CG-VAK Software and Exports Ltd – A niche micro cap stock

“Our client retention and client satisfaction levels have been growing steadily. We have received many client appreciation and a significant amount of repeat business. Our clients have appreciated the way the projects are handled post pandemic. Inspite of the disruption, inflation, changes in the geo-political situations in the economies we operate, we have seen a positive growth in our business. In addition to North America, our business and customer base from Europe, Australia and Africa is also expected to grow as planned.”

Management commentary

Stock data

Ticker	531489
Exchange	BSE
Industry	IT – Software

Price Performance:

Last 5 days	+2.69%
YTD	+1.45%
Last 1 year	+22.3%

Company description:

With more than 25 years of experience, CG-VAK Software and Exports Limited is engaged in providing software services. The company’s registered office is in Tamilnadu, India. They are a group of around 300 people thriving on the 3 tenets “IDEATE, INNOVATE, CREATE”. The company has executed 2500+ successful projects and have 1100+ satisfied customers with more than 35 finest technologies deployed.

Solutions Provided:

The company operates in three niches: Product realization, Digital innovation and Technology innovation.

1. Product innovation: This includes product realization, modernization, Mobile and Testing.
2. Digital Innovation: In this subsection, the company develops website portals, Ecommerce sites, social Media handles and UI/UX for its clients.
3. Technology Innovation: Here the company helps its clients integrate Cloud technologies like Microsoft, OpenSource, Mobility, BigData and others.

Revenue mix:

In FY22, the company earned ~99.5% of its revenue from Software services (offshore and onsite services) while Information Technology Enabled Services & Software services(Domestic) accounted for  ~0.5% of its revenue.

Geographical Split:

North America contributed to 85% revenue of the company in FY22 while the rest of the world accounted for 15% of the total revenue.

R&D:

The Company is developing applications engines, reusable codes and libraries as a part of its R&D activities.

Subsidiary:

CGVAK has only one wholly owned subsidiary, CG-VAK Software USA Inc. It has seen an increase in revenue by ~7% in FY22 over the previous financial year. 

Penalty:

The Regional Director (Southern Region), Ministry of Corporate Affairs, Chennai has compounded offenses during the Financial Year 2021-22. The Company had paid a Compounding fees of INR 3.4 lakhs, subsequent of which The Regional Director (Southern Region), Ministry of Corporate Affairs, Chennai had issued orders dated 21.09.2021 and 18.11.2021 directing The Registrar of Companies, Coimbatore, Tamil Nadu to withdraw the prosecutions filed.

Customer concentration:

Two customers contribute 10% or more to the company’s revenue for 2021-22. 

Growth Strategy:

The company is focussing on the out-sourced Product development (OPD) market segment. It is also planning to penetrate into new geographies globally.

Financials:

What we like:    

1. Robust management team with years of experience:

The company is managed by a well-experienced Board of Directors who have vast experience in creating many success stories in varied businesses. They have over 30 years of business experience including 23 years in the IT business, Manufacturing and International trade. The business units are headed by Vice Presidents and Managers who are well-qualified and experienced in their respective fields.

Resource retaining is always a challenge for any IT company. We can witness that this company’s top-level management are all associated with CG-VAK for a long time which is eventually benefiting to company

2. The company is showing growth trajectory adding new clients every quarter:

The company has continuously given dividends since 2012 while the company’s revenue and net profit has grown by a CAGR of 21% and 53% respectively in the last 5 years. The company acquired 45 new customers in FY22 and acquired 15 new customers in Apr-Aug 2022. The repeat business is also good, wherein 90% revenue comes from repeat customers. The contracts are yearly in nature and currently the company is aggressively looking to expand into geographies other than US. 

Factors to consider:

1. The company is very much focused on its offshore clients for its revenue. Any activities like global slowdown in the economy may hamper the sales of the company.  
2. The remuneration of the CEO and his wife is very high. One can witness from the annual report that their salary accounted for 21% of the net profits in FY22.
3.  The company does not have any significant moat as the work done by the company is very common in the industry. The entry barrier is also very low and hence anyone can do the same job if they quote less.