CRISIL revises Helios and Matheson` fair value to Rs 97

CRISIL Research has revised fair value of Helios and Matheson Information Technology from Rs 80 per share to Rs 97 per share. The research firm expects Helios’ revenues to grow at a three-year CAGR of 26% to Rs 8.9 bn in FY15 (financial year ending in September) driven by the BFSI segment.

CRISIL Research's report on Helios and Matheson Information Technology

CRISIL Research has revised Helios and Matheson Information Technology Ltd’s (Helios’) CRISIL IER fundamental grade to 3/5 (pronounced three on five) from 2/5. The grade indicates that the company’s fundamentals are ‘good’ relative to other listed equity securities in India. CRISIL Research 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 97. The stock is currently trading at Rs 73 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 upward revision in Helios’ fundamental grade is triggered by a) consistent improvement in revenues over the past six quarters backed by strong focus on blue-chip clients, b) rise in employee utilisation and c) improvement in asset utilisation, which is likely to increase returns going forward. The company has delivered 10% q-o-q revenue growth (in rupees) over the past six quarters by (i) mining existing clients through expansion of offerings and (ii) adding clients (10 active clients added in the past two years). Blended employee utilisation rose from 73.3% in Q3FY11 to 75.3% in Q3FY13. Utilisation of capacity improved to 65% in FY13 from 56% in FY12 following strong business momentum. Better deal flows (supported by positive outlook on IT services) are expected to result in further utilisation of investments leading to improvement in asset turnover. As 35% of the capacity is unutilised, no capex for infrastructure is needed for the next two years. Hence, we expect RoE to improve to 16% in FY15 from 10.3% in FY12.

However, certain concerns remain: (a) foreign currency volatility that Helios is exposed to because it does not cover its unhedged forex exposure (54% of revenues are onsite – at the client’s site), (b) high debtors of 100+ days due to association with large clients and Helios’ relatively smaller size and c) high geographic concentration (70% of revenues are from the US). A key monitorable is the pending litigation in the magistrate court filed by Vmoksha’s promoter, Rajeev Sahwney, against Helios’ promoters regarding the acquisition of Vmoksha.

Financial outlook:
CRISIL Research expects Helios’ revenues to grow at a three-year CAGR of 26% to Rs 8.9 bn in FY15 (financial year ending in September) driven by the BFSI segment. We expect EBITDA margin to contract to 19.8% in FY15 from 21.9% in FY12 as the company is expected to face increased competition in large-ticket deals. PAT margin is estimated to improve to 7.7% in FY15 from 6.5% in FY12. EPS is estimated to increase at a three-year CAGR of 29% to Rs 26 in FY15 from Rs 12.3 in FY12. 

Valuation:
Following higher-than-expected 9MFY13 PAT, we have raised our FY13 and FY14 PAT estimates by 17.4% and 29.3% respectively. We have changed our valuation method to discounted cash flow from price-to-earnings because we now have improved earnings visibility (due to expected traction in deal flow). Accordingly, our fair value is revised to Rs 97 per share from Rs 80.

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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