Hinduja Global Solutions - Stock Analysis

After last negative reco, here comes a positive one.

Mcap: Rs 1000 cr, PE: 11

What is good about it?

+ Good Business: Its a BPO company. Business is mostly non-discretionary (operational) on the part of clients. A large part of their business is incoming calls with a minimum guarantee from clients. Protects the company from recessionary trends to a good extent. In 2008 recession, this strength came through clearly with consistent revenue and earnings growth.

+ Strong Balance Sheet: Company holds Rs 328/share in cash. Book value is Rs. 478/share (Source: last quarter earnings call) The cash is from Hutch stake sale and has a high probability of being "real" money. This provides quite a bit of value per share. Also is nearly debt free.

+ Transparent Company: HGSL publishes its balance sheet, detailed financials (including banks in which cash is held) and holds earnings conference call every quarter, a rarity in India.

+ Good Sector: IT/BPO sector is going to be the flagship sector of India in near and mid-term future. All the qualified youths being churned out from engineering colleges will continue to do "computer work" - recession or no recession. In the worst case, there could be salary cuts - 20%, 30% or let's say even 60%. Even then jobs in these sector will be more lucrative and more in abundance than traditional sectors. The margins of IT companies have rooms to come down from 30% to 10% and still make good business sense. IT/BPO in India is a good sector to bet on.

+ Strong Legacy: Hindujas are a big and reputed group. Some people recall Bofors and shy away. Their business record and large legacy (Ashok Leyland: Mcap 7000cr, IndusInd Bank: 5800cr, Gulf Oil: 800 cr, Hinduja Foundries: 303cr, Hinduja Ventures:758cr, Hinduja Bank: Not listed in India) however makes odds quite favorable.

+ Dividend: In 2009, the dividend was Rs 15 (and the stock price then was near Rs 100). A year before, Rs 10. This payout is coming due to strong cash reserves and you could say they should pay more. But still, getting this payout is quite good.

… and negatives?

- Management has been slow on acquisitions. For last several quarters, in investor calls and  news, we keep hearing the acquisitions are coming soon. Still awaited.
   Management says they are being conservative about acquisitions. Its hard to figure out if that is true.

  The acquisitions will deploy the idle cash, increase ROE and allay fears about cash presence. Given their prior acquisition record (Affina), hope is that acquisition will be  EPS accretive.

- Stock price has risen a lot, reducing value left in the stock. I don't see more than Rs 800 value in the stock for current fundamentals. Normal profit growth rate expectation would be 20%, which could probably be achieved in other stocks.
  So, not going to see spectacular growth here, except for the acquisition effect.

Summary:

Combining all the factors together - high cash, decent growth, low pe and good solid business is what makes HGSL stock compelling.

Disclaimer: I may be buying/selling/holding any of the shares I talk about in this blog anytime. Do your own due diligence.