Best Artificial Intelligence Stock: Kellton Tech or Saksoft?

"This machine has a 93% chance of shutting down in the next 20 days."

If you own a manufacturing entity, this isn't what you want to hear.

Unplanned machine shutdowns cost businesses millions of dollars. Not to mention delays in delivery to their clients. It's bad for their reputation.

But today, AI tells you when your machine could shut down and also tells you why.

From quality control, machine performance to answering customer queries, AI has become an invaluable tool for businesses of all sizes and industries.

Actually, scratch that. It's not invaluable... it's non-negotiable.

However, businesses can't just jump into building their own AI systems. It requires a full-fledged team of experts, money, and know how.

Fortunately, IT service companies already have the infrastructure and the expertise to help develop and integrate AI systems in other non-tech businesses.

We're going to explore two such smallcap AI companies - Kellton Tech and Saksoft - and their performance across the board.

Let's get started...

Business Overview

Kellton Tech is an IT service provider in the business of digital transformation. Among their fleet of services are Generative AI and Conversational AI.

Around 80% of its business revenue come from the US, making the US market a massive dependency for the business.

They service companies ranging from startups to Fortune 500 and include businesses in verticals like:

• Information Service and Technology
• Healthcare and Life Sciences
• Retail
• BFSI

Saksoft offers bouquet of digital transformation services. Unlike Kellton, it has positioned itself a little differently.

Saksoft doesn't serve a whole plethora of companies and verticals. Instead, it serves Small and Medium Enterprises (SME) (US$ 0.5 million + and US$ 1 million+ companies) primarily in the fintech, utilities and telecom, public sector, retail & healthcare, and transportation & logistics verticals.

Both these companies primarily offer AI services to their customers. However, Kellton seeks to be the first in emerging technologies and provides their services to a plethora of customers.

Saksoft on the other hand stays on top of emerging technologies and quickly integrates them into their service portfolio. But they only provide these services to a well-defined niche.

So, which one should you pay attention to? Let's find out.

Revenue Growth

Revenue growth is the foundation of all businesses.

Let's look at how Kellton's sales growth compares to Saksoft's.

Kellton Tech Vs Saksoft - Sales Growth

	Sales Compounded Annual Growth Rate (CAGR)
	3 years	5 years	10 years
Kellton Tech	6%	3%	37%
Saksoft	23%	18%	15%

Data Source: Equitymaster

The company's sales have grown at a compounded annual growth rate (CAGR) of 3% in the past five years, while the same comes to 18% for Saksoft.

The primary reason for Kellton's struggle in this area has been that 80% of their revenues come from the US. The economic slowdown that US has been facing in recent years has led to hiring freeze by many of Kellton's customers.

But you may wonder, why hasn't that affected Saksoft? Afterall, they also have a big exposure to the US markets.

Correct.

However, unlike Kellton, only 47% of their revenues come from the US. Plus, since Saksoft operates within a particular niche, they've gained domain ownership. Their motto is inch-wide mile deep, i.e., do a few things but do them really well and focus only on those areas.

This ideology and focus on niche has led to their record performance in financial year 2023 with a 38.5% growth in revenue against 8.9% in Kellton's case.

In fact, Saksoft has successfully migrated three of their US$ 0.5M+ customers to US$ 1M+ revenue category.

Kellton on the other hand is currently focused on growing their sales team to improve their revenue.

Profitability

Like revenue, Kellton's profitability is unfavourable. Its profit has grown at a CAGR of negative 4.7% in the past five years.

In FY23, the company's earnings before interest tax depreciation and amortization (EBITDA) fell to Rs 93 billion (bn) against Rs 105 (bn) in FY22.

Increase in costs (especially salaries) and inability to increase the bill rate have been the two primaries behind this poor performance.

In a nutshell, their bill rates are not increasing as fast as their costs.

On the other hand, Saksoft has shown a profitability CAGR of 12.9% in the past five years.

In FY23, the company booked an EBITDA of Rs 108 bn against Rs 79 bn in FY22.

Kellton Vs Saksoft Sales Profitability

	Sales Compounded Annual Growth Rate (CAGR)
	3 years	5 years	10 years
Kellton Tech	-14%	-8%	31%
Saksoft	29%	31%	22%

Data Source: Equitymaster

One of the reasons for Saksoft's positive profitability is its ability to cross sell and up selling to its current customers. This allows them to earn more from their current customers even during unfavourable economic periods when acquiring new customers become challenging.

Additionally, delivering tangible results to its customers and under-promising and over-delivering has allowed them to build long term partnerships which add to their profitability very well.

Dividend

Which investor doesn't love a fat dividend showing up on their bank account every year?

Any healthy company with good profitability loves to reward shareholders with dividends.

However, it doesn't pay out its entire profit as dividends... only a small portion of it. The rest is reinvested into their business.

Kellton for example reinvests all of its annual profits into its business. That's why we don't see any dividend payouts from them.

On the other hand, Saksoft has been paying decent dividends. Let's take a look at the numbers.

Saksoft Dividend Ratios (2018-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Dividend per share	Rs 0.40	Rs 0.45	Rs 0.50	Rs 0.60	Rs 0.70
Dividend Payout Ratio (%)	1%	1.20%	1.10%	0.90%	8.60%
Average Dividend Yield (%)	1.40%	3.30%	1.40%	0.70%	0.50%

Data Source: Equitymaster

As you can see, Saksoft has consistently paid out dividends with a decent payout of 8.6% in FY23

Debt-To-Equity Ratio

Debt could allow a company to grow faster. However, too much debt makes the company a risky investment, especially when profitability isn't very strong.

This is the case with Kellton. Let's look at the numbers.

Kellton Vs Saksoft - Debt-to-Equity Ratio

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Kellton Tech	0.19	0.24	0.23	0.26	0.22
Saksoft	0.43	0.23	0.16	0	0

Data Source: Equitymaster

While their debt to equity ratio have been stable over the past 5 years, the company's debt burden has been continuously rising year on year. Its current debt to equity ratio stands at 0.22 for FY23.

Kellton Vs Saksoft - Total Debt

	2018-19	2019-20	2020-21	2021-22	2022-23
Kellton Tech	Rs in billion
- Long Term	36	29	23	13	43
- Short Term	69	67	65	92	93
Saksoft
- Long Term	32	25	20	4	0
- Short Term	7	0.85	0	0.16	0

Data Source: Equitymaster

On the other hand, Saksoft has shown a consistent reduction in its debt and became debt free in FY23.

Return on Capital Employed (ROCE)

Is a company using its capital optimally? Return on Capital Employed (ROCE) gives you the answer.

Kellton Vs Saksoft Return on Capital Employed (ROCE)

	2018-19	2019-20	2020-21	2021-22	2022-23
Kellton Tech	28%	21%	18%	17%	14%
Saksoft	28%	26%	23%	26%	23%

Data Source: Equitymaster

As seen in the tables above, Kellton's profitability has been steadily falling while Saksoft's profitability has been consistent despite global economic deterrents.

For FY23, Kellton generated a ROCE of 14% against Saksoft's 28%.

Working Capital Days

Working capital days tell you how many days it takes for the company to turn its working capital into revenue.

Naturally, a higher ratio is a cause of worry because it indicates inefficiencies in the business.

Kellton Vs Saksoft Working Capital Days

	2018-19	2019-20	2020-21	2021-22	2022-23	5-Year Average
Kellton Tech	86	115	129	162	168	132
Saksoft	38	36	18	27	20	28

Data Source: Equitymaster

Kellton's working capital days have been steadily rising, going from 86 days in FY19 to 168 days in FY23.

This has led Kellton to constantly seek out short term borrowings to fund their working capital requirements.

In case of Saksoft, this ratio has stayed far more stable at 20 days in FY23.

Debtor Days

Debtor days show you how quickly the company pays off its debtors. Constantly rising debtor days is usually a sign of poor cash flow.

Kellton Vs Saksoft Debtors Days

	2018-19	2019-20	2020-21	2021-22	2022-23	5 Year Average
Kellton Tech	81	96	97	96	102	94
Saksoft	66	69	61	81	64	68

Data Source: Equitymaster

Kellton's debtor days have increased from 81 days in FY19 to 102 days in FY22 with a 5 year average of 94 days.

Saksoft on the other hand has displayed a more stable with a 5 year average of 68 days.

Valuations

You don't want to buy an expensive stock, do you? But how can you tell whether they're expensive or not?

While there are many tools and techniques to find that, two ratios give a quick idea whether a stock is expensive or not.

Price to Earnings Ratio (PE) - tells you how much you'll pay for every Re 1 of earnings per share. And Price to Book Value ratio (P/BV) - tells you how much you'll pay for every Re 1 of a company's book value of assets.

So, what do these ratios tell us about Kellton and Saksoft? Let's find out.

Kellton Tech vs Saksoft Valuation Ratios (2018-23)

	Average PE	5-Year Average PE	P/BV	5-Year Average P/BV
Kellton Tech	-18.95	1.99	5.35	1.60
Saksoft	13.8	9.06	2.8	1.18

Data Source: Equitymaster

Kellton's average PE is negative. But that shouldn't be of much concern. Let us explain.

In FY23, Kellton showed a net loss which resulted from an exceptional item.

The exceptional item was the write off of the good-will value of a company they had acquired.

This isn't a part of their normal operations and you won't find such transactions every year. Thus, it's called an exceptional item.

If you ignore it, Kellton's net profit is still positive.

That's why looking at the 5-year average PE is important. It smoothens out such rare yet big discrepancies.

Now, let's look at the numbers.

Kellton's 5-year average PE is quite low and can be attributed to the FY23's net loss.

In case of Saksoft, their 5-year average PE stands at 9.06x, while their average PE is 13.8x its current price.

Diving into their P/BV ratios, Kellton's P/BV seems overpriced at 5.35x its price, where for Saksoft, the P/BV stands at 2.80x its price.

From this angle, neither company looks overvalued. However, when you look at these ratios, view them in the context of their overall business.

A PE of 1.99x of Kellton's price might seem attractive but remember that it hasn't performed very well in the recent years as discussed above.

Kellton Tech or Saksoft - which stock is better?

When the pandemic struck the world in 2020, the US was one of the countries with the highest casualties.

This prompted lockdowns and hit its economy hard. All the businesses around the world that depended heavily on the US were also hit hard.

This included Kellton Tech and Saksoft.

But when you factor in proportion of Kellton's revenues that flow from the US, this impact is magnified. Unfortunately, Kellton wasn't able to mitigate these negative impacts. Since 2019, their sales growth and profitability seems to have taken a dive.

To make matters worse, the current slowdown in the US seems to be hurting Kellton even more. Hiring freeze from customers, rising costs and inability to increase their revenues have put Kellton in a bit of a pickle.

However, Saksoft tells a whole different story - a better story. Their ability to focus on a well-defined niche has paid off in spades.

Take the transportation logistic industries as an example. When the pandemic hit, this industry boomed.

With everyone under lockdown, people started ordering everything home. That requires high levels of logistical tracking and automation. Since Saksoft was already a domain expert, they were able to snatch this opportunity even during a terrible time.

Plus, they've been able to extract more value per customer by cross selling and upselling their services.

So even when some customers left, they were able to continue operating profitably till they found new customers which wasn't very hard given how well they knew their target customers.

Kellton is currently acquiring more sales professionals to spark life into their revenue. Additionally, they're also looking to incorporate AI to help their current employees be more efficient.

While both the companies are well placed in their own categories, before you consider investing in any stock, check for the fundamentals and valuations of both companies. It will help you make a more rational decision.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...