First Microcap Crush. E2E Networks.
So, this is quite an under-the-radar company and I am currently investigating it. Not completed my DD for this but have bought some to start off.
I was looking at NSE Emerge companies when I found this. The company is in the business of providing cloud service, specifically Infra As A Service (IaaS) to SMEs. This is obviously a small player with a mcap of ~65 cr.
What really interested me was its past clientelle. Zomato, 1mg, HealthifyMe, and many other unicorns and high profile startups used them in the initial stages of growth. This lends it A LOT of credibility considering the shady stuff going on in the NSE-SM segment.
These startups of course could not continue to use E2E due to their small size. Even though this is the largest listed IaaS provider in India.
The most obvious issue they have is obviously of competition. You have AWS, Google Cloud, DigitalOcean and a plethora of other smaller players aggressively taking market share in India and doing a good job of it. But what gives this company a chance are a few points that I think differentiate it from them:
- It is an Indian company - This has multi-facet implications. The gov's Digital India program and its promotion of SMEs makes this a prime player in the segement. Their USP is pricing. They claim to be cheaper than AWS and back it up with a Cloud Cost Comparison to compare prices with other providers. I have not used their infra so far. Cheap shit always attracts Indian ppl/companies. Further, the gov's 2018 Personal Data Protection Bill when matures and passes (it already is in some industries), will make taking data outside of India more diffcult (impossible??) just like Europe. This company will come in limelight overnight. Then, there is a continous tussle regarding data between larger foreign providers and gov. An Indian Cloud provider would be preferred which is not only in Indian jurisdiction but more like to be amenable to gov requests. This also raises the possibility of the company getting gov as a customer, at least for non-sensitive data. This is in context with the large amounts of data being generated by private and public entities. Check out Gov Data Platform
- They don't do B2C so far. B2C requires substantial marketing and customer support ecosystem and associated prices which causes unit economies being quite difficult. Any compomises to this lead to bad PR. A kid with a 300rs/month server will go on a rant on Twitter when they don't get top class support. So none of that. They only serve B2B. This imo is good.
- Fiancials seem ok so far. They have weaker compliance requirements due to not being listed on the main board, but it looks good so far. Though I am still looking for major red flags.
- Some new features which are industry standard are in the works like a VPC, and IP reservation.
Some cons:
- I found an orange flag in the books. The founder has lend out 2 cr of amount to the company even though the company has reserves and cash balances with banks. The company in return pays a 16% p.a. simple interest to the founder. This imo is not red but an orange flag. It serves as an extra income source for the founder outside of the regular salary. For family businesses and microcaps this is common practise though unethical.
- Extremely small. Can be wiped out with one bad incident.
- All associated risks with Data, Security, Outages and hacks.
- Competition is probably on of the hardest in any digital space with the likes of AWS and Google Cloud who are established players with vitually unlimited resources.
- Large capex whenever you need expansion. Looking at the financials, one can notice they buy computer equipment of 8-10 cr every year with an expected life of just 3 years for the linear depreciation. Their furniture is worth less than what I have in my home!! All money goes to servers and expansion.
- Not a proper con but there is a lot size of 2000 so that's the minimum you can buy atm.
What really gives me some consolence of a company surviving and thriving in a hostile competition environment is the example of Zoho. It is an Indian cloud SaaS provider whose services could be matched to those of Google Suite in a 1:1 relation. They have no VCs or large investors and are organically grown. So it is possible to find your niche and grow in a tough environment. The diificulty is also the capex. SaaS companies can scale quickly to meet demand. IaaS, not so much, this can put constraint on scaling without external cash infusion or massive leverage.
This DD doesn't go in the numbers are I have yet to look on a few more ARs. Will try and see if I can pen something down in a few weeks.
Disclaimer: You have been blessed with a brain and (hopefully) some money. Use them. Don't depend on mine.