HELIOS AND MATHESON INFORMATION TECHNOLOGY LTD - Healthcare IT services to drive the growth

Stock Opportunities Untested - but worth a good look
1

CMP : 111, Mkt Cap : 294 Cr

Investing Rationale : What catches my eyes is contribution from Healthcare sector for this company is 24% of revenues (as compared to 5 -10% for other companies, barring Congnizant - which is listed on Nasdaq). It derives approx 60% revenues from the USA. Experts in the field believe that the “Patient Protection and Affordable Care Act”, popularly known as ‘Obamacare’, represents an opportunity of USD 3 trillion. Congnizant’s USD 2.7 billion recent deal to acquire healthcare IT services provider TriZetto has raised hopes of similar transactions in the sector at home. (Ref :
http://articles.economictimes.indiatimes.com/2014-09-16/news/53983561_1_opera-solutions-arnab-gupta-siva-namasivayam )
** Company & Business : **
Helios and Matheson Information Technology Ltd was established in 1991 and is headquartered in Chennai. FYa13 Operating Income 653 Cr (follows FY Oct-Sept). Revenue contribution : (a) BFSI - 39%, (b) Healthcare - 24%, © Technology - 21%, and (d) Other Services - 14%. Over 60% revenues are coming from US. Its subsidiary aHelios & Mathesaon Analytics Inc.’ is listed on Nasdaq, which is a positive in my view. Traditionally, it has grown organically by acquiring other companies by raising debt. This has lead to higher debt when compared to other listed peers.

Valuation : EBITDA margins of this company are consistently in the range of 20 to 22.5% since past 3-4 years, while PAT margins have moved from 3.8% in FY11 to 7.8% in FY13. The quality mid cap IT firms are trading at 15+ times earnings. This company is available at 5.76 times, which could only be because of high debt levels but it is still very cheap.
** Debt position :** For an IT company the debt:equity ratio is way too high at about 0.8. In FYa13, there was net reduction of long term debt by 30.96 cr (on account of repayment of Term Loans). Short term borrowings increased by 50 cr. Long term debt as on 30-09-13 stands at approx 156 cr. The management, in an interview, expects to arepay the current debt in next 2 a 2.5 yrs considering HMITas present cash flows.a

From where the growth will come from :

1). The company is focused on Healthcare vertical as next growth driver. Max revenues contributed by BFSI & Healthcare. Owing to economic recovery in the US, outlook on BFSI is bright with Healthcare being evergreen / recession proof sector.
2). Focused on SMAC (social mobility, mobile, analytics & cloud computing) as a new growth area and has conducted some test runs in the current quarter.

Concern :

Crisil research has estimated fair value of 114 for this company based on DCF method. (http://www.moneycontrol.com/news/crisil-research/crisil-assigns-valuations-grade45-to-heliosmatheson_1169655.html)

I do not understand DCF and request seniors to comment on this. I believe this stock is attractive because the sector has changed for better (read Healthcare IT services) and the stock is available at a low PE when compared to other listed IT peers.

P.S. There is a thread on this company in Company Q&A. However, I believe this forum is more appropriate to initiate discussion.

2

Hi Advait,

Thanks for pointing this company out. I did a quick check. I knew a bit about this company as i have got many calls for jobs from this and i was under impression that this would be a kind of body shopping cum IT services cum placement company. I think impression was correct.

Coming to financials, yaar numbers don’t add. They start calculating CFO by using EBITDA, they should have started by PBT or PAT. They adjust neither for interest in CFO nor for tax, and somehow numbers match so i m not comfortable. Also, if u pay attention, 127 crores of receivable are there. So, 20% of revenues are yet to be received, i guess thats high. Also, if we calculate adjusted or rather actual CFO, it will be close to 0, thats why debt is increasing yoy and they r raising money by equity too. I wont take a look at it given the above issues.

3

Thanks for alerting Ashish.

Recently came across a chilling article on this company by Monelife. The co is declaring net profit in Crores, but not able to provide timely employee salaries and not able to honor its commitments on retail deposits.

I think something is cooking. Thinking of exiting soon.

4

Folks,

This is a company I know very well from earlier - this is not a reliable company and it’s numbers cannot be trusted.

5

Folks,

This is a company I know very well from earlier - this is not a reliable company and it’s numbers cannot be trusted.

6

People need to be cautious when they see this company trading at less than 3 PE when most of the peers are trading close to 10-12 PE

This straightaway points out that market doesn’t trust the numbers

Besides that a little research would lead to the following articles

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Here’s some more bad nes for this comapny.

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Here’s some more bad nes for this comapny.