CRISIL Research's report on Hinduja Global Solutions
Hinduja Global Solutions Ltd’s (Hinduja Global’s) Q3FY15 consolidated revenues and earnings were in line with CRISIL Research’s expectations. Rupee revenues grew 12.7% y-o-y (13.1% in constant currency terms) to Rs 7,325 mn as the second half is typically strong for the company. EBITDA margin declined by 165 bps y-o-y due to costs incurred for ramping up the Philippines delivery centre. PAT margin contracted by 103 bps y-o-y due to decline in operating margin. The company closed a $10 mn account as a part of its account rationalisation exercise of exiting unprofitable accounts in the US. However, it was able to completely set-off the loss in revenues. We maintain the fundamental grade of 3/5.
The health insurance vertical's revenues rose 45.2% y-o-y and 10.3% q-o-q to Rs 2,615 mn. The vertical has benefitted from the healthcare reforms in the US, resulting in robust volume growth and leading to the addition of three client accounts. This is also evident from 25.5% yo- y growth in the offshore delivery of the India business which largely caters to the US-based clients in the health insurance vertical. Labour shortage in Canada and the ongoing process of exiting unprofitable telecom accounts in the US led to dismal performance of the telecom vertical (volumes down 2.6%). Management plans to address the labour issue by opening a new centre in Windsor, Ontario and expects volumes to pick up by Q1FY16. In the consumer electronics segment, the company has added Chinese clients to offset the volume decline from Japanese clients; the management expects volumes to pick up by Q1FY16.
EBITDA margin contracted by 165 bps y-o-y (up 80 bps q-o-q) to 12.3% as the company incurred costs on ramping-up new facilities in the Philippines. Margin improved q-o-q as some of the new centres have started contributing to revenues and the company was able to close a low-margin $10 mn account as a part of its account rationalisation exercise. Margins should improve going ahead as the remaining new centres start contributing to revenues.
We have rolled forward our estimates by a year to FY17. Accordingly, our discounted cash flow (DCF)-based fair value is raised to Rs 719 per share. At the current market price of Rs 586, our valuation grade is 4/5.
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