18 November 2024

About the Company

Nucleus Sofware Exports Ltd. is a software product company that provides lending and transaction banking products to global financial leaders. Nucleus Software delivers disruptive Fintech solutions to 200+ Banks and Financial institutions across 50 countries supporting Retail, Corporate & SME Finance, Islamic Finance, Automotive Finance, Captive Automotive Finance, Cash Management, Mobile & Internet Banking, Transaction Banking, and more. The company facilitates over 26 million transactions daily through the globally integrated transaction banking plaƞorm. The lending platform manages US $500 billion of loans in India alone, and over US $700 billion of loans globally other than India, while enabling 500,000+ users to log in daily. The Flagship Products FinnOne Neo® and FinnAxia® are backed by 3 decades of BFSI domain expertise and an inbuilt AI-powered plaƞorm to realize the digital transformation goals of FIs worldwide.

The major business segment the company has is as follows:

• Product
• Services

Investment Rationale:

• The company is strategically well-positioned to expand in global markets.
• With a strong order book and a portfolio of marquee clients, the company is poised for sustainable growth in the coming years.
• Its core focus on cost optimization, increasing utilization rates, and investing in new product innovation will drive significant incremental growth in the future.

History of the Company:

•  The company started initially developing software for one of the leading banks for online ATM operations in the year 1986.
• The company launched its first product “LeaseWare” in the lending space in the year 1993 where it was deployed in Indonesia for both lease and loan functions.
• In the year 1999, the company adopted new technologies and transitioned into application to applet based for web experience
• In 2000 they registered the trademark “FinnOne”, from 2000-12 they strongly developed multiple products and were able to scale their services across 12 countries
• In 2014, they launched two flagship products “FinnOne Neo” and “FinnAxia”.
• In 2018, the company introduced Real-time Payment Fraud Detection using AI.

Business Segments:

Product 

This segment contributes nearly 87% of the total revenue from the Product Segment

FinnOne Neo®

• A digital lending platform which was built on an advanced technology framework to:
  • Streamline lending operations.
  • Enhance customer experiences.
  • Drive business growth.

FinnAxia®

• An integrated global transaction banking suite.
• 
• Key functionalities:
  • Cash management.
  • Trade finance.
  • Liquidity management.
  • Other transaction banking activities.

PaySe™

• The world’s first online and offline digital payment solution.
• Aims to democratize money through:
  • Seamless and convenient digital transactions (online and offline).
  • Financial inclusion for individuals and businesses.

Nucleus Software Services

This segment currently contributes 14% of the total revenue as of FY24

• A comprehensive suite of services designed for financial institutions:
  • Facilitates digital transformation journeys.
  • Maintains optimal technology infrastructure.
• Key benefits:
  • Seamless customer experiences.
  • Enhanced operational and cost efficiencies.
  • Actionable insights to support strategic decision-making.

Geographical Classification

The majority of the Income comes from India which contributed 57% of the total revenue in FY24, the Middle East contributed 13% of the overall revenue, 12% from South East Asia (Vietnam, Philippines, Singapore), and 18% from the other countries in FY24.

Management

• The company’s board is led by Mr. Siddhartha Mahavir Acharya  (Chairman & Non-Executive Director) who has served IAS for over 35 years, after retirement he has been the CEO of a leading education trust and Independent Director of Bharat Electronics Ltd.
• The company’s management is led by the (Founder & MD) Mr. Vishnu R Dusad, he completed his Bachelor’s Degree in Technology from the Indian Institute of Technology (IIT), Delhi, and his experience encompasses areas of software development, creation of strategic alliances, business development and strategic planning.
• Mr. Parag Bhise, (Executive Director & CEO) of the company, has been associated with the company since 1998 and was CEO of the company in 2021, where has strong experience in IT Infrastructure development, and business development across 26 years of experience
• The promoter currently has a 73.59% stake in the business, which is reasonable for the size of the business
• The company board comprises Experienced Board Members who are qualified Chartered Accountants and have extensive experience in the BFSI sector, Lawyers, and other professionals who ensure the company’s strong board diversity and people qualified to give strategic inputs to grow the entity.

Deep-Dive on the Investment Rationale

The company is strategically well-positioned to expand in global markets.

The company has strategically positioned itself for growth in global markets, with export revenue contributing over 40% of its total revenue. Its strong presence in the Middle East, driven by its specialized Islamic banking offerings, provides a significant growth opportunity. This market is poised for exponential expansion, fueled by robust economic growth and increasing financing activities in the region.

By broadening its offerings and aligning with stricter regulatory requirements, the company is well-positioned to capitalize on this growth, which is projected to occur at a CAGR of over 15% over the next three years. This expansion is expected to enhance margins and drive strong revenue growth, solidifying the company’s position as a key player in the global fintech landscape..

With a strong order book and a portfolio of marquee clients, the company is poised for sustainable growth in the coming years.

The company’s current order book position stands at ₹813.4 crores as of Q1FY25, comprising ₹752.2 crores from the product business and ₹61.2 crores from the projects and services segment. This marks a significant improvement compared to Q4FY19, when the order book was ₹375.3 crores, including ₹328.0 crores from the product business and ₹47.3 crores from projects and services. This growth reflects a strong annualized increase of 16.73% over five years, highlighting the company’s ability to expand its order pipeline consistently. Revenue growth post-COVID has also remained robust, in the range of 16-17%, further underscoring the company’s resilience and market adaptability.

With marquee clients such as TATA Capital, Emirates NBD, ICICI Bank, and HDFC Bank, the company has demonstrated its ability to secure high-profile partnerships. As regulatory requirements grow stricter and banks increasingly prioritize customer experience, investment in technology has become essential. The company’s sustained growth serves as a testament to its ability to address these evolving needs effectively.

Furthermore, the Indian fintech industry, valued at $584 billion in 2022, is expected to double within the next 2-3 years. With a strong focus on digital transformation and payment solutions, the company is well-positioned to capitalize on this exponential growth, paving the way for sustained and enhanced performance in the coming years.

Its core focus on cost optimization, increasing utilization rates, and investing in new product innovation will drive significant incremental growth in the future.

The company has recently adopted the “Hoshin Kanri” strategy, a lean management approach traditionally used in manufacturing to ensure high-quality products are delivered at optimal costs. By applying this methodology to its services business, the company aims to improve utilization rates while maintaining lower fixed costs. This initiative is designed to provide stability in earnings growth and minimize earnings surprises, although the company has not disclosed specific metrics to track its progress. Effective implementation of this strategy will be crucial, especially as the company transitions into a commoditized business environment where fintech competitors target a limited number of banks with increasingly similar product offerings.

This competitive landscape has contributed to margin contraction, despite the company’s investments in cost-cutting initiatives and innovation. Through Hoshin Kanri, the company seeks to enhance operational efficiency and ensure timely client service, thereby sustaining growth and reducing earnings cyclicality. Successfully navigating this transition will position the company to achieve long-term stability and profitability in a challenging and crowded market.

Risk/Threats

High Competitive Intensity

• Significant competition from in-house tech teams at banks and specialized software firms like Intellect Design Arena.
• Competitors with stronger management and greater scale make securing incremental order growth increasingly difficult.

Technological and Cybersecurity Risks

• Vulnerable to cybersecurity breaches that could result in the loss of intellectual property or confidential client data.
• The company faced a major cybersecurity incident in FY21 and is still recovering from its impact.
• Such risks can deter growth prospects and contribute to margin contraction.

Revenue Concentration

• The top five clients now account for 28-29% of total revenue, up from 21-22% in previous years.
• Increased dependency on key clients heightens exposure to revenue loss if any major client exits.

Sluggish Revenue Growth and Economic Cyclicality

• Operating in the B2B space, the company has experienced slow revenue growth and remains exposed to economic cycles.
• It is developing new technologies, some of which are undergoing the patenting process, which may help address this issue in the future.

Poor Capital Allocation

• Despite the booming fintech market, the company holds over ₹656 crore in cash, which accounts for more than 50% of its total assets.
• Most of this cash is invested in fixed deposits, reflecting a conservative approach that limits growth potential.

Regulatory Risks

• Servicing the financial services sector exposes the company to stringent regulations.
• Ensuring compliance with evolving regulatory frameworks is critical to avoid disruptions in software implementation and service delivery.
• Failure to adapt could severely impact operations and growth prospects

Valuation

As of November 18, the company’s market capitalization stands at ₹3,052 crore, trading at a TTM P/E of 19.5, a Price-to-Sales ratio of 3.76, and a PEG ratio of 1.05. These metrics suggest a reasonable valuation compared to peers in the software industry. However, the company is currently grappling with subdued demand and a broader slowdown in the software sector, leading to stagnating revenue growth and margin contraction. Despite these challenges, it is well-positioned to benefit from India’s fintech boom. Unlike most software firms reliant on Western markets, the company generates a majority of its revenue domestically and has a strong foothold in the Middle East, particularly with its Islamic Banking solutions. This niche focus provides a significant growth lever as it caters to a rapidly expanding market in countries like the UAE, Oman, Qatar, and Bahrain.

That being said, the company faces notable risks. Its core focus on the NBFC sector and rising dependence on a few key clients increase its vulnerability to regulatory and technological disruptions. Additionally, the management’s conservative approach to capital allocation, with substantial cash reserves parked in fixed-income securities rather than being deployed for growth, raises concerns about missed opportunities in a favorable industry environment. While the company offers a unique proxy to participate in the growth of financial services, driven by increasing tech expenditure across banks. A sharper focus on diversification and improved capital utilization will be essential for sustained growth and profitability.