Business Analysis 21: Fidel Softech Ltd
Globally, language localization business is an $80 bn opportunity which is growing at 8-9% CAGR whereas Indian market is growing faster at 23% CAGR according to various reports
I studied an interesting business after its result declaration. The company delivered a fantastic set of numbers. And that caught my eyes in this economic turmoil period.
The name of the company is Fidel Softech. It's a language service company along with IT consulting business mix. It's an SME company. Some of the companies in the SME segment have corrected a lot.
Though the whole segment is still richly valued, you may find some of the companies growing at a faster clip and trading at a reasonable valuation.
Fidel Softech offers several services including localization engineering, language technology, translation services, software development, digital transformative services, infra and cloud support, global capability services, data analytics support, Fintech solution, Bilingual staffing, and other consulting services. So they have many businesses in the whole IT pack but mainly they are language localization tech company.
Majority of their revenue, around 69% comes from Localization business and the rest 31% comes from IT & Consulting. There are around 300 employees working globally. In addition, geographical mix includes 88.35% from export and the rest 11.65% from domestic.
Their partnership relationship with E2E network, Cisco and others reiterates their commitment to their business. Also, a long held relationship with Japanese companies could see more traction in the coming years. In the beginning of FY25, they set a target of 8-10% topline growth every quarter. It seems like they achieved it.
Globally, language localization business is an $80 bn opportunity which is growing at 8-9% CAGR whereas Indian market is growing faster at 23% CAGR according to various reports. They want to become the world's best LangTech services company. This vision led to establishment of an office in the USA. Soon, they will start to take off.
Several global companies are doing millions of dollars in business like TransPerfect, Lionbridge, Language Line Solutions, etc. In their IPO draft in 2022, they set an ambition target of 5x growth in 5 yrs that means 30-40% CAGR by FY27. As the industry is shaping further, it seems like tailwinds are there and they are likely to achieve the milestone or break it if they execute well.
Even if they deliver 25% growth over the next 3 years, they will deliver 108 cr topline with 17 cr net profit.
Current market cap - 180 cr
PE - 20
So, the business is trading around 10 PE considering 3 yrs of numbers. It's really cheap, right being an IT company? Most of the IT companies trade at 20-25 multiples. Comparing such multiples, Fidel is truly cheap. Now, the question is, can they really grow from here on? We need to check their performance every quarter, every year. It's all about execution.
There are several tailwinds.
1. Globalization of e-Commerce
2. Focus on language accessibility and healthcare services
3. Increased demand for multilingual customer support
4. Govt initiatives promoting multilingual communication
5. Rising need for audio-visual content translation
6. Emergence of multilingual virtual assistants
7. Localization efforts within the gaming industry
Last but most important is the problems in the business they're doing.
1. Translation and localization industry is extremely competitive. There's intense competition. The industry is still fragmented.
2. There are rapid technological changes
3. Regulatory challenges across different markets
4. Top 10 clients contribute 80% of total revenue
5. Economic instability could affect client budget and spending on LangTech services as you are seeing in the IT industry
I always say that investing based on just mere cash flow numbers is just a stupid idea. There are multiple things to watch out.
Thanks for reading
Take care
Rabi
Disclaimer: I'm not SEBI registered. This content is for educational purposes only. Do your own diligence.