‘Info Edge’ in Startup Phase
|Market Capitalization: 350 Cr||Current Price: 248 (16 Oct 2020)|
|Stock P/E: 376||Debt to equity: 0|
|Promoter holding: 58.2%||Net Profit Margin: NA|
Overview of the Company
Founded in 2015, Xelpmoc Design and Tech Limited (Xelp) is an end-to-end professional & technology service provider with a keen focus on product development, data science and analytics. Xelp’s core competence lies in building next-generation technology in Artificial Intelligence & Machine Learning Space, with a keen interest in Natural Language Processing & Data Analytics. The company primarily caters to e-commerce, education, transportation & logistics, recruitment, fintech, social networking, among several other industries. Xelp works with governments, businesses, individuals & start-ups and helps them take advantage of their data as Technology Partners & Consultants. Xelp was founded by Sandipan Chattopadhyay, who is the Managing Director and CEO with over 22 years of experience across various technology roles. He is a Bachelor of Statistics from ISI, Calcutta with a PGD in Computer Aided Management from IIM, Calcutta. His previous job includes a stint as CTO of Just Dial Limited. He is a winner of “Red Hat Innovator of the Year” award and has helped technology development of several start-ups and new initiatives at large enterprises such as Tata Motors, Crisil, Standard Chartered Bank etc. Headquartered in Bangalore, the company has offices in 4 locations in India with around 102 employees and 41 clients. Interesting story behind the name – it’s the reverse of COMPLEX – XELPMOC : So the motto is to solve complex problems with innovative solutions.
An Indirect Play to Invest in the Start-up Ecosystem
Xelp is one of the few companies in India that invests in the private equity space to nurture and develop budding ideas in the start-up companies. It has equity stake in various companies at different stage of incubation in the space of Transportation, Voice Technology, HRTech, Social Networking, Digital Advertising, Children’s Lifestyle etc.
As shown in the table below, the fair value of its investments in start-up ventures are valued at INR 34.8 crore as on June 30, 2020. The cost value of these investments was INR 3.6 crore indicating a 10x jump in short span of few years. Although the success rate of investments is low in the startup ecosystem, it nevertheless provides fantastic returns even if only few of the investments click.
Journey of start-ups can be long drawn as it usually takes at least 3 years to firm up the business and almost 7-8 years to capture significant business and become successful. Thus, the benefits usually tend to be back-ended if Xelp can incubate businesses at the early stage and deliver superior value so that the company goes on to capture the mindshare of customers and subsequently lists in the Equity markets. In the meanwhile, subsequent rounds of valuation can increase the fair value of its holdings and prop-up valuation.
Xelp aims to take up equity stake in prospective startups at seed stage in exchange for the tech support and services they provide. This helps it to strike deals at discounted prices and have a greater role to play in the success of the start-up. It plays utmost attention to the quality of the entrepreneur by assessing how the idea can be brought to fruition under Xelp’s guidance.
In total, Xelp has partnered with 15 Start-ups in a range of sectors with high-growth potential. The number of investments has been gradually increasing every year and is set to accelerate further as Xelp has cash and cash equivalent of almost INR 7 crore with zero debt and increasing employee strength.
Going forward, it is looking to target cutting-edge companies in core themes of HEAL (Health, Education, Agriculture, and Livelihood) as these sectors are witnessing huge growth opportunities with lot of technological activity.
Its important to understand the start-ups Xelp is invested in
|Fortigo Network Logistics is freight exchange facilitator for the trucking ecosystem in India. With a highly intuitive user interface, a truck driver, anywhere in India, can find a load and be on his way in just three clicks. Currently, exploring options to enter core sector logistics. Recently got required approvals and licences to operate under core sector which will expand the business considerably. Nandan Nilekani is a co-investor in Fortigo.|
|Mihup is an artificial intelligence (AI) powered mobile assistant for Human-to-Machine, Machine-toMachine, Machine-to-Human, and Human-to-Human interaction. Mihup aspires to be a protocol of conversation and aims to sit between Human or Machine actors, remove personal biases or specific terminologies, and aid communication.|
|Snaphunt matches candidates to prospective employers by leveraging over 20 years of Human Resource expertise, SnapHunt aims to provide an enterprise class recruiting solution that enables candidates to express themselves.|
|Kids Stop Press is India’s first children’s lifestyle website Kids Stop Press (KSP) is India’s first and best children’s lifestyle and parenting website and has its pulse on everything today’s parents want to know.|
|Slate.Ac provides actionable AI inputs to improve capital efficiency by extracting & analysing data throughout the procurement, invoicing, payables and receivables cycle.|
Start-ups Xelp invested in FY2020
Standout company among IT Peers
Xelp differentiates itself from other IT services company as it is trying to grow into a product company with differentiated offerings.
It has two unique product offerings namely ‘DocuX’ and ‘xERP’. ‘DocuX’ is an AI engine powered by Natural Language Processing that uses OCR (Optical Character Recognition) to convert documents into machine readable formats. This product is backed by AI engine which continue to learn and is able to handle more complex cases. Its second product ‘xERP’ is state of the art modular ERP system for restaurants that will help stakeholders by providing them complete visibility into supply and demand thus meeting customer delivery requirements.
Xelp is working on some interesting concepts which could develop into profitable products for the company. It is working on ‘Sensitive Content Detection’ which help entities identify and highlight information that is sensitive in nature. Upon identifying information that is sensitive in nature, the tool will anonymise it to protect and avoid a breach of data. ‘Email Analysis Tool’ that predicts buying pattern, social behaviour, sentiment, job preference and more, by understanding the context from user’s inbox. It is working on other innovative products like ‘Conversational Commerce’ to handle customer queries that learns user preference to sell and promote business through customer interaction and feedback.
Revenue stream in product takes time to mature as product development lifecycle is usually 2-3 years. It involves rigorous testing and trials before being deployed into a full-fledged product. We can see optionality in earnings as products develop and gain traction with clients in the future.
Present in New Age Technologies Witnessing Huge Demand
In February 2019, the Government of India released the National Policy on Sofware Products 2019 to develop India as a sofware product nation. The government has also given a Tax exemption of three years in a block of seven years to start-ups under ‘Startup India’. The government has put in place a liberal system for raising global capital, funding for seed capital and growth.
Xelp recently invested in a Singapore based company called ‘Learning Hats’ which is involved in providing education tools in South East Asia and Africa. It is looking to scale this platform with School Management system, Content development, and Advanced interactive videos.
Xelp is constantly looking to Identify opportunities to optimize business processes and performance with technology and data science. It is strengthening its technological capability matrix in areas of Artificial Intelligence, Machine Learning, and Data Science. It has initiated discussion with enterprises, start-ups, and governments in several countries, especially in the Middle East, North Africa, AsiaPacific and the United States of America which could lead to onboarding of new clients in its platforms. Xelp is also exploring repeat business from enterprise customers and exploring cross-selling to further advance its reach.
- Technology Risk – Rapid technological advances, evolving business models can lead organizations to embrace futuristic technologies and lend existing technology obsolete.
- Attrition Risk – Xelp is a small company with only 102 employees. Any attrition of key personnel can affect the competencies of the company.
- Xelp deals with lot of startups and there is a risk of high percentage of failures in the startup phase of a company.
- Covid-19 led challenges and travel restrictions has led to delay in deploying the funds or identifying suitable investment opportunities in the private equity space.
- Xelp’s product led investments and private equity investments can have long lead times before it turns profitable.
- Any increase in wages of IT Professionals may have negative impact on profit margins and cash flows.
- Xelp has a vision of long-term value addition and realizes that running after short-term profitability will damage its future growth potential. This insightful vision can lead to huge optionality of revenues/profits in the long-term.
- Another competitive advantage of the company is its accessibility to domain experts. Also the culture of the company promotes innovation, entrepreneurship and teamwork.
- The company works on in-demand technologies like Data Science, Artificial Intelligence, and Machine Learning with keen interest in Natural Language Processing & Data Analytics.
- Xelp can acquire stake in promising start-ups at discounted rates as it develops the start-ups by providing its technology and guidance.
Outlook and Valuation
India is the third larger start-up ecosystem with around 9000+ start-ups incepted between 2014-19. Xelp focuses on high-growth sectors and this has led to 10X return on its start-up investments within a short span of 3 years. Thus, Xelp cannot be valued like any conventional company as it invests in start-ups and develops products which have long lead times before it turns profitable for the company. It may be currently valued at around 370+ PE but the company is just turning profitable and posted net profit of INR 1.67 crore in Q1 FY21. Albeit, this was on the back of increased operating margins of 40%+ as Covid-19 related cost savings due to work from home and cost optimization helped the company. However, Xelp believes normalized operating margins to be in the range of 25% and expects to post healthy profits in the current financial year.
Most of its investments have long lead times and hence an investment in this company should be viewed from long-term horizon as it is a bet on the competent management executing successfully and few of its investments in start-ups/products catching the fancy of industry participants. In short, a high-risk high return play in the core technology space.