Hinduja Global Solutions is a pure play business process outsourcing service provider headquartered in Bangalore, and is a part of the Hinduja Group. The company does business in more than 10 other countries including Philippines, USA, UK, Canada, France, Germany, Italy, Netherlands, Mauritius and Jamaica. The company claims to be a world leader in Customer Relationship and Business Process Management. Around 25% of their revenues comes from India, while 27% is USA and 22% is from Canada.
Let's take a look at the company's financials:
Let's take a look at the company's financials:
Margins have gone down significantly from 2009 levels, but in the recent quarters they have rebounded. Growth has also stabilized at a 26% level, and I believe the company can keep it up for some years ahead. Looking at the balance sheet, HGS has $160 million (9.6 billion Rs.) in liabilities, but almost $200 million (12 billion Rs.) in current assets, which are more than enough to cover obligations.
One bad thing is that the return on equity has been only 10-12% in the past couple of years, which is a bit low for my standards.
VALUATION
The company trades at a market cap of 1400 Rs.Cr. and a P/E of only 8.7 and P/S of 0.5. These are very low values given the growth of the business. I did a 3-stage DCF valuation with the following assumptions:
- Net profit growth of 10% for the next 5 years and 5% for the other 5
- 2% terminal growth rate and discount rates of 10%,12% and 14%
One bad thing is that the return on equity has been only 10-12% in the past couple of years, which is a bit low for my standards.
VALUATION
The company trades at a market cap of 1400 Rs.Cr. and a P/E of only 8.7 and P/S of 0.5. These are very low values given the growth of the business. I did a 3-stage DCF valuation with the following assumptions:
- Net profit growth of 10% for the next 5 years and 5% for the other 5
- 2% terminal growth rate and discount rates of 10%,12% and 14%
Hinduja Global Solutions seems undervalued even by conservative standards. With a discount rate of 14%, the value of the business is around 1900 Crore, giving a price of 926, which implies at least 34% upside from current levels of 688.
I like the company but competition is pretty tough in the field, which is evidenced by it's low margins. I already have Tata Consultancy Services, but I might initiate a small position, because the company looks good from a valuation standpoint. The stock shot up 20% on Friday and reached a new all-time high. The stock was also bought by one insider in the past 6 months.
I like the company but competition is pretty tough in the field, which is evidenced by it's low margins. I already have Tata Consultancy Services, but I might initiate a small position, because the company looks good from a valuation standpoint. The stock shot up 20% on Friday and reached a new all-time high. The stock was also bought by one insider in the past 6 months.
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