Business Analysis 9: Orient Technologies Ltd
Today we'll study Orient Technologies. The stock has already run up a lot since its recent IPO. Let's see what the future unfolds and calculate the valuation thereafter.
Terms like AI, Data Center, EV sound adventurous, right? Excitement is already reflecting on the stock prices also. If we want to touch any of the scrips, we feel the heat of excitement.
But not every stock is on fire. There comes a good stock picker. Today we'll study Orient Technologies. The stock has already run up a lot since its recent IPO. Let's see what the future unfolds and calculate the valuation thereafter.
They have 3 business segments. As of H1 FY25,
1. IT Infrastructure products & solutions - 63%
2. IT enabled services - 16%
3. Cloud and Data management services - 21%
As you see, majority of their revenue comes from IT infrastructure products & solutions, followed by Cloud and data management services and IT enabled services.
They cater to several categories such as Mid market - 53.89% + BFSI - 19.62% + ITeS - 9.17% + Govt & PSU - 8.15% + Communication - 6.36% + Healthcare & Pharma - 2.01% + Manufacturing - 0.80%
Total order book stands at 165.51 cr as of Sept 2024, most of which will be billed in H2 FY25. They want to capitalize on the growth opportunity of DaaS, cybersecurity, cloud and management, robotic automation and digital transformation going forward. Data center will contribute 25% of the overall revenue. Also Cloud and data management services will see increase in their share of revenue. Share of Cybersecurity is less than 10% of the total revenue now which will surely go up in future.
Order pipeline is huge, be it current or multi year, expected to be closed by Q4 FY25 and Q1 FY26. The company expects double digit margin soon and the future growth trajectory is set. They target to achieve 30-35% CAGR in topline whereas EBITDA will be in the range of 12-13% in the next years.
Aa you check their earnings, most of their verticals are doing fantastic. Only end user computing are seeing low margins because the business is very competitive. So they are focusing more on cloud and data management and IT enabled services though they're not shutting down the segment.
There's a good opportunity to cross sell their services depending on the customer demand. Most of their customers, around 80-90% stay with them for long. Customer concentration is also less risky because their top 10 customers contributes around 25% of their overall revenue.
Partnering with Amazon Web Services shows their competencies. Only Hitachi and Orient are doing the partnership right now.
Let's understand the addressable opportunity where they are playing in.
Indian IT industry valued at $246 bn. Information taken from Orient Technologies DRHP.
Segmentation
IT services - $129 bn (52.4%)
IT enabled services - $45 bn (18.2%)
Software products and ER & D - $54 bn (21.9%)
Hardware - $18 bn (7.31%)
Domestic IT service industry valued around 156500-157500 cr in FY24 and 187500-192500 cr in FY27 growing at 6.5-7.5% CAGR.
Indian IT Hardware equipment industry valued at 379500 cr in FY23 and 545000-570000 cr in FY28 growing at 7.5-8.5% CAGR.
Indian ITeS market valued at $48-50 bn in FY24 and $57-62 bn in FY27 growing at 6-8% CAGR.
Indian IT Hardware equipment and mobile phone leasing industry valued at 33600 cr in FY23 and 54000-57000 cr in FY28 growing at 10-11% CAGR.
Indian data center industry to see 45000 cr of capex over FY24-26 comprising land+building - 32% and power units, cooling systems and racks - 68%.
Indian data center industry valued at 11000-11400 cr in FY24 and 24000-28000 cr in FY27 growing at 30-35% CAGR.
Indian public cloud services industry valued at 67000-70000 cr in FY24 and 125000-145000 cr in FY27 growing at 22-28% CAGR.
Global cloud market expected to grow from $660 bn in FY23 to $1.35-$1.45 trn by 2027 growing at 19-21% CAGR.
Global IT professional services industry valued at $870 bn in 2023 and $1-1.1 trn in 2026 growing at 6.5-8.5% CAGR.
Indian cybersecurity market by revenue expected to be valued around $3.30 bn in 2025 and $5.29 bn by 2029 growing at 12.52% CAGR. (Statista)
Global cybersecurity market expected to be valued at $203 bn in 2025 and $271.90 bn by 2029 growing at 7.58% CAGR. (Statista)
As you see, there's certainly a big opportunity for the company. All the big players such as Google, Amazon, Microsoft Oracle are heavily investing in data center and cloud services industry.
Let's come to the ultimate part.
Valuation
As per company guidance, if I take the lower number (30% for topline and 12% for EBITDA) for safe assumption, the topline comes around 1300 cr with an EBITDA of 156 cr by FY27. Current market cap - 2385 cr, debt - 8 cr and cash - 109 cr. Current EV is - 2284 cr and EBITDA - 57 cr. So current EV/EBITDA is around 40 as FY24. EV/EBITDA would be around 14 today in FY27 value. Looks cheap? Wait, let's check their peers.
As per their IPO draft, they mentioned HCL Tech, Tech Mahindra, Wipro, Dynacons, Allied Digital, Dev Information technology as their competitors. We will compare with their similar level players, not with the big buddies.
Dynacons is trading at 2x revenue, 15x book and 20x EV/EBITDA
Dev Info is trading at 3x revenue, 6x book, and 16x EV/EBITDA
Allied Digital is trading at 1.5x revenue, 2x book and 12x EV/EBITDA
Orient Technologies is trading at 3-4x revenue, 8x book and 40x EV/EBITDA
So even if I price in the future today, there's little upside for this particular counter. The stock has already run up a lot. However, it's no doubt a good business with well experienced management, clean balance sheet and bright future.
If the price comes down with around 30% fall, that might be a good buying opportunity. Either there has to be sudden bump up in the earnings to push the stock price further upside or the price has to come down. Keep tracking their earnings because q-o-q may not give good numbers but y-o-y they are well poised.
Thanks for reading
Take care
Rabi
Disclaimer: I'm not SEBI registered. This content is for educational purposes only. Do your own diligence.