Brightcom Shines: An Investment Story

Brightcom is one of those investments that requires a special mention: I have touched on a few big winners in the US stock Market in my previous blogs but this one tops the list. Its has all the principles that Christopher Mayer and Thomas Phelps have talked about in 100 baggers.

About me:

I started becoming active on Twitter in 2022 to increase my online presence, I want to connect with like minded investors and share ideas about stock markets.

A brief background about me for the folks on twitter especially Brightcom group investors:

I am not from a family who invests in stocks, stock market for my family is like being in a casino. I have been told gold is good, real estate is awesome and cash is king; which usually is the case with most of the Indian middle class population who are currently in their 30s. Since I have been independent and away from my family from early 20s, I had the opportunity to make my own financial choices and be away from old age gyaan.

I have spent years learning personal finance and value investing and was able to develop mindset of delayed gratification and extreme patience. This learning has been put to test a lot of times in my US investments. I believe in building large positions in a select few companies(3 to 5) which are available at a discount price with a possible catalyst in the near future. The end result has been extremely fruitful in last 5 years. Because of my investment successes, I was able to convince one of my family member to open brokerage account in India and hand over their money in my hands to manage.

New to Indian markets:

I started researching Indian stocks, the timing could have not been much better as it was the later half of 2020. I was finding a lot of great opportunities and the portfolio was immediately into positives - some where over a 100 % in few months time. For example: I was following Carerating for a while and found it to be cash rich business with lite capex and it was getting beaten down due to past ratings issues and fines. The new CEO looked promising and he has vision to make it a turnaround story. While I liked the renewed energy from management but the stock kept falling and in a few months it went down from Rs 420 + to Rs 298, I was able to get my holdings at Rs 303.99 which is closer to all time low for the company, currently close to Rs 580. Similarly, Sunteck was beaten down due to Covid but this quality real estate builder was a going to be a covid recovery story, built the position @ Rs 218 currently around Rs 520. (By the way I still hold shares of Carerating and Sunteck in the account).

*CARERATING @ 90%

*SUNTECK @ 138%

As my style involved very little management, meaning I got basket of good positions at a discounted price and then let it ride. Within a year the returns were amazing(180%+), this inspired another family member to open a brokerage and hand over their money to me. This was in mid of 2021, the prices of the position that I was holdings in the other account had already gone up. So I started looking for other opportunities in Indian market, I was looking for something thats cheap and small in size.

First glance at Brightcom:

Brightcom(BCG) came to my notice. Frankly, I just couldn't believe that a company like BCG could be in a single digit. The numbers of the company and stock price didn't make any sense at all. I was looking at intrinsic value of Rs 128 and the price of the stock was Rs 8 or 9. The stand-alone results were ordinary but the business outside India was excellent. The consolidated figure were just too good. Brightcom's market cap when compared to the peers was extremely small but it was doing more business than them consolidated. A company doing more business than any Adtech company in India was trading at PE of 1. It was a no brainer, there wasn't any downside to this stock.

Looking the Management: Suresh Reddy

This is the time I started listening to all the conference call, interviews of Mr Suresh Reddy, Chairman & CEO and also looking at the history/annual reports of the company. Figured that the company has a long history of 23+years, it has changed name multiple times (USAGreetings, Ybrant Digital, Lycos and Brightcom) and most recent one is Brightcom which was changed in 2018. In one of his conference call Mr Suresh explained beautifully the reason for the name change. He is an amazing tech savvy leader who knows what he is talking about. His articles and interviews clearly showed that he has knowledge of the latest happenings around his business. He clearly answered all the questions from investors in layman's term. His conference calls were like a teacher teaching students and once he answers there was hardly any follow ups required, he usually covers everything and keeps it simple. It’s like investors join the call to hang out with him. There were some really tough questions by investors but there was no hesitation in providing clarity. I was extremely impressed by him and the more I listened the more I liked him. Also, there was genuine effort from the management to clear lawsuits, debt and pledged shares.

It was around the time company was paying off the debt it had with Axis bank. I was totally blown by the clarity and confidence with which the company was assuring long term investors(mostly retail) that things are turning around. All the problems the company had earlier are getting sorted. The action of the management was in accordance to what was communicated in the conference calls. Also, there was lot of clarity or material put by the PR team on the turnaround story.

Brightcom's business growth over the last year:

1) Paid down debt and became a debt free company.

2) Promoters shares pledged were being reduced

3) Bonus announcement of (1:4) for the investors

4) The preferential issue allotted to external investors that was announced was revised to be given after the bonus shares are issued(less dilution)

5) Brightcom becomes the Google Multiple Customer Management Partner

6) Outlook numbers for the year 2022 were unbelievable and they beat estimates quarter on quarter

7) Acquisition of Media Mint at around 8 times EBITA. Increased workforce from around 500 to around 2000 and counting.

8) Not interested in paying dividend rather are focused on putting the cash back into the growth

9) Initiate employee stock option program to buy shares in the open market

10) Looking to acquire a high margin audio advertising company in the USA

11) Using effective filtering technologies to increase their bottomline profits

12) Listed as a Fortune India 400 Company

13) Covid accelerated digitalization and also forced people to spend a lot of time online. Brightcom is a big player in digital advertising and is going to benefit immensely in years to come due to this shift.

14) Addition of industry leading talents at executive level to lead future growth initiatives.

What this company has achieved in last two years during difficult Covid times is commendable. They have adapted to the changing dynamics and have utilized the opportunity to accelerate the growth. They are successfully able to educate market about their unrecognized potential value and are able to richly reward the long term investors. Setting big targets and following up with neat execution to achieve them has been their feature.

Free Cash flow:

Most critical point which Mr Suresh has been highlighting over a year and he also repeated in the FY 22 Q3 call.

• When a Adtech/tech company is under 500 million in annual revenue the free cash flow is absorbed into product development, resources and other expenses and cash for growth is limited based on the margins.

• But when a Adtech/tech company crosses over 500 million in annual revenue the free cash flow starts flowing. The resource and product cost are fixed and their margins are already defined. Since brightcom will be crossing 500 million this annaul year they are going to cross the inflection point and would be free cash cow going forward.

• Hence the management is GUNGHO about their outlook. Brightcom has delivered more than what it has been promised over the last year and I don’t see a reason why it wouldn’t achieve more than the future expectations.

What's ahead - Future Plans:

• Emphasis on improving ROE - May be reach 30% at some point in future

• Innovate Products: B local, Brightcom Compass, Brightcom Video Player - Try newer products to gain share

• Synergies between Brightcom and Media Mint - Use tech to enhance products

• Any further dilution may be planned at the subsidiary level and not at the parent level

• Explore AI/ML and IoT business next year

• Metaverse if successful, Brightcom will be there to provide services.

• Strategic use of Free Cash flow

• Increase presence within USA and rest of the world (China).

• Adtech industry to grow 20% and Brightcom might grow even more.

Brightcom's Mispriced Opportunity:

Simply put Indian market punished this great business because of the prior issues related to an old acquisition. Also the market didn't look at the consolidated figures and concentrated on the revenues from the Indian standalone segment. This is a multinational out of India. Management did awesome last year to get recognized and be fairly valued. Looking at the multiples Indian growth techs get the runway still seems long. And growth rate of 20%+ in next 5 years in the AdTech space would help get this company be valued at a better multiple. Note - Competitor in India - Affle is at PE of 99 and in the US - Tradedesk is at PE of 125 while Brightcom is trading at between 20 to 30. Not saying that it's my expectation but at the same time I don't see a reason why it cant be.

Current Thesis:

My bullish thesis remains intact on this company over a long term. My purchase price is average of Rs 18 and Rs 23 for both the accounts. I never felt the desire to sell even a single share, I just closely follow the company updates and try to assess the direction of the growth and all the steps taken by the management. Obviously ASM listing, UC/LC doesn't impact my investing style. And I don't believe timing the market and paying additional taxes on the short term gains is inline with my long term plans. Hence, I am holding the share at even after the multiplefold returns.

*BCG @ 666.00 %

*BCG @ 840.00%

When I may exit the positions :

• I may exit when BCG gets near euphoric valuation, I don't think market is valuing the company in sync with similar companies in the industry yet.

• I may exit when there will be an exciting opportunity that would be more promising than BCG's future returns

• I may exit if I lose confidence in the management

• I may exit anytime for some other unknown reasons:)

It has been a wonderful mind blowing experience last 9 months, following each and every piece of the material available on internet on BCG everyday. Just want to share the Brightcom parabolic story and also document it to capture it as a memory.

Credit to some youtube channels to cover BCG daily -

• Traders Diary

• Research Bhai

• Stock Market Powerhouse

• Apna Stock Market

*Images are taken on 02/02/2022

Disclaimer:

I may have been unknowingly biased in my thesis as I hold investments in the stocks - BCG, CareRating, Sunteck. I currently don't hold positions in Affle or Tradedesk. This is not a stock recommendation. Please don't consider this as investment advice. Do perform your own due diligence before investing. It's just a fascinating investing story that played out beautifully in the portfolios I manage.