Hinduja Global Solutions

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21

Thanks a lot for the suggestion

22

Birla Sun Life Midcap Fund exits Hinduja Global Solutions

This is probably a good thing as the selling pressure should reduce now. Hopefully.

Disc: Long since a long time.

23

Bad luck and end of tax regime aside … the management has been chasing low margins and consequently working capital issues all along. Hopefully they will learn something from Firstsource. Firstsource turned around by checking margin erosion and is still looking great. Let’s see if they actually walk the talk on margin expansion plans this year

24

Eropean biz and currency fluctuations are likely to take a toll on already a low margin business. Has someone done any calculation.

25

Also there is an element of subsidies (or tax breaks) lapses in Canada. All in all it’s a bit tricky plus you have to doubt if management is actually getting down to chasing higher margins as opposed to growing topline.

26

A reader of the popular blog

Alpha Ideas

gives HGS a wet kiss

Disc: long

2 Likes
27

Following might be the reasons for low margins.

  1. Mphasis has been a great story for us because we bought it very cheap. It gave us a good footprint in India. Mphasis business has posted losses in the December 2015 quarter on the back of integration costs and some changes we are driving. We expect it to break even in Q4FY16 and it will become EPS accretive Q1FY17 onwards," says Partha DeSarkar, chief executive, Hinduja Global Solutions
  1. The company also said that it will see a turnaround in its profit numbers from the first quarter of FY17. The company’s financial performance has been impacted in recent quarters due to pressure in its Canada business. “Our profitability was impacted in a big way due to our Canadian operations. But that is behind us now. We have been able to renegotiate our terms with the clients and those will come into effect from April 1, 2016. You will see our numbers improving from next quarter,” added Sarkar.

so going foward i guess we can see some good bottomline.

Disc: hold a small quantity just for tracking.

28

Back on track. Good set of numbers.
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/F189A4B8_DE8B_4D65_86E3_3D4B80F50641_081047.pdf

Disc: long

1 Like
29

HGSL has done well to bring margins back on track after the serious challenges in FY16 which got compounded on account of several factors-(1) challenges on profitability of the Canadian Operations,(2) Investments in Colibirium and (3) Acquisition of loss making Mphasis’s Domestic business. Some of these things are getting addressed.
My sense is that the stock is relatively cheap to Firstsource on several parameters- Rough cut earnings of ~Rs 90 in FY17.
Negatives- Too much volatility in operating performance over time, Capex intensity is very high…

Disclosures: Not invested but tracking…

30

HI guys
I am probably writing here for the first time, so excuse me if I miss some of the follow to-dos’. Now coming to HGS, i beleieve the business is massively undervalued, compared to other Indian BPO bompanies, wether listed in India or USA. While on one hand they have reduced the dividend payout, but on the other they have started paying down debt. In Q1FY17, they have paid almost Rs.40 crore of outstanding debt.

Coming to its core business, with turnaround of Canadian business and strong reception of new products, their margins have started inching towards industry standards. While their TTM-Q1FY17 EBITDA margins were 10.4%, but the Q1FY17 margins were 11.7%, compare this to TTM-Q1FY17 EBITDA margins were 10.2%, but the Q1FY17 margins were 7.2% .

If we compare this with company like FSL, TTMEBITDA margins were 12.73%, and the Q1FY17 margins were 13.3%. Coming on growth parameters, FSL 3 year CAGR-sales is 4.6% and HGS is 19%.

Now the most important thing, the management is upbeat about the business. By managements own admission Q1 & Q2 will remain flatish, and Q3 and Q4 should see real pickup happening. The management is claiing the current times as "we have
actually concentrated on paying down debt and conserving cash for the Company,
just to handle the kind of furious growth that we are in the middle of, right."

I beleive based on management commentary, that this company should easily deliver EPS between Rs.105-115 for FY17, and if all goes well, build upon the same next year.

While others might have their doubts with the management, but a company from Hinduja group, available at current year PE of 5.1x, where pears are trading at atleast 10x, and going upto 20-25x, we have a very safe bet in hand, and this company can easily double and could turn out to be multi bagger to the extenet of 4-5x from current levels in next 3-4 years.

I welcome others to comment, and guide all of us here, what point am I missing, and why is Mr.Market allowing us to have such a bargain?

Disclosure: Long at current levels, for medium to long term (read 1-3 years)

31

I come from a consulting background mainly doing Financial Services consulting for a large MNC. HGS is doing some good work in the RPA (robotics process automation) area where we are seeing a lot of demand. Now I am not sure if this is just window dressing or is there some meat behind their work as I have not directly worked with them but have seen reference to their thought capital etc.

This to me boils down to the key questions of:

  1. Why is it so undervalued. Is it just because of the margins or anything else? Which leads me to the next question
  2. Is it because of the promoters being non investor friendly. Would love to see people comment on other companies run by Hinduja group and how they have treated minority shareholders in the past.

PS: No investment yet but interested and tracking.

Thanks,
Navneet

32

Hi Navneet, read my post just above yours, and for sure margin issue is not much of a issue now, and the company is confident about expanding the margin number in the current year itself.

33

Another small update, their insurance product Collibrium is doing well. If we beleieve what they are saying then its a success, and past the investment cycle for this product and start of true monetisation now. If this product does well then the margin profile can change for the company. While it might sound like day dreaming but Infosys Fiancle was and still is a big product, similar is the case with Intellect Design. While only future will tell how things play out, but currently its a ok company, with promise of a great tomorrow available at throwaway valuations.

34

The promoter pedigree should not be a problem IndusInd bank asok leyland are standing tall for the promoters history.
This specialized aspect of outsourcing is - Managed services. For example, if you have applied for a Schengen visa recently then instead of an embassy you must have visited the center managed by VFS. Many such functions are being outsourced by the European & North American public sector firms.

Hinduja Global is tasting success in this domain. They have a physical presence in 7 European Locations & 21 North American locations which gives them an edge & the backup of another 40 centers in India & Philippines help control costs. This opportunity has been discussed in their annual report & Q1 result interview and is now visible in their numbers. In the last two quarters the company has done an EPS of Rs. 45 as compared to Rs. 49 for FY16 thus available at a PE of 6x. The cash EPS is at Rs. 40/ quarter thus trading at 3.5x its cash flows. The market attributes premium valuations to Quess Corp & Team Lease trading at a PE of 60-80X who in some form play a role in this space. HGS has similar management pedigree & thus is an interesting study.
Also the health care vertical which is a high margin vertical which will have a good traction both on top line and bottom line because of collibrium Aquisation this fy the cost of employe is on the more side because of recent addition of mphASIs and collibrium there will visible improvement in Ebita margins in coming qtr even an 200 basis point improvent in Ebita will take the OPM to 500 cr and profit of above 220 cr with depreciation cost at 150 cr in coming years we can see bottom line improvement without any additional capex there by some reduction in depreciation cost and cash flow improvement enabling debt reduction they are sitting on a cash of 400 cr and investments worth 200 cr…

Discl. Invested a tracking qty.

2 Likes
35

Thanks for the post. I did some more research and could not find anything bad about the company but I come back to the same point again and again. Why is it so undervalued. What does the market know that we dont. Generally if things are too good to be true there is some issue which we are overlooking. What is it that we are missing!

Invested with a very small tracking position.

Thanks,
Navneet

1 Like
36

I dont think its highly undervalued, its trading at roughly 9 PE. Its a BPM industry where the growth is not much and lot of competition within India and also from Philippines.

It would be a good buy in aug16 when it was slightly above 400. At this point we can get decent increase but not great returns.

This is my gut feeling

37

I think what we need to look into it also is the book value. I do think it is inflated due to the goodwill they would have paid for certain acquisition but it is trading below its book value.

Thanks,
Navneet

38

Fundamentally this qtr and fy there will be a huge improvement in the ebita margins it should be tracking the historic level of 12.73 to 13.25 and even with moderate growth of 8% in revenue terms the ebita can be 450 to 500 cr
Technically trading above ema 20 and 50 and the adx is above 20 formed cup and handle pattern.
Also the hni investor seetha kumari is holding more than 1 percent very low floating stock I think it is at an inflection point IMHO
Invested for long term

39

I have been looking at HGS for the last 6 months,when it was around Rs400/-.It is a potential multibagger.Also the volumes are low,the ROE is low,book value of 0.91,may indigate the books are cooked!!
kpj

40

While it needs more investigation (in my opinion) to understand the long term potential, I dont think that books are cooked. Promoters are hinduja group (promoter of ashok ley.) and have a decent track record of being clean. It could be trading below book value, as the book value includes goodwill they would have paid for some of the acquisitions that they have done recently.

Not invested but tracking and investigating

Navneet