Saksoft Q2FY25 Earnings - Revenue growth of 13.1% y-o-y - Should this company be in your watchlist?
Capability driven Acquisitions, Tailwinds from AI and with Sales momentum picking up, let's take a look at what the management had to say about its recent earnings performance
Saksoft, a small-tier IT company focused on niche vertical offerings announced their results on 11th November. Revenue grew by 13.1% y-o-y and PAT rose by 3.5% y-o-y. The results have been tepid, although one should not forget past few quarters have not been good for the IT services industry in general.
The earnings announcement was met with further selloffs in the stock which in itself was not seeing the best of days amongst the correction in Indian Equity markets. Is this company still worth a look? Let’s unfold the Earnings Announcement and try to make sense out of it.
Financial Highlights:
Flat Organic Revenue: Revenue stood at Rs. 215.29 crores for the quarter. This is a 7.1% increase q-o-q from Rs. 201 crores in Q1. However, out of the Rs. 14.29 crores sequential increase, 8 crores came from the acquisition of Augmento in the previous quarter. Therefore, only Rs. 6.29 crores was organic revenue growth from Q1 to Q2. However, the company also indicated that one of their largest customers in the Fintech is undergoing re-organization and revenue has been deferred to H2FY25. Hence, we can expect the Fintech vertical to be posting higher numbers on the back of this deferred revenue.
EBITDA margins at 17.08%: The company reported an EBITDA of 17.08% which is lower than the historical 18% Saksoft has been able to maintain and guided on. The primary reason for the decrease is the wage hike that was awarded to the employees in July. The company has acknowledged that the EBITDA margins should return to normalcy of 18% next quarter. When asked to the management, if there are any possibilities of EBITDA breaching the 18% levels, the company mentioned that it would not be possible in the coming quarters. The company has been able to expand their EBITDA margins in past couple of Financial Years owing to the Rupee depreciation against major currencies like USD, GBP and SGD. However, the depreciation in last couple of quarters has not been significant and hence we are seeing the margin stalling around 18% levels. Also, Saksoft is focusing on growing their accounts significantly and hence are offering their services at a discounted rate to win larger customers. The management is hoping that they will be able to mine these accounts later on at a higher EBITDA margins.
Is the Management still sticking to their Guidance for FY25?
Saksoft Limited’s management remains committed to their ambitious revenue guidance of INR 1,000 crores for FY25, although they acknowledge it will be challenging to achieve. Several factors support this guidance, including increased activity in the sales pipeline driven by recent hires in the US and UK sales teams. While these hires were made earlier in the fiscal year, they are now beginning to have a positive impact, building momentum and optimism for revenue growth in upcoming quarters. The management is also focusing on organic growth as a sustainable strategy, noting that acquisitions are a short-term solution and not their primary approach. They are confident in their existing contracts, which they believe will bring in at least INR 870 crores in revenue, assuming no unforeseen disruptions. This confidence is further supported by Saksoft’s short turnaround time from contract signing to revenue recognition—typically within three weeks—thanks to the company’s niche focus and available resources.
However, challenges remain. The INR 1,000 crore target is ambitious, particularly given current market conditions, and reliance on organic growth can be sensitive to market volatility and competition. Additionally, while management is confident about reaching INR 870 crores, this target could be at risk if there are any unexpected setbacks. Reflecting these risks, Saksoft has revised the lower end of their guidance range to INR 870 crores, indicating a potential 13% downside risk from the original target. Management has not ruled out the possibility of further acquisitions, though any such moves are expected to be small-scale due to financial constraints and are not central to their revenue projections. In conclusion, while Saksoft’s management is committed to the FY25 revenue target, their revised range and focus on organic growth highlight both optimism and caution in the face of potential obstacles. The coming quarters will be key in determining if Saksoft can reach its aspirational goal.
Acquisition of Ceptes Software Private Limited
In September 2024, Saksoft Limited acquired Ceptes Software Private Limited for INR 62 crores, including earnouts, as part of its strategy to enhance service capabilities. Ceptes is Salesforce Summit partner with a revenue base of approximately INR 20 crores and an initial EBITDA margin of 15% (expected to exceed 20% post-integration), adds consulting, digital transformation, and innovative Salesforce solutions to Saksoft’s portfolio.
Strategic Benefits and Growth Potential
This acquisition strengthens Saksoft’s Salesforce capabilities, and gives the company significant opportunity to tap into the entire Salesforce stack. Salesforce is widely used by medium sized enterprises that are the target client audience for Saksoft. Through the acquisition, Saksoft can:
Enhance Existing Client Relationships: Saksoft can now offer a broader array of Salesforce services, creating cross-selling opportunities and strengthening client loyalty.
Broaden Cloud and AI Offerings: The acquisition includes advanced Salesforce solutions, such as Service Cloud, Finance Cloud, and Agentforce- Salesforce’s AI Platform, aligning with Saksoft’s goal of delivering AI-powered analytics and automation to clients.
How’s Saksoft using AI to compete with bigger players?
Saksoft is leveraging AI to enhance its service offerings and gain a competitive advantage over larger players in the digital engineering market. The company recognizes AI's disruptive potential and is actively incorporating it into its operations and solutions.
Enhancing Existing Services with AI
Saksoft primarily focuses on using AI to improve the efficiency and value proposition of its existing services, particularly in digital engineering, which contributes to roughly 50% of its revenue. The company has developed AI-powered frameworks and tools that enable it to deliver services more efficiently and cost-effectively.
Examples of AI-powered tools and their benefits:
SakVerse: An AI-powered test case generation tool that automates the testing process, saving 40% effort compared to manual methods. This allows Saksoft to offer testing services at a significantly lower cost than competitors, making it an attractive option for clients seeking cost savings without compromising quality.
SackFiling: Similar to Microsoft Co-pilot, this tool assists in the software development cycle, likely automating code generation or documentation tasks, leading to faster development times and reduced costs.
Leveraging AI for Competitive Differentiation
The development and implementation of these AI-powered tools provide Saksoft with a distinct advantage over larger competitors. While larger players might also be exploring AI, they face challenges in adopting these technologies due to their size and existing processes.
Saksoft's advantages in the AI landscape:
Agility: As a smaller company, Saksoft can quickly adapt to new technologies and integrate them into its operations, unlike larger companies with more complex structures and legacy systems.
Lower Risk of Cannibalization: Saksoft's AI-powered solutions enable it to enter new markets and offer more competitive pricing without significantly impacting its existing business. Larger companies risk cannibalizing their existing high-margin services by adopting AI-powered solutions that offer lower prices.
Final Thoughts:
The company is currently trading at a 2-year forward P/E of 24.6. I believe this to be a fair valuation given the headwinds that the company is facing. With company aiding its capabilities through acquisitons, we are yet to see organic growth coming in. The company has established sales team and it would take a few more months before we can start seeing the results of it. I believe the company is good enough to be kept a track of and in case there are positive triggers in terms of rising sales momentum, further strategic partnerships with Azure and ServiceNow (management mentioned they are working towards this), and/or AI aiding the expansion of EBITDA margins, then there exists a good reason of initiating a position.