Hinduja Global Solutions Ltd: Undervalued IT stock
(BSE Code: 532859) (CMP: Rs.663.20) (FV: Rs.10)
Hinduja Global Solutions Ltd (HGS), a part of the $25 bn Hinduja Group, provides a full suite of business process management (BPM) services from traditional voice contact centre services and transformational DigiCX services to platform-based back-office services and digital marketing solutions by applying analytics, automation and interaction expertise to deliver innovation and thought leadership. It commenced operations in Bengaluru as Hinduja TMT (HTMT) in 2000. Its first client was a Fortune 100 US based Health Insurer, who continues to be a client. Today, it has 39,834 employees across 67 locations worldwide delivering localized solutions in 37 languages. It derives 67% of its revenue from domestic operations. Its expertise spans the healthcare, telecommunications and media, insurance, banking, consumer electronics and packaged goods industries, retail, technology as well as the public sector. HGS has a strong presence in USA, Canada, France, Germany, India, Italy, Jamaica, Philippines, the Netherlands, UAE and UK. Collectively, these centres offer the advantages of lower risks, round-the-clock productivity, shorter lead-time, enhanced cost benefits and faster response due to zero communication gaps.
HGS derives 78% of its revenues from Customer Care/Management services, which include voice as well as non-voice support like email, chat, etc. The balance 23% comes from transaction processing services like claims management including claim adjudication, payment and settlement for insurance companies, payroll processing services, etc.
HGS serves 5 of the top 10 US Healthcare Payers and Providers Groups. It provides customer service solution to top Telecom giants in Canada, India, UK, USA and manages customer interactions for Global Banking and Financial clients across India, Philippines and USA. It provides consumer solutions to 30+ leading consumer brands and customer support to large Public Sector clients in UK and Canada.
HGS recently launched HGS DigiCX, a suite of digital customer experience services focused on transforming traditional call centre customer experiences. Under this umbrella, it introduced innovative offerings such as DigiWEB, DigiCHAT, DigiTEXT, DigiSocial and DigiINSIGHT, which are expected to help capture new revenue streams. Its RPA (robotic process automation) solution is a non-invasive technology solution that automates process steps and thus improves efficiency and effectiveness of a process. This is a big opportunity for HGS since it is already working with more than 5 clients and the management hopes to gain big from its early mover advantage in this space. For FY18, HGS reported 7% higher PAT of Rs.192.07 crore on 4% higher sales of Rs.3849.37 crore and an EPS of Rs.92. During Q1FY19, it reported 3% lower PAT of Rs.40.31 crore on 19% higher sales of Rs.1100.83 crore and an EPS of Rs.19.26.
With an equity capital of Rs.20.8 crore and reserves of Rs.1462.21 crore, HGS’ share book value works out to Rs.712.98. The promoters hold 67.3% of the equity capital, foreign entities hold 8.6%, DIs hold 2.3% and PCBs hold 3.9%, which leaves 17.9% stake with the investing public. India’s IT-BPM sector has grown at ~8% CAGR to $167 bn in FY18. It had grown at 11.14% CAGR to $155 bn in FY17 from $74 bn in FY10, which is 3–4 times higher than the global IT-BPM growth. The sector is forecast to grow to $350 bn by 2025. Notwithstanding global headwinds and uncertainties, the
National Association of Software
& Solution Companies (NASSCOM) has projected a growth rate of 7-9% for the Indian IT-BPO industry in 201819 v/s 7.8% in 2017-18. Exports are projected to grow to $137 bn in 2018-19 from $126 bn in 2017-18. The overall IT-BPO industry is projected to add $1416 bn and add 1,00,000 jobs in 2018-19.
Digital Transformation is projected to create $1 trillion in value and sustain 55-60 million jobs by 2025. While digital sectors such as IT-BPM, telecom, electronics manufacturing, ecommerce and digital payments are expected to grow 2-3x in terms of economic value by 2025, it is the digital eco-systems in other verticals such as financial services, education, health, agriculture, manufacturing, transportation and logistics, etc. that are expected to help India reach the ambitious $1 trillion mark.
Robust growth of the Indian BPM Industry, growing preference for BPM services, opportunity through US healthcare reforms, larger deals with existing customers, penetration and growth in the public sector marketplace in European and Canadian markets, expanding geographies with potential as future BPM destinations, established position in the digital, social media, analytics and automation segments all give solid revenue visibility going forward. HGS is expected to report a consolidated EPS of Rs.100 in FY19 and Rs.107 in FY20. At the CMP of Rs.663.20, the stock trades at a forward P/E of 6.63x on FY19E and 6.19x on FY20E earnings. A reasonable P/E of 12.5x will take its share price to Rs.1250 in the medium-term and Rs.1338 thereafter.