CRISIL Research has assigned a CRISIL IER fundamental grade of 3/5 to Hinduja Global Solutions (Hinduja Global). The grade indicates that the company’s fundamentals are 'good’ relative to other listed equity securities in India. Our fair value of the stock is Rs 674 a share. At the current market price of Rs 590 a share, our valuation grade is 4/5 indicating that the market price has upside from the current levels.
The grades are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument’s future market price or its suitability for a particular investor. The assigned fundamental grade reflects mid-sized outsourcing player Hinduja Global’s organic growth and successful integration of acquisitions which have enabled it to post a PAT CAGR of 21% during FY07 - 13. Post 2003, Hinduja Global focused on inorganic growth and acquired many companies. This helped to (i) drive revenues by 7x during FY07 -13 to Rs 20 billion, (ii) expand service offerings to diverse sectors such as telecom, healthcare, insurance and consumer and (iii) widen its geographic presence.
Diverse presence - in 55 locations across 11 countries with different time zones helps it cater to client needs round the clock and also manage cost. Offshore and onshore presence in various destinations helps the company meet client-specific needs for delivery of service.
We expect Hinduja Global to benefit from the industry growth potential- CRISIL Research expects the Indian Business Process Management (BPM) industry to increase at a five -year CAGR of 12% to USD 31 billion in FY18. However, the BPM market is fragmented. Integrated players providing IT and BPM services are an apparent threat to pure play BPM players such as Hinduja Global as clients may opt for bundled service offerings from a single vendor. However, given BPM is a non -core offering for integrated players, the risk is in significant.
Hinduja Global gets majority of repeat business, but it is exposed to client concentration risk as top five clients constituted 47% of Q3FY14 sales. Any loss of business from these clients or loss of a client could reduce the company’s revenues and impact its business.
It is also exposed to the geographic concentration risk; the US and Canada account for about 80% of revenues. The grade has taken into consideration the risk of contingent liability of Rs 2.3 billion in FY13; of this, Rs 1.8 billion pertains to income tax demand received by Hinduja Ventures for the IT/ITES business prior to October 2006. As salaries account for more than 65% of revenues, managing attrition (which is an industry -wide phenomenon) at reasonable levels is critical.
CRISIL Research expects USD revenues to grow at a three year CAGR of 13% to USD 524 million in FY16, primarily driven by telecom, technology and health insurance industries. We have factored in average Rs/USD exchange rate of ~62 during FY14 -16. We expect Hinduja Global’s EBITDA margin to improve hereon because a) it is exiting the unprofitable Indian telecom client accounts and b) seat utilization is improving. PAT is expected to increase at 36% CAGR to Rs 2 billion in FY13 -16.
CRISIL Research has arrived at a fair value of Rs 674 a share for Hinduja Global by the discounted cash flow (DCF) method, after lowering some of the contingent liability risk. The fair value implies P/E multiples of 7.2x FY15E and 6.0x FY16E earnings.
