Questions to ask / Post-Conference Update

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  • #12891
    hw_tw
    Registered Boarder

    My views on dividend policy posted in BCG TG channel…the example of ITC or any company saturated in terms of technology and to certain extent consumption too is in similar line of cement company as mentioned by SKR…sharing it over here if someone is still not in that group

    In my view it is fine when a company’s business is kind of saturated and the company has no means to utilise their profits and expand their business. They can distribute dividends and keep investors hooked on to their company shares.

    For example, can ITC generate more business by setting up another Cigarette or an Atta factory…the number of people consuming their products are going to remain same and it is not going to go up just because they have set up a new factory … In this case what will ITC do with their profits … They give dividends to investors so that investors are happy holding the shares even though there is not much growth in the business

    Please note ITC is just a hypothetical example here, I have never tracked this stock and don’t know the growth drivers for this business

    BCG is in Adtech industry with operations across the world. As you can see this industry is huge and is growing at a rapid pace with increased digitisation across the world. There is lot of business out there up for grabs and and every rupee is important for BCG to invest it back in the business which is ultimately going to generate 10x or 20x returns for the investors
    ——–

    Let’s do a rough math on dividend with some assumptions and rounded numbers for simplicity sake

    Let’s say BCG is going to make 1000cr Annual profits and let’s assume it is going to distribute 20% of the profits which is 200cr … With around 100cr shares this will come to 2 rupees per share … At CMP of 94 this is around 2% of your investment

    Instead investing back the same 200cr in the growth they will be able to generate more business.

    Let’s assume they are going to invest back this 200cr in the current business itself …with around 120 days of receivables cycle, in an year they will be rotate this amount 4 times generating 800cr of business in total.

    With net profit margin of 18%, they will be able to get 144cr profit…this is 1.44 EPS and with a conservative PE of 20 this would translate to 29rs addition to per share price

    Decide now whether we want 2rs dividend or a 29rs growth in share price

    #12892
    odysee
    Registered Boarder

    Very well summarised @hw_tw, and your viewpoint on multiple important issues are much appreciated.
    I did note, though, that the acquisition of the DM company cannot be considered a done deal even if the due diligence has been completed. You have rightly pointed out the potential sticking points that may arise, and I would add that the consideration to be paid ( possibly cash plus equity as indicated by SKR in the earlier conference call) could be tricky with the stock price having moved up so significantly from the time the LOI was signed. With the added emphasis on ROE by the management as stressed upon yesterday, I just hope a mutually satisfactory deal can be structured.
    Which leads me to a question I was unable to ask yesterday as I didn’t get the opportunity ( luck of the draw or the * and 1 not being punched smartly enough)- does BCG currently have the resources in manpower and otherwise to sustain very high growth rates, quarter on quarter, without an additional back-end resource being acquired expeditiously? I would imagine that the proposed acquisition presently in very advanced stages was to play an important role in buttressing the back-end as well as the expanded marketing thrust that will play a significant role in the plans as articulated by Mr Reddy.
    Would appreciate your views as well as those of @Logans and other esteemed fellow forum members.

    #12893
    hw_tw
    Registered Boarder

    @odysee – Regarding your question

    Does BCG currently have the resources in manpower and otherwise to sustain very high growth rates, quarter on quarter, without an additional back-end resource being acquired expeditiously

    We can infer this from the following statements from SKR
    1/ Growth projections are without considering any acquisitions

    2/ We are on target as per the projected numbers

    3/ Company is very strong on the SSP (Sell Side Platform) & the company’s core strength globally is on the demand side where it works with Ad agencies & direct advertisers the company tries to grow both together as it aspires to be a full solutions company.

    4/ Regarding Indian acquisition the due diligence is complete (both legal & financial) the acquired company is doing extremely well, now all the legal papers, share purchase agreement (SPA) will be done as its a 2 stage process first is signing & then closing the deal in about 2 months in order to ensure a smooth transition.

    My thoughts basis statements 1 and 2

    – The current quarter will be the biggest one in the history of BCG and it’s going to be the most hectic one. In case of any need of additional bandwidth they would have already added resources to handle it considering that they are well aware of these numbers upfront and the corresponding workload during this period.

    – The acquisition even if it had happened by now, it would have still taken time for the financial closure and movement of resources. Plus, it would take some time for the team to settle down and work in coordination with BCG’s team. So in all probability, they wouldn’t have considered these resources for their current business

    – The higher numbers they are generating now is because of the increased no. of ads. I don’t think this would require any additional bandwidth as these are programmatic ads which are set up once for each campaign.

    Having said this, this again leads to the question. What kind of business which BCG is looking to expand and why they need this additional workforce?

    BCG’s DM related work as well as the team behind it seems to be small. If we look at DM related activities like SEO, SEM, Email marketing etc; (checkout https://www.uplers.com/ as a reference for a typical DM related work), all these activities are coming from Brands (Demand side business) and not from Publishers side (Supply side business). Out of these the Programmatic ads section is the one where the DM agencies would work with companies like BCG to target their ads.

    SKR seems to be looking to expand this portion of the business. This is a bit low margin business and would require lot of people and an established process + tools to scale this and that’s where he would have seen synergy with the target DM company.

    Basis the above statements 3 and 4 from SKR, I feel there is no change in strategy and this seems to be progressing as per the plan.

    Hoping it is just a operational delay and hoping the negotiations go smooth and they quickly sort out things and we get to hear good news as soon as possible.

    #12894
    odysee
    Registered Boarder

    Thank you very much @hw_tw. Makes logical sense.
    My reference to the ‘quarter on quarter’ expected phenomenal growth was in relation to a longer term perspective, bearing in mind the comments made by Mr Reddy on the expectation of a Multi fold increase in the eps by March 2023, despite a substantial increase in the paid up capital of the company.
    I understand that the immediate next 2 quarters are pretty much factored in with the existing resources , and no acquisition related positives have been considered in the projections for March 2022 as well as possibly Quarter 1 of 22-23.
    Nevertheless, the observations made by you are very valid and I’m grateful for your considered response.

    #12895
    Logan
    Registered Boarder

    I’ll just share my opinions on some topics instead of updating everyone about the call. I think @jay69, @hw_tw, @odysee and @admin have covered every topic perfectly.

    For me this was the best conference call by miles. The important takeaway from the call was about 3 things – Growth, RoE and FCF. As I have written many times in the past, for me, before anything else, growth in the business is the most important thing. Companies get premium valuations if there’s growth in the business. You don’t get premium valuations just because you pay dividend or buyback shares. Those will get you a good valuation, but without growth, the valuations won’t sustain for long.

    I have one complaint though but it’s about the callers and not the management or the CEO. I’m not talking about any individual but I’m talking generally. Some questions are very repetitive and people keep asking the same ones in every call. Questions on topics like promoters’ holding, dividends, Lycos, profits, Mutual Funds etc etc. All these are so easy to understand and there’s no need to ask the CEO about them in every conference call. Many people with very important questions will be waiting to ask their queries and because of these repetitive questions they won’t get a chance.

    Promoters’ holding/shareholding pattern is so easy to understand, just by looking at the percentage of the holding (where there’s a decrease) some people come to the conclusion saying that promoters sold their shares etc. Just spending 2 minutes we can get the proper answer. The fact that the CEO has to answer this in every call is little annoying.

    Then the queries on profits/dividends are very irritating for me to listen to. Dividends are a waste of money for a growing company. We don’t see people asking companies like TTD, Magnite, PubMatic etc for dividends. This is not 2012 or 2013 anymore. All the information about the company is available on the net and people should check the industry, peers etc before commenting. Judging companies like BCG on dividend payment is like judging a pure-batsman on how many wickets he takes.

    Ad-tech companies are like proper batsmen, they should be judged based on how many runs they score (growth) and not how many wickets they take (dividends). There’ll be some all-rounders who’ll get both runs (growth) and wickets (dividends) and ad-tech companies won’t be like that. Maybe IT companies are like that and if you want an all-rounder then you’ll have to invest in those companies and not in an ad-tech company like BCG.

    Now the ad-tech industry is like T-20 cricket. All these years it used to be like ODI or like a Test but after the pandemic things have changed. Just like how every ball is important in T-20 cricket, for ad-tech companies every paisa/rupee is very important. Missing one ball can cost you a match and in the ad-tech market missing good opportunities will cost your business a lot. If BCG doesn’t move quickly into the audio ad field then other companies will get into it and they will become leaders there and later it’ll be very hard for BCG to get into.

    Also, who in their right mind will pay more dividends when they have plans to acquire 2 companies? 3 if you count Lycos also. This is so easy to understand which many people don’t get.

    In every conference call you can expect at least one query on dividends and the CEO will give the same answer to all those queries but still people won’t stop asking them. It’s so boring and I’m hoping these type of queries won’t be asked in the next call.

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