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My Best Pick
22 December 2017 / Outlook BUSINESSR
emember the childhood science ex-
periment of burning paper with a
magnifying glass. It was fun cre-
ating fi re without matches. It was,
of course, no wizardry. It was all about focusing the
sunlight using magnifying glass. Focus is a power-
ful trait and together with specialisation, it can cre-
ate extraordinary and durable competitive edge for
businesses. Durable competitive advantage or moat,
as it is called, can help create superior economics in
businesses, meaning high pricing power, sticky and
predictable revenue streams with fabulous free cash
fl ows. Such businesses usually come with superior
margin profi le and high return metrics measured
by return on equity (ROE) and return on capital em-
ployed (ROCE). They don’t guzzle capital to fund the
growth because of free cash fl ows, and, usually, de-
pend less on debt to fuel their growth.NICHE LEADERSHIP
Nucleus Soft ware is one such fascinating company
that has built an extraordinary moat by specialising
in a much-diff erentiated product space of loan orig-
ination and lending. Within its fl agship award-win-
ning FinnOne Neo platform, Nucleus has built the
next generation lending suite to shape the future of
lending across retail, corporate and Islamic sectors
for banks, non-banking fi nance companies (NBFCs)
and fi nancial services companies. Its lending suite
runs the back-end of almost all leading banks and
NBFCs in the country. Be it HDFC bank or Bajaj Fi-
nance, they call Nucleus for their lending solutions.
It has to its credit, the covetous Global No. 1 lend-
ing product award by IBS Publishing (UK) for seven
consecutive years. Not a small feat for a homegrown
company to achieve this at a global stage with the
who’s who as competition.
Not very oft en, one comes across a great business
at a great price. It is a rare thing in the investment
world. But, a myopic market can tend to be inexplica-
ble at times. It can misprice a magnifi cent business to
maniacally low levels. Nucleus was one such hidden
gem that was mispriced not too long ago. Though thestock has been partially rerated, it still off ers reason-
able upside for patient investors on rising prospects
for its cloud off erings.LEAN PATCH
It was not without reason that Nucleus was out
of favour. The company went through (is still go-
ing through to some extent) a very sluggish phase
of growth for a protracted period since 2011. Sales
growth was fl attish at 6. 1 % over the fi ve-year peri-
od between FY 13 and FY 17. More importantly, the
domestic business was lacklustre with its share lan-
guishing below 17 % of the overall revenues in this pe-
riod, with the rest coming from exports. The compa-
ny used this slow phase to invest ahead in the product
cycle. Challenging as it may be, Nucleus went in for a
complete recoding of its lending platform FinnOne to
come out with an all-new cloud-compatible market-
beating FinnOne Neo suite. This new version created
huge upgrade opportunities, besides opening up the
untapped NBFC market, for its competitive cloud of-
fering. Huge investments have gone into revamping
its products over the past few years and so is the case
with investments on the sales engine. The company
invested over # 110 crore during FY 12 - FY 16 to ramp up
its lending platform. The R&D investments for FY 12
and FY 13 was over 15 % of revenues and came down
gradually to 7 % in FY 16. With the product and sales
investment phase behind, pay-off time is not far away.SILVER LINING
With its flagship solution making a mark in the
cloud, it could potentially change the entire business
landscape for the company. The addressable marketHuge investments have gone into
revamping products over the
past few years. Nucleus invested
over #110 crore during FY12-16
to ramp up its lending platformNote: Market related data as on December 1, 2017; Financials for FY17;
Consolidated fi nancials considered wherever applicable
Data: Ace Equitynet sales# 372 cr
stock price# 565 M-CAP #1 , 640cr
ROE 12.86%