35
(^) Outlook BUSINESS / (^) 22 December 2017
could change multifold for this solution. Going by the
growing number of registered NBFCs and by the RBI’s
regulatory push for IT automation, estimates indi-
cate that the NBFC segment alone would invest over
$ 2 billion in cloud over the next fi ve years. Add to
this, the growing number of small banks, payment
banks and fi ntech companies (in the digital lending
space) that would ramp up cloud investments signifi -
cantly in the coming years, the market potential is
huge and can be multiple times the current market
cap of the company. With no upfront investment for
cloud solutions and the fl exibility of a phased rollout,
it could make the solution aff ordable for many small
NBFCs which did not have access to high-end solu-
tions such as the FinnOne Neo.
The cloud business’ revenue model is based on sell-
ing licences. Rough estimates indicate that an NBFC
would require one licence for every # 2. 5 crore of lend-
ing book. The company is likely to generate over $ 1
million of cloud business over 4 - 5 years from a lend-
ing book size of # 500 crore that is growing at a rea-
sonable clip. Currently, cloud constitutes less than 5 %
of the company’s overall revenue and is expected to
go up to over 20 % over the next 3 - 4 years. With cloud
emerging as a sweet spot, Nucleus’ quarterly deals
have seen a sharp uptick. Some of the notable names
in the NBFCs that had gone live on Nucleus cloud are
Manappuram Home Finance, Shubham Housing,
Five Star Finance and Finnova Capital. With NBFC
and microfi nance sectors in a growth phase, it will be
only a matter of time before this translates into high-
er growth for the company. The economics of busi-
ness will go from good to great for Nucleus with the
cloud business gaining traction.
The signifi cance of the cloud business has not to be
seen so much from the revenue prism but from a profi t
perspective. While the business is unlikely to be over
20 % of the topline even aft er three to four years, it does
have the potential to more than double the bottomline
for the company over the same period. We expect profi t
to grow at a CAGR of over 25 % during FY 18 - FY 20. We es-
timate a signifi cant increase in free cash fl ow (FCF) dur-
ing this period from the current level of over # 50 crore.
ON CLOUD NINE
We initiated our initial buying at # 60 -plus levels in
2012. We continue to like the stock even aft er it has
made nearly 8 x return at over # 550 -plus levels. The
stock, which, in fact, gained over 55 % in less than
a month, has been partially rerated because of the
recent buyback and the market’s recognition of the
increasing traction in the cloud business. The pro-
moter’s decision not to participate in the buyback,
too, has been taken very positively by the Street as
it refl ects the promoter’s confi dence in the company’s
future. The reason being that the growth in Nucle-
us’ intrinsic value has always outpaced the rise in
its stock price. Adjusted for cash of # 389 crore (as on
September 30 , 2017 ), the business is available at just
over 2 x the sales, while globally such businesses are
valued anywhere between 3 x and 4 x of their sales.
Given the traction in the cloud business and increas-
ing share of domestic business on rising prospects in
the lending space, Nucleus’ FCF is likely to grow mul-
tifold in the coming years. Even on a conservative
growth assumption of over 15 % CAGR in its FCF for
the next fi ve years, based on a discounted cash fl ow
model, the intrinsic value for the business works out
to over # 2 , 500 - 3 , 000 crore. Since Nucleus’ cash-adjust-
ed mcap is only around # 1 , 200 crore, the stock off ers
signifi cant upside for long-term investors despite its
recent stupendous rally. If NBFCs are hot in this bull
market, can a soft ware company that runs their back-
end be far behind? b
The writer and clients of his fi rm have a position in the stock
A cut above the rest
Nucleus return ratios are the best among its peers
RoNW RoCE RoNW# RoCE#
Intellect -5.80 -4.10 -5.80 -4.10
Majesco 6.90 6.00 4.90 5.90
Nucleus Software 12.80 14.30 92.50 93.50
Intellect has positive net debt; #Cash Adjusted FY17 fi gures in % Source: TrustLine Holdings
CY17 RETURN 120%
net profit# 63 cr
ttm p/e (x) 27
roce 14.54%