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Over the past forty years, air travel has During early 2017, Warburg Pincus, a business.

s, a business. The same has averaged around

expanded ten-fold and air cargo fourteen- global private equity firm acquired Accelya 45% over the past ten years, and 68% over
fold, compared to a three to four-fold rise Holding Luxembourg S.A. from Chequers the past five.
in world GDP. Yet over this period, airlines Capital and through this, a controlling
have only been able to generate sufficient interest in the Accelya group of companies. Given that the business continues to
revenues and profit to pay their suppliers Notably, Warburg is also the majority generate more cash than it consumes,
and service their debt. There has been shareholder of Mercator, which is a global AKSL is retaining a small part of its
nothing left to pay investors for providing provider of product-enabled solutions to incremental profits while giving away a
equity capital to the airline industry. the travel and transportation industry. large portion to shareholders as dividends
Accelya and Mercator will now operate (dividend yield stands at 3.6%). The return
under a single brand i.e., Accelya. The on what has been reinvested has been
combined group has revenues of $200+ great. The business is not asset heavy, and
million and over 400 customers, including thus does not require heavy/constant
250 airline customers. capital investment. Depreciation has
approximated capital expenditures over
Coming back to AKSL, its expertise spans the past decade. The combination of the
the following areas of an airlines companys high margins (net margin has
technology requirements Revenue averaged 25% over past five years) and low
Accounting, Audit & Revenue Recovery, requirements for capital investment
Credit Card Management, Miscellaneous results in significant annual cash flow.
Billing, Finance & Accounting Processes,
and Decision Support & Analytics. The
Strong Cash Flows (Rs M)
company is especially strong in the 1,400
Over the years, one of the key initiatives the Revenue Accounting space where it serves Net Profit Free Cash Flow
airline industry has taken towards around 13 airline companies and holds a 1,050

improving profitability has been to 6.5% market share.

outsource most non-core processes like
aircraft maintenance, repair and overhaul AKSLs revenue accounting product is 350
providers, catering, ground handling, and called Revera. It works on a pay-per-use
technology. In fact, such has been the scale model, which enables airlines to have a low -
capex and variable costs. At the same time, FY11 FY12 FY13 FY14 FY15 FY16 FY17
or outsourcing that investors have earned
excess profits i.e., a higher return than this model ensures the company annuity
they would have got by investing revenue streams resulting in revenue AKSLs competitive advantage lies in the
elsewhere, in these outsourced processes. visibility. With most airlines plagued with fact that a software solution that is
huge fixed costs, it is imperative for them integrated across and deep into the
The highest returns in the air transport to take decisions with regards to their systems of a company creates switching
supply chain are earned in the distribution capital and operating expenditure, and a costs in the long run. In addition, if the
sectors. Computer Reservation System high level of agility to overcome these vendor is doing a good job and is staying up
(CRS) services provided by the Global obstacles. This is where the opportunity to date on technological advancements,
Distribution Services, which is a network lies for AKSL, which is a known brand in carriers would have little incentive to
operated by a company that enables the third party airline revenue change to another vendor and risk
automated transactions between travel accounting space, through its Revera disruptions that could be very costly to the
service providers, mainly airlines, hotels platform. AKSL also has a cost business and to their own customers.
and car rental companies, and travel management solution called FinesseCost.
agencies, earn an average return on capital As for key risks, the big one is technology
of 20%, double their 10-11% cost of capital. As far as financial performance is obsolescence. While the existence of very
concerned, AKSL has done well on both the few players that service the space that
It is no surprise that CRS has seen some sales and net profit growth over the years, AKSL does talks about the competency the
high-niche, tech-oriented businesses that with these having grown at average annual company possesses, it still needs to remain
have built solid competitive advantages rates of 13% and 20% respectively over the on top of advancements, especially in the
over the years. The industry is consolidated past eight years. Growth over the past five airline revenue accounting space. Another
among three big players Amadeus, Sabre, years has been decent too, at 11% and 17% key risk is that of losing a big customer.
and Travelport which also provide respectively. While the industry trends are suggesting
various technology solutions to the airlines otherwise, it may happen that a big airline
industry. Then there are third party players With the airline industry witnessing rising and AKSLs customer decides to bring the
like NIIT Technologies and Accelya Kale, passenger volumes, carriers would have to system in-house and hence not renew the
the company Ive analysed in this report. continue to improve their technological contract with the company.
systems, including revenue accounting.
Accelya Kale Solutions Ltd (AKSL) is a This could create a good growth The stock currently trades at around Rs
leading solutions provider to the airline opportunity for AKSL. Not just growth, 1,430, which is 23 times its trailing twelve-
and travel industry. It was earlier called being in the software products industry months earnings (earnings yield of 4.3%).
Kale Consultants, but changed its name to that has a high operating leverage enable Please do proper homework and ensure
the current one post its acquisition by AKSLs profits to grow at a faster rate than sufficient margin of safety before making
Spain based Accelya Holdings in 2010. revenue after initial product development any investment decision.
costs are recovered. AKSLs is a high ROE

Statutory Warning: This is NOT an investment advice to buy or sell shares. Make your own decision. I do not own the stock, but my analysis may be biased, and wrong.
I, Vishal Khandelwal, am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).