CRISIL assigns fundamental grade of 2/5 to Helios
CRISIL Research has assigned a CRISIL IER fundamental grade of 2/5 to Helios and Matheson Information Technology (Helios). The grade indicates that the company's fundamentals are â€˜moderate' relative to other listed equity securities in India.
CRISIL Research has assigned a CRISIL IER fundamental grade of 2/5 to Helios and Matheson Information Technology (Helios). The grade indicates that the company's fundamentals are ‘moderate' relative to other listed equity securities in India.
CRISIL has assigned a valuation grade of 5/5, indicating that market price has ‘strong upside' from the current levels. Our one-year fair value of the stock is Rs 80. The stock is currently trading at Rs 53 per share. 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 takes into account Helios' successful integration of the five companies it acquired over 2001-2007 and which paved the way for Helios to enter the IT services space. It also considers Helios' sustained relationships with large US-based companies on the back of non-discretionary services, higher onsite presence and ability to meet client requirements consistently. Helios derives more than 90% of revenues through repeat business. With the banking, financial services and insurance (BFSI) and healthcare segments expected to drive the growth in IT services industry, the company's strong presence in these segments is also a positive.
However, the grade has been constrained by several negative factors: (1) Helios' lower asset utilisation and, hence, lower return ratios than peers are a concern (Helios' four-year average RoE is 7.4% compared to its peers' ~20%); (2) Helios' high geographic concentration (70% revenues from the US) is likely to impact growth if the global economic slowdown persists; and (3) because of its offshore presence, Helios is exposed to currency volatility, especially as the company does not cover its unhedged forex exposure. Besides, association with large clients and Helios' relatively smaller size have resulted in higher debtor days (over 100 days) than its mid-sized peers.
Financial outlook: CRISIL Research expects Helios' revenues to grow at a two-year CAGR of 23% to Rs 6.8 bn in FY14 (financial year ending in September) driven by strong growth in the BFSI segment. We expect EBITDA margin to decline to 20.2% in FY14 from 21.9% in FY12 as the company would face increased competition in larger deals. PAT margin is expected to remain stable at 7.0% in FY14 due to lower capex outgo on account of under-utilised assets. EPS is expected to increase at a two-year CAGR of 28% to Rs 20.1 in FY14 from Rs 12.3 in FY12.
Valuation: CRISIL Research has used the price to earnings multiple method to value Helios. We have assigned a multiple of 4x FY14E EPS to arrive at a fair value of Rs 80 per share.
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