash Menon who ran the Show and even remained Director till 2015. Menon’s Rise & Fall Story has been covered in some interesting detail by Forbes in November 2012 .Do even read the Readers Feedback to the Forbes Article. The Board also has Sanjeev Aga, ex MD of Aditya Nuvo & Birla ATT (Idea) & Anil Singhvi of Ican & earlier known for his long tenure with Ambuja Cement. He also was an advisor for two years with the Reliance ADA Group & advised on the Enam Axis Bank Merger. The Promoter Category shows a few investors with a very low stake.In fact many  others especially FPIs have much larger stakes & a few were allegedly instrumental in Founder Menon’s ouster because of the Syndesis Acquisition debacle that crippled Subex. The suspicion was that there was more than meets the eye in this US $ 165 m acquisition & it’s funding by US $ 180 m FCCB 1 (See below) ~ Question : What’s Surjeet Singh’s strategy going forward to address the challenges that yet remain & scale the Topline & Bottomline significantly ?     
2. Networth Jump with FCCB Conversion ~ Networth has jumped from Rs 209 crs at March 31, 2015 to Rs 727 crs at March 31, 2016 as Company revised FCCB III Conversion price downward yet again from Rs 22.79  to Rs 13 on May 14 2015.This attracted near full conversion of the FCCBs taking the Equity from Rs 182.92 crs to Rs 502.81 crs in FY 16…. These FCCBs were the huge Debt overhang in the Balance Sheet.The Book Value thus became Rs 14.46 on March 31,2016 with the Balance Sheet showing very little Debt with just US $ 6.95 m o/s on all FCCBs I ,II & III . The FCCB Story commenced 10 years ago in 2006/7 when 2%  FCCB I for US $ 180 m was issued with Exchange rate fixed at Rs 44.08 & Conversion at Rs 656.20.In 2009/10 a restructuring proposal of FCCB 1 was offered at a 30% discount to Face Value.Those who held US $ 141 m face value FCCB I accepted & were issued 5% interest per annum, payable half yearly US $ 98.7 m FCCB II with exchange rate fixed at Rs 48.17  & Conversion at Rs 80.31.Redemption date was the same at March 9,2012 which RBI extended to July 9,2012.However another restructuring offer was made in June 2012 to FCCB I & II Holders & most (US $ 38m of the 39 m FCCB I o/s & US $ 53.4 m of the 54m FCCB II o/s) accepted it in July 2012 & were issued 5.7% interest per annum payable half yearly FCCB III for US $ 127.72 m with exchange rate fixed at Rs 56.0545 & Conversion Price at Rs 22.79 with maturity date of July  7,2017.On May 14,2015 the Conversion price was reset on these FCCB III to Rs 13  ~ Question : Though the FCCB Mess has been resolved where lies this High Networth & how is it going to be serviced?
3. Goodwill on Consolidation ~ The Networth lies in the Carrying Values as on March 31,2016 of the Investments of Rs 647.39 crs made in Subex(UK) which contributes nearly all of topline & of Rs 124.96 crs (lower by Rs 54.90 crs) in Subex Americas Inc.Consolidated Accounts throws up these Investments in the Goodwill on Consolidation. Company has,and new auditors, S R Batliboi & Associates(Previous was Deloitte Haskins & Sells) have accepted the continuing Goodwill Value of Rs 670.36 crs for UK & the fresh assessed Rs 97.26 crs for Americas (down by Rs 88.70 crs from the Rs 186.06 crs carried till FY 15). Company views this as fair based on their assessment of operations  & cash flows going forward & even external valuations ~ Question : These are Intangible & carry risk of Impairment going forward & thus are they yet being overstated even now ?
4. Topline ~ Sales continue to hover in the Rs 320 crs to Rs 360 crs range last four years despite regular annual report noises on the potential of  mobile telephony going forward.Bottomline remains relatively insignificant even as FY 16 generates Rs 50+ crs and an EPS of Rs 1…maybe enough to service stakeholders like Employees & Working Capital Lenders but what about Shareholders~ Question :Even assuming lower Interest Burden with the FCCB Conversions & less risk of Exchange Fluctuations how would such a flat growth topline generate enough bottomline to service the Equity of over Rs 500 crs now?
5. Subsidiaries Outstandings set off sought from RBI~ Standalone Financials as on March 31,2016 reveal Trade Receivables,net of Doubtful Debt) from Subsidiaries  at Rs 412.73 crs &  Payables at Rs 441.28 crs.Company plans to apply to RBI to allow them to set these off. No Accounting adjustment has been made for these & neither have Auditors qualified their Report on the Standalone Accounts though they have drawn attention to it as an Emphasis of Matter ~ Question : That these have grown so huge on either side over the years without being settled does it signal at least a part being accommodation entries?

Remember how I had analysed & exposed Geodesic in 2012/13 at @ Rs 10 & with huge FCCBs too when many were floating it as multi-bagger potential to cross Rs 100. It dropped to under Rs 2 & has since been suspended from trading         

Over 600 Employees yet believe that Subex will Turnaround under Surjeet Singh… Question is do you as a Potential Investor ….or is the risk a bit too adventurous for your profile…. Subex has little long term debt & is showing a positive bottom line now …. well the FCCB Mess certainly has been cleared up but at the cost of FY 16 creating an additional 32 cr shares which already created a selling momentum after the conversion… some yet may have to be sold off.

This is anybody’s & everybody’s share now with insignificant Promoter Holding…. There are many who jumped in excitedly at Rs 18 last year & saw their Investment halve in quick time on selling pressure created by additional 32 crs created from August 2015, earliest effective conversion date was in this month ,on the FCCB III.Remember these FCCB Holders had already faced 30% Face Value Loss on FCCB II issue  + Exchange Loss from original Rs 44 & then Rs 48 & then Rs 56 when current rate is @ Rs 67 …. and shares converted at Rs 13 would surely have been crying to sell at Rs 18 to recover some loss for the holders!…. Now there are many yet aggressively buying in at Rs 9.50 to Rs 11… Volumes & Price Trends are telling some story…Selling Pressure seems to be ebbing

Anybody interested in acquiring  majority stake in Subex? will cost you under just US $ 45 m or under  Rs 300 crs (@ Rs 67 ex rate)  for a 51% stake & you’ll get a Rs 350 crs topline company with little debt & in profits & servicing  most of the leading Telecom Operators & Communication Service Providers worldwide…and the Book is near Rs 15 with very little equity dilution remaining on account of remaining FCCB conversion…. you of course need to believe the carrying worth of Investments in Subex (UK) & Goodwill on Consolidation shown because of it… you would also need to believe in Surjeet Singh’s exclamation in his statement in the FY 15 Annual Report that it’s Inflection Point & all at Subex are very excited about the road ahead

Would love to have you at my Fundamental Equity Training Workshop…. there’s one scheduled for the full day on Saturday,September 10,2016 in Bangalore where more such case studies will be analysed & debated on Price vs Value… details will come up shortly

Update on evening of June 23, 2016 

Been getting quite a few calls & messages today for this Subex post… let me make it clear… I have merely spelled out the facts & questions that came to my mind especially on the risks … I have not offered any opinion on whether one should buy or hold or sell Subex… that is left to the reader based on his risk profile & conviction & confidence levels… as for Geodesic, I am not comparing the two to spark fear or warning… just that in the past I have raised issues with IT companies that went on to strangle like Geodesic, Cranes, Aftek & Teledata… in Geodesic & Subex there were both FCCB debt overhang + huge amounts due to & from subsidiaries… Subex has cleared the FCCB mess & is planning to set off subsidiaries balances if RBI approves…. my blogposts are not for the purpose of one upmanship or to ridicule… I just put out some fundamentals & risks that I perceive ….. readers can hold a contrary view on the risks…. any downside or upside is for the reader to conclude