Mid-Cap Gem - Part I

There are vast numbers of Mid-Cap companies in India. One really needs to look hard to find a fundamentally strong company. Hence, in today's discussion I am going to focus on two mid-cap gems which I found to be tough and strong. 

I will divide the post in two parts. Today's discussion will focus only on one company. The next will in a few days time, as i need to finalize my analysis.

The first company is Hinduja Global Solutions Ltd. (HGSL) 

Introduction:

Hinduja Global Solutions Ltd. (henceforth will also be refereed as "HGSL" or "the company") is part of Hinduja Group (henceforth will also be refereed as "HG" or "the Group"). HG was started in Sindh by Parmanand Deepchand Hinduja. The Group established its first international office in Iran in the year 1919, and is currently spread all over the world, with offices in the U.K. Switzerland, India and Iran.

Merchant Banking and Trade were the twin pillars of the business in the initial years and the Group remained headquartered in Iran, until 1979 when it moved to Europe.

Today the Group has become one of the largest diversified groups in the world, employing over 40,000 people and has expanded and diversified its business to all the continents.

The group has interest in Banking (Hinduja Bank, IndusInd Bank), Energy (Gulf Oil), Information Technology (Hinduja Ventures - HVL), BPO (HGSL), Healthcare (Hinduja Hospitals - under the umbrella of HVL), Transport (Ashok Leyland and Hinduja Foundries), Real Estate (under the umbrella of HVL), Media & Entertainment (under the umbrella of HVL), etc. 

About HGSL: 

HGSL came to existence after the Group (Hinduja TMT- HTMT) spun-off its BPO business, in the year 2006.  Before the segregation the company was under the HTMT brand, which had started its operation in the year 2000.

Currently the company employs more than 15,000 people (both domestic and int'l) and offers BPO services to various industries, such as Telecom, Retail, BFS, etc. The company has 23 delivery centers across India, US, Canada, Mauritius, Philippines. 

Outlook:     

The company is sitting on hoard of cash balance which it intends to deploy for inorganic growth. HGSL has well laid out acquisition strategy where in it will look for only profitable acquisitions. Additionally, the company plans to do some capex and increase the number of employees and centers for addressing wider customer base. 
 
Financials:

The company has done exceptionally well in terms of growing its balance sheet, acquiring new clients and improving its financials.

 Data: Bloomberg; Wealthy Opinions

The topline has grown by 52% and bottomline by 74% in the last 4 years. In the last FY (2010) HGSL's revenue stood at Rs. 8.92 billion, an increase by 12% on a YoY basis, and made profit of Rs. 1.30 billion, representing an increase by 39% on a YoY basis. 

Data: Bloomberg; Wealthy Opinions

On liquidity front, company has achieved solid liquidity from higher sales and hence better cash flows. Cash Ratio, Quick Ratio and Current Ratio, all are well above the expected standards. 

For the period from 2007 to 2010, the company has gained a solid footing, as visible from the various liquidity ratios, which have grown (CAGR) by over 40%. In the last fiscal, the cash ratio was at 5.19x, quick ratio at 6.33x and current ratio at 7.28x; indication that HGSL will be well able to meet its short term obligations.

Data: Bloomberg; Wealthy Opinions

On profitability front, the company has achieved high returns. Since 2007 Return on Assets (RoE), Return on Equity (RoCE) and Return on Capital (RoC), have all increased (CAGR) by 8%, 6% and 5%, respectively. 

Further this is to bring to notice that the company is making good use of the financial leverage, as indicated by the higher return on common equity than the return on assets.  

In last fiscal, the company achieved a RoA of 11% - an increase by 22% on a YoY basis, RoCE of 13.7% - an increase by 23% and RoC of 13.2% - an increase by 21%.

Data: Bloomberg; Wealthy Opinions

Over the years, HGSL has handsomely rewarded its share holders not only in terms of dividend payment, but also by increasing its intrinsic and book value.

Data: Bloomberg; Wealthy Opinions

Since HGSL's spin-off, the company has rewarded its shareholders by paying good dividends in all the years. For the last fiscal the company has declared dividend payment of Rs. 20 per share, which will be paid to all the share holders on the record date. 

Data: Bloomberg; Wealthy Opinions

Risks:

The BPO industry is very competitive; hence any new entrance might reduce the market share of the current players. Further, the company is exposed to forex risk due to its international presence. 

Conclusion:

The current price is 50% of the fair value (10.9x) to industry average (21x) based on price to earnings. If the management is able to maintain the current numbers, then the stock is a "Cheap Bargain". 

My analysis show that the stock is trading way below its fair value and hence could achieve a re-rating. Further, the current price has got very limited downside risk, due to the cash holding which accounts for more than 60% of the market price (per share).  


Happy Investing!!!