This article was orginally posted on 27th November, 2023 and later brought to this platform.

I think one of the most underrated companies in the stock market currently is eMudhra. Let me build a case as to why.

The company is in the business of providing trust in the digital world. This has manifested in various different forms but can broadly be classified between Public and Private. Public trust refers to scenarios where entities need to be authenticated over the internet, while private trust is needed where authentication is required within a private network of devices / servers.

Public Trust Solutions

1. DSC: The Digital Signature Certificate is the oldest solution provided eMudhra where they behave as the Public Certificate Authority providing proof that the person signing the document is indeed the person who they claim to be.

2. SSL: This is very similar for DSC, except while DSCs are made for humans, SSLs are made for websites, servers or machines.

Private Trust Solutions

1. emSigner: This is eMudhra’s paperless transformation solutions where they digitize workflows of an organization along with providing secure digital tools for various approvals. The simplest example would be getting your expense approved by your boss before submitting it to finance for processing.

2. emAS: This is their access management solution also sometimes referred to a single sign on solution. It provides features like multi factor authentication and also allows restrictions to be placed on users basis their role and clearance levels. Think employees not having edit access to attendance records, while HR having it. Or Supply Chain team not having access to Marketing DBs.

3. emCA: If a corporation has a large network of devices and usecases, getting them all certified by a Public CA can be expensive. Instead to ensure sercurity on their private network they may choose to set up a private CA for themselves that will manage the Certification for all devices, services, people within that network. The customer can also use this solution to become a public CA as well!

How does it earn?

The company has various business models running:

1. Public Trust: Made up of SSL and DSC. Sold for a 2 year period (generally) at which point they need be renewed. These are sold via channel partners and also D2C. This is about 33% of the business.

2. Paperless Transformation: Made up of emSigner. This is sold to companies on a license basis (basis number of users) and for a particular set of time (~5 years). There is an additional AMC fees associated with it which is recurring. Also license counts increase as usecases increase within the same organization. This forms 17% of the business.

3. Zero Trust: Made up of emAS, emCA and some other products (e.g. emDiscovery). This is the same as emSigner in terms of business model and forms 50% of the business.

Hence, while 30% of the revenue is still coming from the DSC business, eMudhra has moved considerably away from being only dependent on that and is now more in the space of Zero Trust security which is a much larger global theme being played out. This is a security approach where devices are not trusted even if they are part of the network and everything is authenticated. This has become a preffered approach to mitigate the damage that a malicous actor can do even if they manage to compromise the security and enter the network (e.g. steal a laptop).

Total Addressable Market

1. Public Trust: I am ignoring this because I don’t consider this a major growth area.

2. Paperless Transformation: Generally considered a 8-10 B dollar industry growing rapidly (30%)

3. Zero Trust: is a huge market, but the company has pegged the size for their products at about 15 B dollars.

Geographical Spread

eMudhra began its operations in India but quickly spread its market. We know that 45 to 50% of their business comes from abroad but country wise split has never been shared. It is reasonable to guess that currently major portion of this is coming from the Middle East, with Africa rising fast and their hope is to make US the largest market in the medium to long term.

Basis management commentary, it seems like MEA is a strong region for them and they have been present there for a while. They believe there is a lot more opportunity here to grow. However, nothing beats the scale of America.

They have been trying to make forays into the US for the last few quarters and this has been a learning curve for them. This is not to say that they have not managed anything: Management said that even this year about 60 Cr revenue should come from the US.

If and when they crack the American market, this can accelerate their top line quite significantly.

Right to Win

Their right to win is incredibly simple and powerful:

1. They are cheaper compared to all their western competitors

2. Are willing to work with th customers and finetune their product for them

3. Have stayed in these geographies for years and established credibility

Financial Track Record

The company has grown at 35%+ for the last few years and infact the last 3 quarters has grown at 69%, 53% and 65%. Its profit growth has not kept pace with the top line because I suspect the company has taken a conscious cost to increase BD expenses to scale faster. Their new benchmark is 30% EBITDA margins. In a couple of quarters the baseline will have adjusted and then profit growth will be in line with revenue growth.

The management has given a guidance of 360 Cr topline this year, which implies a 40% growth. This implies the growth will slow down in Q3 and Q4 of this year (compared to Q1 and Q2; still very high in absolute terms).

The company is cash flow positive, no debt, and has an ROE of 22%.

Valuation

The management is confident of giving a 25% growth rate with a optional upside if and when the US market clicks in for them. Thus even if the company grows at 25% the PE should NOT contract. That means we get a 25% IRR. And when the US clicks, we could be in for a wild ride.

Disc:

• This is not investment advice; please do your own research before making any investments
• I am invested in this stock and hence biased