Stock Review: Hinduja Global Solutions

 

Hinduja Global Solutions is expected to fare well on the back of its new units and capacity additions in the coming quarters

 

HINDUJA Global Solutions has recorded a healthy growth in the December 2010 quarter against the previous quarter. Its North America business recorded an 8% volume growth on back of the holiday season, while Manila continues to contribute to its growth significantly following the stabilisation of the new delivery centre.

   The company has chalked out plans to set up delivery centres in new geographies through acquisitions or joint ventures to cater to the growing demand in various industries, including telecom, health insurance and consumer electronics across the globe. Moreover, with the ramping up of newer centres, the company is on a hiring spree. This improves its revenue visibility in the coming quarters.

BUSINESS:

A company from the Hinduja Group, Hinduja Global Solutions is a Bangalore-based business process outsourcing company. Incorporated in 2000, HGSL offers outsourcing solutions, including back-office processing, contact centre services and customised ITES solutions. The company has adopted an inorganic route to expand its global presence and enhance its solution offerings in various industries including insurance and telecom. In 2003, it forayed into international markets with its Manila centre. HGSL acquired a UK-based customer relationship management company, Careline Services, in June 2010.

   Today, the company operates from 30 delivery centres spread across the US, Canada, the UK, Mauritius, Philippines and India.

GROWTH DRIVERS:

The company has been shifting facilities to low-cost centres in tier 2 and tier 3 cities to reduce costs. During the December 2010 quarter, HGSL opened new delivery centre in Siliguri, West Bengal. Internationally, the company has chalked out plans to set up a centre in tier 3 city in Philippines. It plans to enter into joint ventures in China and Latin America at 500 seats and 300 seats capacity, respectively. During the quarter, the company has observed decent growth coming from telecom and technology, health insurance and consumer electronics segments. It expects the momentum to continue in the coming quarters as well.

   The company hired 2,000 employees during the quarter on the back of increased demand during the holiday season bringing the total employee base to 18,730 at the end of the quarter.

   On the back of the capacity expansions, ramp up of new centres and acquisitions in the coming quarters, the company expects to double the number in next twothree years.

FINANCIALS:

The company posted healthy growth numbers during the December 2010 quarter. Its topline grew 8% to nearly 290 crore over the previous quarter on account of healthy growth recorded from North America and Manila businesses. Moreover, the recently acquired Careline Services contributed significantly to the growth recorded by the company.

   Over the past two quarters, HGSL's operating profit margin has been hovering in the range of 13-14%.

   However, during the December 2010 quarter, the margin surged 120 bps to 15% against the previous quarter on account of reduced operating expenses relative to net sales. Improved sales and reduced operational costs led to a 10% sequential growth to 28 crore in its bottomline during the December 2010 quarter.The company takes nearly 55 days to receive payments from its clients that helps it to maintain healthy working capital. Historically, HGSL has maintained healthy cash and cash equivalent on its books, which has aided in upholding its debt-to-equity ratio at as low as 0.12.

VALUATION:

At the current market price of 314, the stock trades at 6.3 times the earnings for the trailing 12 months. Healthy cash flow from operating activities indicates the traction in the company's business across the globe over the years. Given its expansion plans, HGSL is expected to fare well going ahead.

CONCERNS:

The US business continues to form a major chunk of the company's total revenue thereby exposing its to currency risks. However, the Careline acquisition has helped in diversifying HGSL's operations to a certain extent.