“On a Robust Path to Turnaround with Strong Growth in Aviation and Payroll Segments”

About the Company

Ramco Systems Ltd. is an enterprise software product! platform provider with its multi-tenant cloud and mobile-based enterprise software, successfully providing these services for over 25 years. Over the years, Ramco has maintained a consistent track record of serving 1000+ customers globally with 2 million+ users and delivering value in Global Payroll, Aviation Aerospace & Defense, and ERP. Ramco’s key differentiator is its innovative product development approach through its revolutionary enterprise application assembly and delivery platform. On the innovation front, Ramco is leveraging cutting-edge technologies around Artificial Intelligence, Machine Learning, RPA, and Blockchain, amongst others, to help organizations embrace digital transformation.

Key Segments for the Company

•  Global Payroll
•  Aviation
•  ERP & Logistics

Investment Rationale:

• The company is strategically positioned for a turnaround, with marquee partnerships with global consulting firms driving a strong recovery in Q2FY25.
• Strong relationships with marquee clients worldwide and a growing order book ensure sustained growth.
• The company is well-prepared to capture the global MRO and Payroll markets, focusing on building a robust product business backed by significant R&D investments.

Business Segments:

Global Payroll & HR

Global Payroll & HR is the one of key growth segments for the company that is driving the company, the company has to grow the company have a strategic partnership with Delloite, BDO, and Oracle. Core Operational s The total revenue contribution as of H1FY25 is around 39-40%

Aviation

The Aviation Segment is where the company is into the MRO (Maintenance, Repair & Operations), where the company offers end-to-end tech solutions from Engineering and Supply Chain the Back Office solutions such as Accounting & HR where they serve top airlines, third-party MROs, helicopter operators, defense organizations, and urban air mobility companies, globally. The company over the years has been able to get strong orders from clients such as Korea Air, Etihad Engineering, etc. This segment contributes nearly 30 to 35% of the overall revenue of the firm

ERP

ERP Segment where the company specializes in two core segments: the cement industry and next is maintenance services providers such as facility management, and equipment rental, the company has a strong marquee clientele where they’re group company “The Ramco Cements” is one of the major clients for the company, they do have a strong presence globally, especially in the Middle East Markets, this one of the segments the company is looking to leverage by adding AI/ML. The company as of now contributes nearly 25% of the overall revenues for the firm.

Geographical Classification

The majority of the Income comes from India which contributes 60% of the total revenue in FY24, UAE Contributes 25% of the overall revenue, and 15% from Singapore in FY24.

Management

• The company’s management is led by Mr. P.R. Venkatarama Raja (Chairman) who has been leading the management from inception
• Mr. Sundar, he has been CEO till recently when had stepped down from recently where the son of the Chairman, Mr. Abhinav Raja was promoted from Whole Time Director to Managing Director of the company
• The promoter currently has a 55% stake in the business, which is reasonable for the size of the business, the company has also been a key investor for the preferential issue of 150 crores raised from external investors, ensuring the strong credibility the management has on the business.
• The company board members are well-experienced 

Deep-Dive on the Investment Rationale

The company is strategically positioned for a turnaround, with a strong recovery in Q2FY25 by capital infusion.

In September 2023, the company faced substantial challenges, reporting significant losses amounting to ₹145 crore, primarily driven by higher write-offs during the quarter. However, the situation began to improve in Q3FY24, as the company embarked on a structured turnaround strategy that led to a steady reduction in losses. The company had achieved EBITDA positivity by Q4FY24, marking a critical milestone in its recovery journey. Management has expressed confidence that this positive trajectory will continue, projecting full profitability by FY25.

A pivotal element in this turnaround was a capital infusion of ₹160 crore, contributed by the Promoter and marquee investors such as Atyant Capital and Vanderbilt University, one of the largest endowment funds managing funds over US$ 8 billion based in the United States. These funds were strategically deployed, with approximately ₹130 crore utilized by the end of FY24 to strengthen the company’s financial position and operational capabilities.

By Q2FY25, the company had successfully become debt-free. This strong capitalization ensured the company was well-equipped to pursue its next phase of growth, targeting new opportunities and consolidating its market position. This recovery demonstrates not only the resilience of the company but also the effectiveness of its long-term strategy and investor support.

Strong relationships with marquee clients worldwide and a growing order book ensure sustained growth.

The company over the years has been strongly investing in client relationships with a focus on increasing its growth in the current existing geography rather than expanding into multiple markets, this was the blunder the management of the company made which led to the downfall, and the company has been the focus, the company as of H1FY25 has an unexecuted order book of more than US$ 180 Million which is expected to be executed in the next 3 years which would ensure the company can have strong growth in revenues and earnings, the company has with the strong focus on transitioning from a Licensing model to Saas Subscription Model ensures the company has steady recurring revenue for the company, as of FY24 out of total revenue of 526 crores, 320 crores is recurring revenue which both through the AMC (Annual Maintenance Contract/ Subscription Model, moving away fixed price contract which impacts their costing and profitability, and with the focus in ensuring getting high order value contract in the coming years.

The company is well-prepared to capture the global MRO and Payroll markets, focusing on building a robust product business backed by significant R&D investments.

The company’s primary focus on achieving a strong turnaround is centered on enhancing its product offerings in the payroll market. A key development is its new software, “Payce,” which has received a strong response globally. Designed as a SaaS solution for HR and payroll management, Payce aims to significantly reduce payroll processing lead time from months to weeks, thereby enhancing organizational productivity. Revenue generation from this software is expected to commence in H2FY25, marking a critical milestone in the company’s growth trajectory.

In the MRO market, the company has secured marquee clients such as Korean Air, one of the leading airlines globally. The contract, valued at over US$10 million, spans multiple years, underscoring the company’s ability to attract high-profile customers. Despite earnings pressures in FY22 and FY23, the company has consistently invested in R&D and technology, reflecting its commitment to transitioning into a product-driven business.

These investments are expected to yield results starting H2FY25, with the launch of Payce and other MRO-focused software solutions. Together, these initiatives are anticipated to drive robust revenue and profitability growth in the coming years.

Risk/Threats

Higher Working Capital Days:  As the company is in the B2B space, in the IT Space, the biggest working capital requirement is the Receivable days which are nearly 66 days as of FY24, it has sequentially come down from 115 days at its peak in FY22, which is a significant improvement with a strategic turnaround the company is now at, but this is again the risk which led the company to take multiple write-offs due to non-repayment of customer which constraint the cashflows and profitability as was the case the company faced post-COVID.

Forex Risk: Another Risk the company is facing is that of the foreign exchange risk, where more than 75% of the total revenue is made in foreign currency, hence hedging the currency is crucial to ensure the smooth running of operations without impacting the revenue for the company

Competitive Intensity: 

As the company is in the ERP segment, the Payroll segment and Aviation segment are very competitively intensive markets, especially in the ERP and Payroll where the company has very competitive intensity with less possibility of increasing prices which leads to margin contraction, the company intensively invested in R&D with nearly 30-40% of revenue invested in R&D and strategic partnerships with consulting firms to ensure the pricing in line with the growth, hence its very crucial to invest in R&D to stay in line with the market.

Very High CFO to PAT Conversion: The reason the company had a very high CFO (Cash Flow from Operation) to PAT conversion was that the 5-year PAT was (456) Cr whereas the CFO for the company is 451 Cr, there is a very high difference this is primarily due very high write-off of receivables and had lead to higher losses as write off, which is a non-cash expense by which it didn’t affect operating cash flow, hence investors need to be careful on the write-off the company, the pace of write off has decreased in the current quarter of Q2FY25, which is a good sign but its crucial to track.

Valuation

As of January 13, the company’s market capitalization stands at ₹1,370 crore. Despite being currently loss-making, its valuation through the Price-to-Sales (P/S) ratio of 2.5 appears reasonable compared to the industry range of 5-6 times. The company is on track to achieve profitability by FY25, with consistent quarter-on-quarter improvements in reducing losses and nearing completion of receivables write-offs. Additionally, the successful launch of new products is expected to drive strong revenue growth, particularly in HR & Payroll and Maintenance, Repair, and Overhaul (MRO) segments.

The company is transitioning from an IT services model to a product-focused approach, enhancing scalability and market differentiation. Collaborations with reputed firms such as BDO and Deloitte in the HR & Payroll segment are boosting credibility. Additionally, efforts to reduce Days Sales Outstanding (DSO) are strengthening cash flows, laying a solid foundation for future growth. The company’s ability to offer end-to-end solutions positions it strongly to capture market share in growing niches, such as MRO, while benefiting from broader industry tailwinds in IT products and SaaS solutions.

Investors should note the higher working capital requirements typical of the B2B business model, particularly in managing receivables. The SaaS market for HR & Payroll is competitive, requiring the company to continually innovate and deliver efficiently. In the MRO segment, while opportunities exist, unlisted players currently dominate the Aviation and Defense sub-segment, posing a challenge. Furthermore, with significant revenue coming from international markets, forex exposure remains a critical risk.

With its focus on profitability, strong product pipeline, and strategic industry partnerships, the company is well-positioned for sustainable growth. However, careful monitoring of receivables, competitive dynamics, and forex exposure is essential. Investors should weigh these risks against the company’s growth potential in assessing its long-term prospects.