India is known for its cost competitiveness and high quality services in Business Process Management(BPM) industry with capturing major market share. India has maintained its dominant share in BPM with latest trends suggesting that BPM industry is evolving from a cost-based to a value-based industry. 


Hinduja Global Solutions(HGS) is one such leader in global solutions provider with focus on three major segments:

  •  Consumer Engagement
  •  Business Process Optimization
  • Digital Innovation.  

Operating in seven countries, it boasts of 44000 employees with largest base in India. 


Investment Rationale

Due to consolidation in IT Solutions provider industry, HGS is looking towards inorganic growth through acquisition led strategy. HGS has recently acquired Element and Axispoint health through treasury surplus for $5 million and $14 million respectively to improve their product offerings and improve market share. According to the management, additional revenues from the twin acquisitions are $49 million. For FY19, the two acquisitions in aggregate will have an estimated EBITDA loss of $2 million to $3 million. FY19 Company expects to be generating free cash after working capital changes and capital expenditure.

 

Although HGS' customer retention capacity is above par, certain European customers are exiting. This is not a reason for concern as unlike US markets, where HGS is gaining market share although at slower pace, Europeans markets are not that open to outsourcing. The management is focused on improving product offerings and customer satisfaction is their top priority.

 

Indian IT Solutions provider industry is facing stiff competition from economies like Philippines, due to proactive governmental initiatives, which is decreasing the competitiveness of Indian firms. To improve its competitiveness, HGS has started increased its head count in such markets. After India, the major headcount comes from Philippines which might boost operational efficiency and at the same time translate into revenue growth.

 

Technical analysis

The stock is trading at a discount to its book value and has corrected from 900+ levels which makes it a bargain in its industry. Although there are short-terms headwinds in the industry but the management is capable to tackle them.

 

HGS has fallen from levels of 968-980 to 650 odd levels now, and what makes it an interesting point to enter apart from the strong fundamentals is the stock is just crossing its 200 week moving average which suggests that the stock is at some sort of a fair value in technical terms. 

 

This distribution phase has been going on for the past six months and a time wise correction is seem with a strong base formation at the current levels, on the upside a decisive break of 680 would complete a double bottom on the stock and incidentally the 200 day moving average is placed around 670 odd levels which makes this an interesting technical bet. 

 

The stock was in a downtrend for a greater part of the past few months and analyzing the indicator setup suggests that the down move is done and over the last six months is a time wise correction which suggests a good bottom to work with. We are of the view that a break of 679 on the upside would lead to a decent upside with a stop loss at 620, and any dips towards these levels are buying opportunities. 

 

Financials


Source: Economic times

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