[Logan]

1n

Hi everyone, please view the contents in this thread as an article and not as a post. It’s a lengthy article and requires more time to read and analyze. My intention is to make everyone understand the reasons for the fall in share price of BCG. There’s no easy way to explain the reasons in short posts. It has to be explained in detail.

Also this post is for people who analyze looking at the fundamentals. Since I don’t know much about technical analysis, I won’t talk about that here. I wrote this article mainly to analyze the reasons for the fall in the stock price and not about valuation (I will start a separate thread on valuation later).

For more information you can refer other threads like Brief History of Brightcom Group, Suresh Reddy Underrated? Market Sentiment, Brightcom Accounts Receivable, BCG vs TTD Accounts Payable, Brightcom’s Growth etc.

[Logan]

2n

Some of the reasons for the fall in stock price are :

1) Venture Capital and Private Equity Firms

As I mentioned in a separate post (“Brief history of BCG”) VC and PE firms get to buy stakes in the startups for cheap. They look at growth in revenue and EBITDA and decide the valuation. BCG (Ybrant) grew mainly by acquiring other companies and they got the money from these VC and PE firms to buy the companies.

These VCs invest mostly in Private companies and rarely in public companies. This is because there are more rules and regulations if some firms want to invest in Public companies.
They’ll have more control over the prices of private companies and they can demand higher price but in public companies they can buy or sell only at the price the stock is selling for in the market.

“Venture-backed companies are not very profit-oriented. Their view is to get revenue up, achieve capital gains, sell and get out”

These VCs will try to exit when the company they have invested in goes Public. This is the case in all the startups that come to markets especially in tech companies. Recently UBER also had this problem.

These VCs would greater returns for their investments when the company they invested goes public.

Now with BCG (Ybrant) these firms didn’t exit during the reverse merger of Ybrant and LGS Global. They started selling the shares in the market. Most of the selling started in 2013 ( Everyone can check the latest investor presentation posted by the company for details and also the shareholding pattern, archives are available on BSE)

Passport Capital, Eight Capital and Venus Capital sold between 2013-16, Sansar Capital between 2014-17, Everest between 2018-19. Some have sold because they got good returns and some because of other reasons.

Some of these firms started selling the stocks without informing the management. You can check Mr.Reddy talking about this on NDTV Profit and also in conference calls. He mentions that some of these firms sold out because they didn’t see growth in India and not because of the company. Still they should’ve informed the management about the selling so that he could’ve arranged a suitable buyer.

Since most of these stocks came to the market there was an oversupply of shares and the price went down. If more stocks are held by retail investors there won’t be stability in the price and these firms exiting the company made things worse when they all started dumping the shares at the same time.

We should remember that these are VCs, PEs and not mutual funds or other institutional investors, they are very cut throat in business and don’t care about the company or other investors (There are many examples for this and if I start mentioning about that then I should start a new thread about the VCs and PEs).

These exits had a great impact on market sentiment. People without checking the reason and doing enough research on both the company (BCG) and these firms started selling their shares. They thought that something must be wrong with the company so these firms are selling.

What was already a big problem became even worse when retailers started selling the shares. People started blaming the CEO for the fall in prices though he didn’t have much control over the events that happened.

[Logan]

3n

2) Rs.150 cr write off

This incident had a great effect on both the company and the stock price, it still continues to have the same effect. Just when Ybrant came to the market and when they were growing well, they had to write off this amount. Ybrant should’ve been careful about this. When Ybrant wrote off this in 2012-13, the stock price declined from Rs.95 to Rs.2.5 (though the prices were falling before that).

We all should remember that interest rates were very high back then. Mr.Reddy mentioned in a conference call that some of these loans had an interest of 14%. Just when the company came public they wrote off a huge amount. Obviously people will think of it in a negative way and started selling the stock.

But Ybrant’s business was growing back then and their results were very good and the price recovered from Rs.2.5 to above Rs.60.

The loans were labelled as NPAs and Ybrant got bad name because of that and people became more and more negative on Ybrant.

BCG (Ybrant) started paying off these loans from 2013, though it didn’t hurt their digital marketing business, there was a lot of pressure on it’s software business, the software division though was making profits, because of the interest payments all that money went there.

Markets thought if they are making so much profits why not pay off the debt sooner but there are problems to that, there are cash flow issues, receivables and Cross border transaction problems.

( I have mentioned the difficulties of loan payment in a separate post, Suresh Reddy Underrated)

Mr.Reddy could’ve used the money that was spent to loan payments for growth. He could’ve paid dividends but since the amount is very big, he decided to pay off the debt first then concentrate on dividends.

[Logan]

4n

Why did it take so many years to pay off the debt?

The answer is not so simple, we can’t look for answers in a single dimensional way of thinking. In business, there are many events going on with the company, they just can’t look at one issue, they’ll have plenty of other things to focus on. There are other problems like Lycos case with Daum, receivable issues, Lycos LIFE etc. The company also planned to acquire Mysms from TriTelA Gmbh.

People should understand that if they want to get good returns on their investments they have to look at various factors. All these years they complained about not closing off the debt but did/do they consider other issues. If suppose the company wanted to acquire another company would they like to have more cash on hand or not? Would they pay off the debt and miss the opportunity of growing?

The herd cares only about stock price, they should remember that stocks are pieces of a business and not some symbol that they trade. I don’t mind if others trade and sometimes even I do trading, but I have issues with people who don’t understand how the business works and the problems faced by the company. They just complain about the CEO and the management, but do they know how to handle those situations? Do they know how to solve those problems?

Just because the loan isn’t paid off all these years doesn’t mean the profits are fake, like I mentioned there are other factors the CEO has to consider.

[Logan]

5n

3) DAUM Case

Of all the incidents, this had the greatest impact on the stock price. I won’t go deep into the financials as I’ve mentioned about them in a separate thread (Brief history of Brightcom, Suresh Reddy Underrated). I would like to talk about the psychological effects it had on people’s thinking.

Before the deal, Lycos had $ 4.5 million in EBITDA for 9 months so Ybrant valued at 6 times the EBITDA which is $ 36 million (they thought next quarter also Lycos will do $1.5 million so totally EBITDA will be $6 million)

Agreement was over and Ybrant paid them $ 20 million in the first installment. Rest $ 16 million they would pay later. That time DAUM didn’t say anything about the price.

Later on Ybrant grew well and became famous in the Western markets and part of it was because of Lycos. In my opinion, DAUM saw this and became too jealous looking at Ybrant’s growth , Ybrant used Lycos brand well which DAUM couldn’t.

But we should know that people in DAUM are very cunning, and they inflated the EBITDA by $ 4.5 million, that is the total EBITDA they showed was $ 9 million and they wanted Ybrant to pay 6 times that amount which is $ 54 million.

Ybrant and DAUM fought in many courts (Singapore,USA) for many years and finally DAUM won and the court in New York ordered Ybrant to pay the $ 34 million immediately.

[Logan]

6n

Mr.Reddy declared bankruptcy (Chapter 11 in the US) of their subsidiary, Ybrant Media Acquisition,USA (this company was set up only to hold Lycos). There’s a law in the US that says companies filed for bankruptcy(Chapter 11) need not pay the dues immediately. Mr.Reddy did this to take time and to renegotiate with Daum and tried to settle this matter later.

Mr.Reddy, who is very clever did this move to protect other subsidiaries in the group.

Market should have sensed this as a clever move and should have seen the opportunity in the price but instead it took it as a threat and hammered the stock to low levels.

People who believe Market is always right and supreme fail to notice the brilliance of Mr.Reddy here. He declared bankruptcy of a single subsidiary and not the whole group. He not only avoided paying DAUM immediately, he also made sure that the interests of the shareholders were protected. He made sure that Ybrant’s core business i.e. Digital Marketing was not affected by the court order. Could the people who criticize Mr.Reddy’s actions do this? Doesn’t it show his brilliance?

The Market still judges Mr.Reddy negatively by looking at the bankruptcy incident when it should be doing the opposite. People are still worried about DAUM and that is one of the reasons why price is low.

As they say “ Don’t judge a book by it’s cover”. People are still judging Brightcom by looking only at DAUM case. They focus only on the negatives when there are plenty of positive developments happening in the company and also the industry.

[Logan]

7n

4) People don’t understand the business.

When we look at the Indian markets, we don’t have new age technology companies that are public. Brightcom, Affle, Flipkart, Uber, Ola, Google, Facebook etc. are some of the new age companies. So when Brightcom(Ybrant) came to the market, people didn’t understand their business properly, they thought it was an IT company and when Ybrant changed the name to Lycos Internet, people thought that it was a search engine company. Even the media and many websites compare them with IT companies.

Many people comparing BCG to an IT company still don’t believe the profits BCG is making. Why don’t they believe the numbers?
Well, that’s because they think that if any company is making profits then that should be distributed as dividends or used for buybacks. If the company doesn’t pay dividend they think that the profits are fake and the company is fraud. They think 40% of the profits should be given as profits, they don’t understand the difference between profit and cash flow.

They fail to understand that the company needs the profits for growth. IT companies pay dividend but BCG is not an IT company as they believe it to be. IT companies throw off cash but Ad Agencies are not like that, Ad agencies have receivable issues at the beginning. All companies have that issue not only BCG(check Brightcom accounts receivable thread).

[Logan]

8n

There’s a saturation point after which more free cash comes in. According to the CEO, for BCG, it comes after $ 500 million revenue (right now the revenue is $ 375 million). People should understand this.

If people notice properly, all the big tech companies in the world like Google, Amazon, Facebook don’t pay dividends.
Microsoft was founded in 1975 but it started paying dividends only in 2003, almost 30 years later.
Apple was founded in 1976 but it started paying dividends in 2012, after 38 years.

If people judged Microsoft only by dividend then they would’ve missed making 250 times their money i.e. from 1986(IPO) to 2003. From IPO to present, Microsoft has gone up 1,870 times i.e. if Rs.1 was invested in 1986 it would’ve become Rs.1,870 !!!!!

Same with Apple, if people didn’t buy Apple because it didn’t pay dividend would’ve missed making 150 times i.e. from 1980-2012. From IPO to present, Apple has gone up 649 times!!!!!

Amazon has not paid dividend at all but it has gone up 1,434 times i.e. Rs.1 invested in Amazon in 1997 would’ve become Rs.1434 !!!!!

All those who judged these companies by dividends would’ve missed so many great opportunities.

[Logan]

9n

Now, coming to BCG, I would rather want the price to go up many times instead of getting small amounts in dividends.

And I’m not saying BCG will become the next Apple or Microsoft, but it deserves a respectable Market Value not the present MCap of Rs.400 cr.

If BCG resolves it’s receivable issues then it’ll start having more free cash which can be used to acquire more companies or venture into new markets or even pay dividend.

BCG won’t take 20 or 30 years to pay dividend, they may even start paying it after DAUM case closes.

And people who don’t see the merits in Digital/ Online advertising will lose so much if they see only dividend. They should remember this about Brightcom.

“Adtech is what makes of the Internet tick. Ads are the lifeblood of the internet, the source of funding for just about everything you read, watch and hear online. We put the tech in Adtech.”

So as more people use internet, companies like BCG get lots of benefits. We can see that now in India how everyone is investing in tech companies like JIO, Flipkart, Ola etc. It’s not easy to invest in these companies but everyone can invest in BCG and that too when BCG is available at cheap prices.

[Logan]

10n

5) Receivables/Cash Flow

Most of us know the industry that BCG is in, we know that the Ad tech companies have receivable and cash flow issues at the beginning of their journey. But most people especially the people who have herd mentality don’t understand this and these are the ones that compare BCG to IT companies.

Whenever there’s a conference call we can be certain that there will be a question on receivables. People don’t understand that these agencies have to pay publishers every month and the advertisers pay them only after 3 months. If BCG demand the payments to be made sooner they might lose that advertiser. Big companies like Google, Facebook and AOL don’t have this problem because they can afford to lose some advertisers but BCG can’t do the same because they are still growing.

BCG would’ve solved this problem if their share price were higher but that is not the case. That is why they are going with the LOC.

[Logan]

11n

6) Promoters Shares Pledged.

The shares pledged by promoters is very high, till December it was 68% and now it is reduced to 50%, it is still high. When investors ask about this the CEO says it’s because of the bank loans and he doesn’t give detailed answer. I think the promoters have pledged their shares for personal reasons and maybe he doesn’t want to talk more about it.

One interesting thing is Mr.Reddy’s and the other co-founder, Vijay Kancharla’s pledge percentage is less than 50% but some companies that come under promoter group have most of their shares pledged. Redmond Investments which holds 4.88% of the shares have pledged all their shares.

My guess is that Canara Bank still hasn’t removed the pledged shares, SBI also took more time. If they pay off the Axis bank loans then maybe all the pledge on the shares will be removed but I’m not sure on the pledged shares used for personal loans.

[Logan]

12n

7)The CEO and the Management / Corporate Governance.

Though the CEO and the management don’t have control over the day to day price changes, their actions determine the long term changes in the stock price. He has been giving timelines for many events but isn’t executing whatever he says in those timelines. The company won’t respond to investors mail and calls.

The company changed it’s name many times, from Ybrant Digital to Lycos Internet and now to Brightcom Group. This confused many people. Still now, many websites mention Brightcom as LGS Global or Lycos.

*On VCs and PEs.
Mr.Reddy should’ve known better about the VCs and their operations. He should’ve talked to them frequently and stopped them from selling the stocks in open market.

*On Rs.150 cr write off.
Before reverse merger with LGS, Mr.Reddy should’ve been more proactive in LGS business, he should’ve put someone from Ybrant on LGS board.

*On DAUM.
He has mentioned that they should’ve put a cap on Lycos purchase price. He shouldn’t have let DAUM go to the courts and instead should’ve settled it out of the courts earlier (This may be easy said than done). He shouldn’t have dragged it till now and should’ve tried to close the case earlier. He shouldn’t have let DAUM know about the White Oak deal.

*On People not understanding the business.
Nowadays we can see BCG putting up many investor presentations. They are explaining everything in detail and are covering all the topics. In my opinion this is one of the greatest moves that the company has made. But if they had done the same few years back, the price wouldn’t have fallen by this much. People would’ve bought the stocks looking at the future of BCG and the industry it is in and the price would’ve been higher. Though he explained about the industry in detail during the many conference calls, most people don’t attend the calls.

*On Receivables and Cash Flow
Well, Mr.Reddy has tried many options but since the price is low and because DAUM stopped White Oak from making a deal with BCG, we can’t blame him much.

*On Pledged Shares.
The CEO should provide more details on this.

[Logan]

13n

8) Putting it all together, the main reason is “Market Sentiment”.

We all know that Market is not always right and it mostly reacts to news and then take actions. If the news is positive, stocks prices rise and if it’s negative, the price falls.

Now with BCG, so many incidents have happened, both positive and negative. But markets reacted more to the negatives than positives. Markets didn’t care about the growth in the business, if BCG traded in western markets then the value would’ve been very high.

Though some of the negative incidents have high impact, it didn’t change the fundamentals of the company. The company still continues to do well and looks to be prepared well for the future.

[Logan]

14n

How market sentiment affects new investors?
Many new investors buy shares looking at the rise in share price, they think that if they don’t buy now they’ll miss out later (FOMO), then when the price starts falling, they ask old investors for advice and these old investors did the same thing back then that is even they bought looking at the price alone. These old investors who don’t know anything about the company except the price start giving false information and they convince the new investors to sell the shares. They don’t want others to make money on stocks that they sold, they don’t want the price to go up
(think of it as people who don’t want to see their ex happy).

Now these new investors start spreading fake information about the company. The cycle repeats and all these people only see price even though if the business improves. Same is happening with BCG.

We can’t stop this completely but we can try to control it. We should be asking for proofs if they say BCG is a fake company. If they don’t believe the numbers, then we should show them the numbers of BCG’s competitors also.

[Logan]

15n

All the above reasons are factored into the market sentiment. Nowadays the sentiment is changing, people have started noticing BCG’s strengths. The company has also improved it’s communication with the investors.

Brightcom (and its stock) has so many strengths like it’s technology, presence in many countries, 5G future, it’s in a high growth and new age industry, it’s operating margins, net income margins, ROE , ROCE, it’s P/E ratio, Book value, good and honest CEO, it has reputed clients, very well known in USA, Europe and Israel.

We are getting BCG at a great price compared to its present and future value.

As Warren Buffett said “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

With Brightcom, we are getting “a wonderful company at a wonderful price.”

[Logan]

For some reason posts 2n and 3n are not visible. Admin will fix it.

[vsk]

Excellent analysis dear Saul Goodman _/\_

Take a bow!!!!

Many thanks for your efforts in explaining your opinion the whole history in full detail.

I am sure this should help long term investors like me to understand the company better and decide how much intrinsic value this stock has which is not at all visible in the CMP

Your views can be shared across platforms like valuepickr, telegram and whatsapp groups

[sagraa]

Thanks Soul.
You have explained extremely well the true sequence of event.
I have been investing in it from 2013 onwards and know most of the events as you mentioned.
I hope people should go through your posts and try to understand that BCG is a new generation company and CEO is well competent. It’s the market and overreaction which is impacting share price.
Business is growing consistently and would improve further after they receive lone of credit.

[sandyc316]

Thanks for such a great post Saul and taking the time to put it all together.
I agree with your thought on the pledged shares as I too think that some of it is for personal reasons and paying off all bank loans of the company may not necessarily bring it to 0. It should, however, considerably reduce it.
It would be incorrect to view negatively the promoter of a company who is not “extremely rich” – someone who cannot buy more shares of the company at every fall in price or someone who has loans. Once the company starts paying dividends then I’m sure we can see the pledged shares coming down as well.

[admin]

Thanks Saul for this brilliant write-up!

[Author]

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