Hov services


(Hitesh Patel) #1

HOV SERVICES cmp 142 market cap 178 cr

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HOVS is one of the largest end-to-end BPO companies, providing healthcare, finance and accounting, e-content management, document lifecycle, presentment, HR assist, and strategic consulting services across key verticals such as BFSI, Healthcare, Government, Telco, Publishing, Retail, Commercial and Industrial Manufacturing industries.

The motto of the company is âExceed Expectationsâ.

True to the word, the company exceeded expectations of shareholders on the downside in terms of share price.

Reason: It sold of its stake in various subsidiaries namely 100% Stake in Bay Area Credit Services, 100% interest in HOV AR Management Services, and 30% minority stake in TRAC Holdings to Rustic Canyon for a consideration of 12 Million usd. In doing so the company effectively booked exceptional loss of 132 crores and hence reported a loss at net level in FY 10.

FINANCIALS

After all this mess clean-up, the company reported the following results for Q1 FY 11.

Sales 182 cr vs 223 cr (decline in revenues is due to divestment of subsidiaries)

NP 17.64 cr vs 12.27 cr ( improvement in margins is evident)

Interest payment has reduced from 9.41 cr to 7.36 cr.

As on June 2010 qtr, the total debt was at USD 100 Million down from 119 Million a year earlier.

Quarterly EPS is at 14.13.

Total outstanding shares are at 1.25 cr and total market cap is at around 178 crores.

**Debt as on march 2010 was around 520 crores which is expected to go down. **

Dividend declared during fy 10 was Rs 4.

Promoter holding is around 49%-- no pledging (around 9% shares were re classified as non promter from promoter categoryâhence q-on q reduction in promoter shareholding)

Company bought back around 63000 shares at an avg price of 32 during buyback which finished in Jan 2010.

INVESTMENT THEME:

If one were to annualise the quarterly eps of 14, we get an annualised EPS of around 56. So we are surprised why the stock is available at a pe of roughly 3 and market cap to sales of around 0.25? And that is where the dilemma occurs.

Sometimes we are faced with a situation which is just âtoo good to be trueâ. In such situations, one begins to wonder if there are skeletons hidden in the cupboard waiting to come out. I tried hard to find out whether there are any significant negatives in this company. Except debt and the write off, I couldnât find too much.

**Currency fluctuations could impact earnings. **

Disc: I have HOV in my portfolio. The dividend declared has been regularly deposited in my bank account so the earnings are for real.

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PLEASE LOOK AT CONSOLIDATED NUMBERS FOR THIS COMPANY BECAUSE MOST OF THE EARNINGS IS FROM US AND NOT REFLECTED IN INDIAN OPERATIONS.


(Abhishek Basumallick) #2

Hitesh, one quick point. Satyam, Enron paid taxes and dividends on their cooked-up earnings. I am not suggesting that HOV is in that league though. I think the discount is simply due to the debt burden. A 200 cr market cap company having 500cr of debt is scary. It does not tell good things about the management. Probably, they got carried away in the 2005-7 boom and was trying to buy growth. Now, the problem is that you would have to be always careful of what the management is up to.

But the stock does appear cheap. And the IT/BPO market is actually picking up quite well. Orders are flowing back in and pricing is stable, so may be a good pick for the next 2-4 quarters. How does it look on the charts?


(Hitesh Patel) #3

I think it is a chance one has to take if one wants bigger returns.

I have been following the debt each quarter and it appears to be reducing on a regular basis. Plus if you see the amount of interest paid compared to the gross profit, the company seems to be on a sound wicket.

If you go through their investor updates each quarter, the management does appear to be very communicative to the investors apprising them of the progress on all fronts. And if the company keeps churning out good results each quarter there is no way markets can ignore it for long.

On the charts it is forming higher tops and higher bottoms and looks good. I expect good upmove on short term time frame also.


(Hitesh Patel) #4

It seems the short term correction in the stock is completed near 132-134 levels. It has given a good upmove today with higher volumes and if upmove is sustained, there could be good upsides. I have a good chunk of my portfolio in this one.


(Senthil Kumar) #5

Hi Hitesh,

HOV is getting beaten continuously now. Is there a reason?


(Hitesh Patel) #6

In the current market scenario, stocks of companies having management even with a small bit of blame attached to them are beaten black and blue. Sometimes justified and sometimes not so justified. HOV has an unpleasant FY 10 where it wrote off 132 crores which to the markets did not present the management in a very good light. So that blame attached is playing out now. Till now the company has given out a dividend of Rs 4 – Rs 2 interim around each quarterly results. Now if the same things go on then I expect around Rs 8 per share dividend (might be construed as wishful thinking but could happen) which could provide very good dividend yield.

These days markets’ dictum is : “Guilty unless proved otherwise”.


(Vinod MS) #7

Hi, Hitesh,

Looks like the worst is over for HOV as far as market sentiment goes. How does the merger impact the nos? Anyway we were doing valuation based on consolidated results right?

Regards

Vinod


(Lloyd Pinto) #8

Bumping up this thread.

This stock was brought to my attention by a friend and it also showed up on the cash bargain screener on screener.in (though it is not a cash bargain yet - i think)

Investment thesis

The listed entity holds ~26% stake in a JV in the US - SourceHov Inc. This entity is a large BPO player with operations in 12-13 countries, 80+ delivery centres, 12000+ workforce.

According to published articels its topline last year was approx US$525 million with an operating profit of $150 million. There was no visibility on the bottom line.

This entity was put on the block last year around December 2013 with an approximate valuation of US $1 billion

Please see article below.

For some reason the sale has not gone through (dont know why?)

Based on this valuation, HOV’s share is approx ~260 million. Even if we assume the entire this is gain and taxed at 30% - the net realisation from the sale could be around US$~182 million, i.e. INR ~1100 crores.

There is minimal debt in the company of approx INR 10-15 crore.

Currently this stock is trading a market cap of 133 crore signifying a deep discount. This is without ascribing any value to the other businesses in the entity.

Even if we were to discount the valuation of the US entity by 50% which seems a fair value for a BPO player (1 times sales) )- the share of HOV would still be around 550 crores from the exit. It seems to have a decent margin of safety.

It appears to be an interesting bet at CMP of 104.

Views Invited.

(Disc - invested)


(bomi karkaria) #9

Hi Lloyd, I found some news items on Source HOV but when I tried to post the same, I received a Server not available error. Can any member tell me if my work is saved or lost and if saved, where can I find it.

Thanks.


(Lloyd Pinto) #10

Hi Bomi… i guess you will have to repost. With this site getting more popular by the day… we are seeing a lot of server errors (Note to admin - need to upgrade server :slight_smile: )

I generally save my comment in a word doc before posting - as I have faced this problem several times…

Cheers!


(bomi karkaria) #11

What I find most disturbing is buried in Note 8 of the audited accounts of HOV Services:

As at 31/3/2013 At at 31/12/2012

Total value of Investment in Associate (i.e. SourceHOV) 207 cr 207 cr

Add/Less :Share of Profit/(Loss of Associate) (51.7) cr (5.3) cr

It means that HOV Services share of losses of Source HOV was Rs. 51.7 cr in FY2013 and Rs. 5.3 cr in calendar year 2012. Perhaps, for this reason the sale of Source HOV in Jan 2014, did not take place.


(vaibhav) #12

Th deal has happened -

HOV Services Ltd has informed BSE that a Meeting of the Board of Directors of the Company will be held on September 30, 2014, inter-alia, to consider a transaction pertaining to investment of wholly owned subsidiary of the Company.

http://www.digitaljournal.com/pr/2218421

In the transaction, stockholders of BancTec will receive stock in SourceHOV, and SourceHOV will use a new$1.1 billioncredit facility to refinance existing indebtedness, redeem certain existing SourceHOV equity holders and provide additional working capital. Closing of the transaction is subject to customary conditions, including regulatory approvals, and is expected to occur this year. The transaction value was not disclosed.

Morgan Stanley as Sole Bookrunner and Sole Lead Arranger has provided financing commitment in support of the transaction.

Disc: bought today @ 103 after the news broke…


(Vijay) #13

@vicky. How did you buy it? It went on upper circuit in a few seconds?

Were you watching CNBC and gave order immediately as you saw the news flash?


(vaibhav) #14

Yes, was watching cnbc, and immediately as the news flashed, I put the order as the laptop was in front of me. It was pure co-incidence.


(Vijay) #15

Mmmmm…TV is not that bad then!!!

Btw, am holding decent quantity for a month!


(vaibhav) #16

congrats :slight_smile:

I heard abt this company first from TV only ( G Chokkaligam) and bought it 3 months back but then sold it after a few days.


(Vijay) #17

I have not watched CNBC for years now!


(vaibhav) #18

Sale of HOV’s stake has happened for $95 million.

Current Market Cap of HOVS is abt 190Cr after today’s UC hit.


(Varadharajan Ragunathan) #19

what am I missing here ? the promoter’s own company hands-on fund is buying this company which is the crown jewel for $ 95 MM and they need shareholders approval to check if someone else can offer the same or more. And they control the process for that sale anyway.

Wow…is’nt this a breach of governance standards ? a news article a year back says it was exploring a price of $ 1.2 B. For a company that has $ 525 mn in revenues and $ 150 mn in EBITDA, $ 95 mn is 0.7 x EBITDA. And the merger with another company post the transaction which could be value accretive.

What am I missing here ? Existing owners control a sale process to sell the company to themselves and then do a potential merger with another competitor post the sale.

It looks a terrible deal for minority shareholders. Am I wrong here ?

http://www.moneycontrol.com/livefeed_pdf/Oct2014/HOV_Services_Ltd_011014.pdf


(vaibhav) #20

Looks like your assessment is correct Varadha. Following promoter-holdings for HOVS shows “HOF2 LLC” holds 13.x% in HOVS -

http://www.moneycontrol.com/bse/shareholding/shp_promoters.php?sc_dispid=HOV#HOV

The stake in SourceHOV is being sold to “HOF4 LLC" ."HOF2LLC” and"HOF4LLC" maybe belonging to the same guy I guess.

What you do suggest should we do for now? WIll they honestly pay the dividend for $95 million? This is what following article says -

“The Board of Directors will use the sale proceeds, including considering dividend and new investments to grow the current business.”

http://www.equitybulls.com/admin/news2006/news_det.asp?id=148219

Sale of HOV’s stake has happened for $95 million.

http://www.moneycontrol.com/livefeed_pdf/Oct2014/HOV_Services_Ltd_011014.pdf Link: http://www.moneycontrol.com/livefeed_pdf/Oct2014/HOV_Services_Ltd_011014.pdf

Current Market Cap of HOVS is abt 190Cr after today’s UC hit.