I analysed Hinduja Global Solutions Ltd (HGSL) and share it below:
One of the pillars of successful investing is buying share in a good business when current market price is at a large discount to its underlying business worth. HGSL combines investment case for both value and growth prospects.
Business:
1. HGSL operates in the BPO space. It is a leading provider of Outsourcing Solutions that include Back Office Processing, Contact Center
2. It serves industry verticals like BFSI, telecommunications, pharmaceuticals, life sciences, consumer electronics/products, media and entertainment, energy and utilities, transportation and logistics.
3. HGSL is headquartered in Bangalore and has over 30 delivery centers in the US , Canada , U.K. , Mauritius , Philippines and India
4. Bharti is among the top clients of HGSL.
5. About 73% of HGSL's revenues are generated from voice-based services based on FY10 financials.
6. The Company employs 18,730 people worldwide. As per press reports, company is increasing the hiring in this fiscal by another 2000 or so.
Industry outlook:
Management:
1. HGSL is part of the Hinduja Group which is a conglomerate having diversified business interests.
2. High promoter's holding 68% gives it stability.
3. Top management team of HGSL has strong academic background, industry experience & performance trackrecord in the area of its operations.
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Financial summary (consolidated):
Particulars | FY2008 | FY2009 | FY2010 | FY2011E | FY2012E |
Revenue(Rs crore) | 637.05 | 797.57 | 892.34 | 1076.70 | 1189.43 |
EBIDTA (Rs crore) | 94.06 | 132.82 | 162.80 | 193.80 | 209.87 |
PAT (Rs crore) | 87.42 | 93.77 | 130.11 | 118.43 | 143.75 |
EPS (Rs) | 42.50 | 45.50 | 63.20 | 57.50 | 69.80 |
NPM (%) | 13.72 | 11.75 | 14.58 | 10.99 | 12.08 |
ROE (%) | 12.20 | 10.00 | 14.00 | 11.70 | 13.00 |
ROCE (%) | 8.00 | 9.50 | 11.50 | 11.20 | 13.00 |
Investment Rationale:
1. HGSL's business is repetitive and spread across verticals; total client count is on the up at over 80. The company has demonstrated high stickiness with clients due to its delivery and capability.
2. No reason why the cost advantage will not sustain, it's kind of a non-discretionary spend for the large clients.
3. Can see some acquisitions in coming year which will be earnings accretive.
4. Strategy to have operational centers in Tier III cities like Durgapur in West Bengal, Guntur
5. Free Cash Flow positive as can be expected from such a business. Operating margins at 17-18% are good. Strong revenue & earnings visibility backed by comfort of valuations.
6. Net Cash per share is about Rs 238 per share. (not a big positive at the moment since they are sitting on cash for quite some time now, and it majorly depresses ROE, ROCE).
7. High dividend yield (above 5%) with DPS of Rs 20 for FY2010 limits the downside.
Concerns:
1. Company has not been able to deploy cash in any meaningful way like business acquisitions for far too long now.
2. It is not into high end high value-add businesses.
3. Stock is illiquid, so problems associated with entry/exit of low volume stocks.
Stock parameters:
CMP: Rs 376 (FV Rs 10); Market cap: Rs. 779 crore; 200DMA: Rs.392; 52-wk Hi/Low: Rs.520/295; Free Float: 31.80%
Valuation parameters:
PE: 6.54; P/BV: 0.75; Div. yld: 5.31%; EV/EBIDTA: 1.82 (based on FY11 estimates).
Valuation looks comforting with good margin of safety.Outlook:
1. It is a steady dividend payer. DPS of Rs 20 for FY 2010 was impressive. I expect it will maintain, and increase, dividend pay-out for FY 2011.
2. Any developments with regard to potential acquisitions will re-rate the stock.
3. Around 50% capital appreciation with a time horizon of 16-18 months looks reasonable expectation.
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