Latent View analytics

Introduction:

Latent View analytics is a company founded in 2006 by Venkat Vishwanathan to provide analytics solutions to business problems. Their entire business comes from the digital side of IT services business (unlike most of the other Indian IT services companies) with almost complete focus on data engineering, analytics and artificial intelligence. 

With offices in India, Europe and USA, they are a global data and analytics company that aims to help organizations interpret data accumulated from sources such as business, operations, social interactions and sensors by using the power of big data through business analytics and the data insights.

They provide digital solution accelerators, big data capabilities, social media predictive analytics and analytics tools to help companies increase revenue generation opportunities, improve efficiency, reduce costs, and increase competitiveness.

Their business can be classified into the following sections:

Consulting services

Consulting services focus on helping organization identify the most relevant trends that are impacting their business, understand the challenges and opportunities presented by those trends and prepare an analytics roadmap for harnessing the power of data and analytics to capitalize on the opportunities using their cross-company experience of working with clients.

Business Analytics and Insights Services

Helps improve business strategies, operations by enabling smart data-driven decisions that lead to a competitive advantage. Business analytics typically comprises the following three problem types:

Descriptive and Diagnostic Analytics

Involves providing insights on past business events using historical data and leveraging visual tools to present findings with additional data exploration capabilities.

Predictive Analytics

Involves use of advance algorithms to predict the future using historical data and trends.

Prescriptive Analytics

Involves leveraging a combination of advanced ML models and complex statistical techniques to support business decision making.

Business Analytics and Insights services segment across these five enterprise functions:

• Finance and Risk Analytics

• Customer Analytics

• Marketing Analytics

• Supply Chain Analytics

• People/ HR Analytics

Data Engineering

Enterprise Data Management (EDM) refers to a set of processes, practices, and activities focused on consolidating data from disparate sources – both internal and external, maintaining accuracy and quality of data, and providing security and governance across the enterprise according to regulatory mandates.

Digital Solutions

Digital solutions and products focusing on building solutions and products for consumption by organizations leveraging the solutions which have been provided to clients in the similar industry space. The focus here is to democratize the solutions created for the industry so that they can be made quickly available to various players within it.

Management summary:

The company has the following strengths if we critically analyze the management:

Institutionalization – Despite the small size of the company, it is already institutionalized with professional CEO, board, top management and other stakeholders. This makes them very sustainable and scale able compared to other peers in the industry

Experienced top management both within the company and outside – Most of the top management has worked in the company for more than 5 years and majority more than 10 years. This implies that the top management has deep experience of both the company as well as the industry landscape as it evolved over the last few years.

Very strong academic pedigree – Most of the top management are IIM graduates/ BITs/ IIT graduates

Below is a more detailed summary of the top management:

Name	Designation	Time with Latentview (Yrs)	Work experience (Yrs)	Previous companies	Academic background
Rajan Sethuraman	CEO	6	18	Accenture/ KPMG/ NIIT	IIMC / BITS
Venkat Vishwanathan	Founder and Chairman	16	27	Cognizant/ ICRA/ Essar	IIMC/ IITM
Pramad Jandhyala	Co-founder	16	27	ICRA, IBM, Ford, kotak	IIMC/ BITS
Ramesh Hariharan	Head, Innovation and Technology	16	20	Cognizant/ Oracle	IIMC/ IITM
Rajan Venkateswaran	CFO	1	19	PWC, Deloitte, Mphasis, FSS, Ashok Leyland	CA – 2004
Krishnan Venkata	Chief Client officer	14	18	Cognizant, CS Solutions	B Tech – Kerela, IIMC
Shalabh	Chief Growth officer	11	16	Citi	IIML, NIT Durgapur
Annu Baral	Head of consulting	1	23	McKinsey, Merliytics, Wells Fargo, StanC	California Coast university
Anup Gunaseelan	Delivery head	8	8		IIMB
Boobesh Ramadurai	Business Head	9	16	Latentview, GE, Encore	BE – Anna university
Ganesh Sankaralingam	Delivery head	9	21	NA
Mahadevan Balakrishnan	Business Head – Europe	14	17	Countrywide, Docomo Labs	Madras University, Illinois institute of technology
Parijat Banerjee	Business head	1	21	TCS, CAI, GE, Genpact (15 years)	IISc
Shiraz Ritwik	Business Head	1	17	3 years in Fractal, Opera, Everest, Sapient	IIMA
Sunder Balakrishnan	Director – Supply chain practice	4 months	11	Director supply chain analytics, Course5i, hansa cequity, PWC, Infosys,	Goa institute of management
Suvra Basu	Business head	2	26	Adriotec, Axiscades, TCS	IIT Kharagpur
Tarunya Suresh	Head – Marketing and Demand generation	7	15	Cognizant	Asian college of Journalism

Industry Overview

Global IT spend is expected to grow at 8.5% CAGR from 2020 to 2024 within which the digital space is going to expand at a whopping 16%. The double digit CAGR growth in its parent industry (IT industry) augers really well for the company.

The market for data analytics is expected to grow at an even faster rate of 18% till 2024 from current $174 B to $333B. Effectively within the IT space, data analytics will be the fastest growing vertical. Even if the company grows in line with industry average; we can expect 18% growth for the company.

Within the data analytics space, the business can be further divided into Enterprise data management, Descriptive and diagnostic analytics, predictive analytics and prescriptive analytics. Within this space Enterprise data management is expected to grow at 10%, Descriptive and diagnostic analytics at 18.5%, predictive analytics at 25% and prescriptive analytics at 31%.

Some of the key insights on competition based on our primary research and discussion with industry leaders are as follows:

Company Business:

In a very short summary, LatentView provides mathematics and data driven solutions to their client’s business problems. They employ mathematics, statistics and data to enable their clients take better decisions. Some of their key services are focused on data management and engineering, data analytics, prescriptive and predictive analytics, business problem identification and insight generation.

Aligned to the above industry overview, the company focuses mainly on the digital side of IT services business, particularly in the analytics space. The company has built a niche for itself in this space by providing analytics solutions, data engineering solutions, consulting and products to enable their clients to make data based decisions.

The company has 4 revenue streams : Consulting, Data engineering, business analytics and data solutios.

The data engineering constitutes 20% of the revenues, consulting is 15% and business analytics and insight services constitute 60% of the revenues.

The industries they cater to are technology, CPG and retail, BFSI and Industrials. Most of their revenues (93%) come from North America and 4% from India.

Their resources are trained to handle everything on data analytics space from basic data cleaning and manipulation to analytics and dashboarding to generating insights and predicting outcomes.

They have strategic relationships with most data analytic product companies like Google, Microsoft, Amazon and are one of the biggest vendors for quite a few of them.

The typical deal size is 5 to 7 million USD with the project size which engages less than 100 employees. They have specialists from business, management, subject matter experts, data scientists, statisticians working together to provide maths based solutions to their clients business problems.

Their key focus is managed solutions and services and they strongly refrain from provide time and material-based solutions due to lack of scalability and margins. They have very strong focus on knowledge and talent management and tend to invest heavily on upskilling employees.

As we can see from the revenue share of Latent view, they are engaged more on the descriptive and diagnostic analytics, predictive and prescriptive analytics which are slated to grow at 19%, 25% and 31% respectively. Given this huge growth potential of the underlying industry, we may not be surprised if Latent view is able to generate >20% revenue growths for a few years.

Some of the key insights on competition based on our primary research and discussion with industry leaders are as follows:

Competition:

The primary competition for the company comes from various data analytics companies as well as IT companies. Data analytics companies include Tiger analytics, Mu sigma, Fractal, Palantir. Latent view mainly provides customized solutions and not products to their clients and hence deployment and insight generation as well as customization & domain expertise is a very important element of their business solution just like other IT service providers within India.

Though IT services companies do not directly compete in this space, they do get some indirect competition. The reason why I say this is that IT services companies as well as IT consulting companies are rapidly building capabilities in the data analytics space since this industry has huge growth potential (as we can see from our previous section). Most of the IT services vendors have small teams already catering to these client requirements. What separates Latent View from these (as per our ground level research) is that Latent view is able to understand the business needs and connect more with business level decision makers and understand their requirements whereas IT services companies look at solutions more from the IT standpoint. This line will slowly keep blurring though over a period.

Some of the key insights on competition based on our primary research and discussion with industry leaders are as follows:

Macro Structure:

The primary revenues for Latent View come from North America. Any major events within that country may impact its revenues. Some of the major macro events which may impact the business of the company are as follows:

Spending reduction – As we know IT is a discretionary spend and within that space data analytics is even more discretionary. As we saw during covid early phase, Data analytics spend was reduced considerably to save on costs. So, any major spending reduction drivers may impact the company. As of now, I think the risk is low as most companies (post covid) have increased their focus on improving their technology capabilities and data insight generation abilities and this trend may stay for some time as most reports suggest less than 20% large enterprises have embarked on this journey as of now.

Earnings reduction of the target companies – I think this is a major factor and needs to be monitored closely. Reduction in earnings of the target companies can lead to spending reductions from them which can significantly impact their data analytics spend.

Advancement in technology – I think this is well covered within Latent view due to heavy focus on learning and skill upgradation (see our insights from ground research for more details).

Visa restrictions / Policy impacts – As a significant revenue comes from US, any major policy changes on offshoring may impact the company adversely.

Overall, the macro structure looks quite conducive for Latent view until now unless some significant disruptions happen.

SWOT analysis:

Strengths:

Growing industry – expecting growth rates of more than 20% in the focused area of the business

Small size and hence ability to quickly adapt and expand – Currently approx. 850 employees

Strong learning and training culture – from ground level research

A client list any company would be proud to show off – With some of the best global technology and fortune 500 companies already on their client list, Latent view has more than something going right for it already

Strong promoter group and top management – Our ground research has yielded extremely positive reinforcements on the promoter group, their vision, commitment and their ability to take the company forward.

More revenue per employee as data analytics work is considered more high end than traditional IT and hence the revenue per hour for a resource as well project value are much higher.

Weakness:

Lack of Indian clients – As we know, most of the top clients that Latent view are marquee technology companies who already would have strong in-house data analytics capabilities and hence would not be giving their best projects to latent view. This would reduce their exposure to best-in-class data analytics works. More Indian clients would have helped them bridge the gap as these companies would have given them high end data analytics and prescriptive analytics work.

Our ground level research suggests that though latent view is good in data analytics, it is still not considered as the best in class both from an employee and client perspective. There are a lot more other companies (which I cannot name here) which are considered to be better at insight building that latent view.

Lack of strong products – Latent view being a service company does not have a strong product team. Our ground research suggests that their ability to build products is a bit hampered due to the inherent services culture within the organization.

Opportunities:

Focus on consulting space – With increased focus on consulting which currently constitutes 15% of the revenue and recruiting senior members from top consulting companies, the company will be able to penetrate the market better by providing high end solutions.

Increased focus on products building – The company needs to focus on building platforms which can be quickly customized and implemented for clients. Something similar to what Infosys did with Finacle.

With the IPO money, the company can achieve some major acquisitions which will help the company expand both geographically and technologically (the 2 main growth levers for any IT company).

Threats:

There will be significant competition from both the IT services companies as well as new age start-ups. The competition not only will be on client acquisition but also for talent acquisition which will affect both the revenues as well as profitability of the company.

Overall, the current capabilities, management, culture and industry landscape look favorable with significant threat from competition which may affect revenue growth and profitability.

Financials:

Following is the P/L Statement for the company for the last 5 years:

Type – In Rs. Million	31-03-2017	31-03-2018	31-03-2019	31-03-2020	31-03-2021
Net Sales	2,382	2,351	2,889	3,104	3,059
Growth	37%	-1%	23%	7%	-1%
Personnel Exp.	1,335	1,262	1,720	1,980	1,772
% of Sales	56%	54%	60%	64%	58%
Total Cost	1,727	1,605	2,216	2,299	2,013
EBITDA	655	746	673	804	1,046
EBITDA Margin	27%	32%	23%	26%	34%
Other Income	9	53	107	193	208
Depreciation	29	27	28	67	69
Interest	9	8	1	29	26
Tax	53	98	122	173	245
PAT	572	666	629	728	915
PAT Margin	24%	28%	22%	23%	30%
Growth	129%	16%	-6%	16%	26%

Last quarter results:

DESCRIPTION	Dec-21	Dec-20
Total Revenue from Operations	107.75	78.25
Other Income	5.31	3.92
Total Income	113.07	82.17
Total Expenditure	78.30	53.56
Profit before Exceptional Items, Share of Associates and tax	34.77	28.61
EBITDA Margin	31%	35%
Exceptional Items	-22.62
Profit before Share of Associates and tax	57.39	28.61
Profit before tax	57.39	28.61
Tax	7.46	6.16
Profit after tax	49.92	22.45

Sales growth:

Annual Sales have increased from 174 Cr in 2016 to 306 Cr in 2021. This indicates a growth of 12% CAGR over the past 5 years. The growth of the last 2 years was extremely muted at 3% mainly due to reduced discretionary spend on IT and focus on profitability which made latent view let go some of their less profitable clients. The growth is generally consistent historically. We expect 22% growth in this year (should see this number in quarterly reports and if any disappointment here may significantly affect valuations). For the last quarter (Dec’21), the sales growth was 30% and hence it was healthy.

EBITDA and margin:

EBITDA has increased at 25% CAGR both from 2016 to 2021 as well as last 2 years. This is in line with management focus of reducing non profitable business as we saw through the revenue decline. So despite the revenue decline, the EBITDA is increasing, indicating higher EBITDA margin which has increased from 19% in 2016 to 34% in 2021. Note that this increase is also due to saving on travel costs and other overheads. Our estimate suggests this can be a 2% to 3% margin expansion. So overall as things get normal, EBITDA may come down to 30% levels. Note that this is much higher than the best performing IT services company currently in terms of EBITDA margin (TCS at 25%-27%) whereas most midcap IT companies operate at less than 20%.

Revenue and margin story:

This company looks in a very promising space where it has growth drivers higher than midcap IT services companies and the margins better than the best large cap IT services company. However, one important word of caution is that the last 2 years growth was very muted and hence quarterly growth numbers are very significant validation which is required for the above story. We must be able to see quarterly growths around 6% to 8% to be able to feel comfortable about the above story and if that happens, the company would have a very promising future.

ROE: Reduced from 40% to 24%  from FY16 to FY21. FY21 ROE is 24%. ROE has been constantly above 20% over the past 5 years.

ROCE: Reduced from 41% to29%  from FY16 to FY21. FY20 ROCE is 29%. ROCE has been constantly above 25% over the past 5 years.  

Debt and coverage:

There is negligible debt.

Profitability drivers:

Like most IT services companies, the primary driver for the company is the number of data analytics resource they have. Though the company takes a lot of managed services as well as projects rather than time and material projects, number of employees would be a significant driver to the overall revenue growth story of the company.

With the strong supply constraints on the resources, the company may lose some EBITDA margin going forward. We still believe that the EBITDA margins will stay higher than the large cap IT peers (and hence most of the midcap IT peers as well).

The next big lever for growth and profitability would be their foray into Products/ consulting. Seeing the consulting and solutions revenue closely should be able to give us that picture over a period. The IPO money will probably be used for inorganic growth as well as suggested by their RHP.

Operating leverage:

There will be significant operating leverage created as the company grows in size and the resources are more efficiently utilized right from support functions to training and development.

Shareholding:

Promoters hold 78-80% stake pre ipo and will hold 67-68% stake post IPO. There is little stake sale from the promoters which is very positive.

EPS and Dividend History:

Earnings per share after IPO issuance: Rs. 5.29 in 2021. Dividend Yield : 0%

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