Nagarro: From €85 to €210 Rally Amidst €400 Million Debt

Nagarro: From €85 to €210 with Debt Rising from €140 to €400 Million

Buying Nagarro at €85 was one of those bets that pay off. The stock reached €210. Then, it lost half its value. In between, an uncomfortable question lingered: what was behind a short-term debt that grew from €140 to €400 million in just one year, without a public report clearly detailing it.

Nagarro Group is a technology services company listed in Germany after separating from its former parent, Allgeier. The operation, a spin-off, left the new entity with the debt burden while the parent was relieved of it. A predictable scenario: the demerger takes the good and leaves the troublesome. The workforce, mostly Indian, supports a cost structure that many point to as its key competitive advantage.

The Spin-off Debt: From €140 to €400 Million

That's where the only serious debate began. The combined financial statements for 2017-2019 showed a debt of €140 million. The trinc year, calculations circulating among the most meticulous investors spoke of €400 million. The prevailing explanation was that a significant portion corresponded to legal reorganization liabilities, amounting to €277,832 thousand at a fixed interest rate of 3%, plus office leases. The dominant thesis argued that this debt would be refinanced long-term with bank loans and that, with ample free cash flow, there would be no liquidity issues. There were always those who asked for patience: audited results would clarify everything.

P/S 2.62 and P/E 34.7: Cheap or Expensive Expectations?

With 11,382,513 shares at €92.8, the market capitalization was around €1.056 billion. 2019 sales were €402.4 million and profit was €30.4 million. This resulted in a price-to-sales (P/S) ratio of 2.62 and a P/E ratio of 34.7. For a tech company with annual growth of 20-25% and operating margins around 10-12%, the former seemed cheap. The latter required confidence that profits would materialize. The core discussion was never about the multiple, but about how much time was needed.

The breakdown of this liability, including the 3% fixed interest, is in the documents meticulously analyzed, not in the summaries circulated on social media.

From the Rally to €210 to a Correction at €120

The stock took off upon entering the main small-cap index. It rose to €210; some bought more at €185 and others at €190. Then came the crash. The stock plummeted to around €120, with stops at €128 and €130. Sentiment shifted from euphoria to "I've averaged down." Some called it normal rotation for a small company; others, outright ruin.

The Guidance That Restored Optimism

April's results provided ammunition for the optimists. The company raised its revenue forecast for the year to €546 million from the previous €535 million, with gross margin at 28.3% (previously 28%) and adjusted EBITDA at 14.6% (previously 14%). Not only was it growing, but it was improving profitability on what was already promised. With this, the €120 floor held, and the first rebounds above €130 occurred.

Relatech, Digital Value, and the Rest of the Carousel

When a small-cap stock rises, someone always points to a cheaper one. Here, the turn was first for Digital Value and then for Relatech, the latter still "very small." The scene repeated: intrinsic value comparisons, warnings about small-cap volatility, and the suspicion that hardly anyone wants to do the meticulous work of examining the accounts one by one.

With the upward guidance and the debt pending a report to clear up doubts, the case remains open. There are arguments to suggest the stock will recover and surpass €200. And there are reasons, the same ones that caused alarm in 2020, not to take it for granted.