Hinduja Global Solutions

Stock Opportunities Not-so-Hidden Gems
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7f64667b-b062-4bac-8fa2-936c0f55b58e.pdf (442.3 KB) Can someone please explain the financial implications of this partnership?

As per this website, the jump today was due to this announcement whereas I think it might have been due to the healthcare vertical hive off plan speculation.

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Company has partnered with Parkland Community Health Plan partner to deliever diesase management service relating to asthmatic and diabetic members. Since it will increase top line of the Company for future years from January 2021. It is reflecting in the current price.

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The stock gave All Time High break out and Multiyear Breakout and will do well with better numbers going forward.

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Attached last quarter presentation and concall transcript. Final_Q2&1HFY2021_Conference Call Transcript.pdf (485.5 KB) Motilal Oswal Investor Presentation 28th Sept 2020_ Final.pdf (3.2 MB)

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The key to the stock will be what they will do with the 0.8bn cash they will get from the stake sale of the healthcare business. If promoters distribute a good chunk the stock will see a big positive.

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Where did you get this figure from? Please share.

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ET NOW was carrying this news about valuation around 1-5 billion $ of the healthcare business being considered by some large PE funds.

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The company has confirmed the sale of Healthcare Services business to Betaine BV for a EV consideration of USD 1.2 billion which approximately translates to Rs 9,000 crores. This vertical contributed approx. 53% of the revenues of the company. The debt as on March 21 was Rs 1100 crores approx. The company would give the Jun 21 figures for debt in its investor’s presentation most probably. The market cap of the company as on today’s closing price was Rs 6422 crores. What are the member’s view on fair value for the company’s remaining business and what are the opinions for the possible end use of this cash by the company?

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Hear it directly from the horse’s mouth.

Disc: Studying

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Hi All,
I wanted to share some red flags that I came across.

  • I did some simple calculation of the interest expenses. It seems that the company is paying interest at the rate of 22-24% p.a. (Interest paid/ Average debt)
  • It is lending some part of its money to promoters/ other group companies at about 7 to 8% (Interest recd/ Average loan)
  • And this is a company that has 500 to 700 Crs of cash on its books!!! Why would any sane management borrow at 22% when you already have cash?
  • And of course lending to a group entity at a rate far lower than your own borrowing costs raises a red flags for me! (Just to compare…Warren Buffett borrows based on BH’s credit rating and then lends it to one of his subsidiaries at 1% higher).

Here are my calculations. Please let me know if I am missing something.

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Hi Vikas,

HGS is doing lot of Hedging and forward cover even for a duration of 2-3 years forward. Generally those costs are billed under financial expenses and therefore the interest cost may appear high. This may be one probable reason though I have not checked it myself.

Nikhil
Invested in HGS

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I attended the concall of the company held yesterday. Some salient points (from memory) of the discussion are as below:

  • The sale of the Healthcare vertical is on Track ; Expected to be completed in next 4-6 weeks. Out of deal value of ~1.2bn$ for healthcare vertical, they expect to pay tax to the tune of ~12% so net money inflow in the company would be ~1.05bn$
  • The cash received will be used for rewarding shareholders + inorganic/organic expansion of the balance business. The management/board is still deliberating on the way to reward shareholders which will be clear over the next 4-6 weeks
  • The company has a limit of 500 Cr for advances to promoter group. They expect to remain within that limit.
  • No money is going directly to promoter/entities. All the money will come to the organization
  • The growth of the non-healthcare vertical in the quarter was double (~28%) that of healthcare vertical (~12%)(YOY comparison). They are doing some capex investment to increase the seating capacity in some geographies (Jamaica, Philippines etc)
  • The management expects to become a technology company by 2025. They are seeing traction on Digital side. The non healthcare business will have EBITDA margin in low double digits (lower than healthcare)

The main point is that Market cap of company today is 5800 Cr with 500 cr cash in balance sheet. Against that for selling the healthcare business they are going to get ~7800 Cr Cash Post tax. Plus they will have non healthcare business, size of which will be ~2200 Cr topline with 10-11% EBITDA. This will also grow over next 2-3 years. So there is significant delta in terms of the overall value. The main point would be how they use the cash in the company and also reward shareholders.
Whether 1+1 will be 2 or whether it would be only be 1, will be seen after the promoter actions post the closure of the deal.
However in any case it looks like a case where downside is low but the upside can be significant in case of good promoter behavior/actions.

Nikhil
Invested- So may be biased.

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Finance cost includes interest expense on lease liabilities
I think you are missing that.

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My rough calculation was worst case 6x Ebitda, would give 2800 cr, value or Rs.1350 per share odd, seems too harsh as I type this Teleperformance in Europe a similar predominantly voice business trades at high multiples. I was conservatively looking for 40% upside predeal, now, assuming cash is dividended out, I am thinking 70% upside won’t be out of realm of my hope atleast…lol…or wishes… Rs.5000 + per share target price looks like now, pre special dividend.
Thoughts welcome, I know would seem too bullish, but who would have thought Firstsource would trade at these levels, or midcap IT NIIT tech, etc

disc: invested.

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Hinduja has declared closure of the deal, 1:1 bonus and interim dividend of 150/sh

Personally, as an initial reaction, I am disappointed with the following

  1. Interim dividend of only 150/sh when the company is receiving Rs4000/share in the bank from the deal. Paltry 4% share with Minority shareholders - for whom the entire deal was planned.
  2. Increase in limit for corporate guarantees, loan and advances to 3500 cr from 500 cr earlier. Arguably this may all go to promoter/ group companies in the pretext of earning 1% higher rate of interest.
  3. All “Statements of intent” of investing in digital business and all but no concrete information and plan.
    Company is going to sit on 7000 Cr cash for searching opportunities or giving it to promoters/group companies
    Unless there is some more information coming over the next couple of weeks/Q3 results concall on the usage of money and sharing with MINORITY Shareholders, this will become a value trap and live example of Greedy promoters.
    These are initial thoughts. If clarifications/visibility comes over next few weeks then the views can change.
    Regards,
    Nikhil
    Disc: Invested
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Considering the promoter pedigree scepticism is not unwarranted. However, I feel it’s too early to come to a harsh conclusion that nothing will be shared. The profit on the sale of the business is yet to reflect in the net worth. I don’t think the company can declare dividends on profits not yet recognised in books. In fact, the interim dividends can be declared only on the profits earned during the financial year. The dividend is also tax inefficient compared to buyback. The bonus will ensure that the capital gains will also be lower if the distribution is done using the buyback route later. I don’t think the company has any ability to do anything more than what it has done with the last audited balance sheet available at this juncture.

They may still short change the investors. What I am saying is that it is too early to conclude that they have already short-changed the investors.

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Market clearly has given it’s verdict, with the stock locked in down circuit.
2 most important questions to address

  1. This is the most important one. Are the promoters responsible enough and have they shown fair treatment towards minority shareholders in the past? If their track record is to fairly compensate the minority shareholders, the rewards will flow through, albeit later.
  2. Is paying dividends a most appropriate way of rewarding the shareholders. Given that the dividends are taxed at maximum marginal rate of each individual tax slab - many will end up with being taxed at 20% to 30% tax. Probably a buy back would be more beneficial.

Here is the link to management video i saw on CNBC TV 18 today.

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Whatever the technicalities that are there, management could have done 2-3 things

  1. Not increase the limit for loans/investment etc to 3500 from 500 cr. This clearly signals the intention of diverting the money though obviously it has not happened till now
  2. Declared the intention of going further than 150/- dividend for shareholders. They could have made the statement clarifying their intent yesterday itself that they intend to reward further.
    Now, even if they change their stance a little bit, the damage is mostly done. The sentiment is scarred. As the saying goes " Doodh ka jala chaach bhi phook phook kar pita hai". They will have to be holier than the holiest to gain confidence in short term.

Regards,

Nikhil

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I agree that communication could have been better. He did mention that this is not the end in the CNBC interview and that buyback cannot be ruled out. But more clarity was desirable and the tone was not encouraging.

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