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6 December 2013

Hinduja Global Solutions

Healthcare spending to drive growth; margins to expand
Key takeaways from analyst meet
BPO market is large and fragmented. BPO market is pegged at US$240bn globally and is growing at 5.9% CAGR, as per Gartner. Despite being a large market, Indias largest BPO company Genpact is expected to end 2013 with revenues of US$2.1bn, representing <1% market share. The fragmented nature of the market suggests that there are opportunities for niche players like Hinduja Global Solutions (HGSL) to grow in the BPO industry. Healthcare spending to drive growth. HGSL derives 26% of its revenues from the healthcare vertical where the company has expertise in the payer market (Insurance) with all business processes covered under its offerings and has a small provider business (like hospitals) built through EBOS acquisition. The company is ranked 4th in market share amongst healthcare BPO providers. The company may look at M&A to build capability in this vertical. Moreover, there are entry barriers in this business with certifications playing a role in the eligibility and comfort of the client while outsourcing contracts. Lack of platforms is not a hindrance. HGSL has tied up with software product companies in the US for their platforms to provide end-to-end solutions to the customers. In such contracts, the company offers services on top of the platform, and customers get the platform they prefer. In terms of pricing structure, customers can either pay licensing fee directly to the software company or HGSL can structure it on a pay-as-you-go model. India business restructuring, better utilization to improve margins. HGSL has churned out non-profitable clients and is reducing dependence on Indian telecom clients to reduce concentration risks. Also, there was an excess capacity built in Philippines resulting into lower utilization levels. These problems stand resolved now and the company expects margins to improve here on. Our take. HGSL is trading at 10.7x FY13 EPS and 6.0x annualized 1HFY14 EPS. On an EV/EBITDA basis, it is trading at 4.4x FY13 EBITDA and 3.4x annualized 1HFY14 EBITDA. Risks Client concentration remains high with top 5 and top 20 contributing 45% and 78% of the revenues, respectively, for the company.
Key financials (YE Mar) FY10 FY11 FY12 FY13 1HFY14 Key data

Rating: Not Rated Share Price: `469

HGSL IN / HGSL.BO

52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding

`469 / `218 20,217 / 6,005 US$49.9m ` 8.6bn / US$0.14bn 20.57m

Shareholding pattern (%)

Sep 13 Jun 13 Mar 13

Promoters - of which, Pledged Free Float - Foreign Institutions - Domestic Institutions - Public

68.14 15.72 0.01 16.13

68.14 15.65 3.02 13.19

68.14 15.64 3.11 13.11

Relative price performance

Source: Bloomberg

Sales (US$m) Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) after tax Dividend yield (%)
Source: Company, Anand Rathi Research

188 8,923 1,301 63 38 7.4 1.0 14 21 4

235 10,731 1,073 52 -17 9.0 1.0 11 8 4

321 15,540 1,061 52 -1 9.1 0.9 10 7 4

364 19,834 906 44 -15 10.7 0.8 8 6 4

201 12,064 806 39 78 6.0 0.7 12 8 2

Mohit Jain
+9122 66266531 mohitjain@rathi.com

Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities

6 December 2013

Hinduja Global Solutions Healthcare spending to drive growth; margins to expand

Quick Glance Financials and Valuations

Fig 1 Income statement (`m)
Year-end: Mar FY10 FY11 FY12 FY13 1HFY14

Fig 2 Balance sheet

Year-end: Mar FY10 FY11 FY12 FY13 1HFY14

Revenues (US$m) growth (%) Revenues (`m) growth (%) Effective USD:INR Cost of Revenues SG&A EBITDA EBITDA margins (%) D&A EBIT EBIT margins (%) Other income Tax ETR (%) Minority Interest Net Profit Net margins (%) EPS (`) EPS growth (%)

188 9 8,923 12 47.4 (5,279) (2,016) 1,628 18.2 (386) 1,242 13.9 187 (128) -9 0 1,301 14.6 63 38

235 25 10,731 20 45.6 (6,866) (2,309) 1,555 14.5 (452) 1,103 10.3 198 (228) -18 0 1,073 10.0 52 -17

321 37 15,540 45 48.4 (10,348) (3,355) 1,837 11.8 (613) 1,224 7.9 (0) (163) -13 0 1,061 6.8 52 -1

364 13 19,834 28 54.4 (13,412) (4,185) 2,237 11.3 (772) 1,465 7.4 (157) (402) -31 0 906 4.6 44 -15

201 11 12,064 22 59.9 (8,211) (2,406) 1,448 12.0 (429) 1,018 8.4 97 (310) -28 0 806 6.7 39 78

Sources of Funds Share capital Reserves & Surplus S/Hs Equity Minority Interest Total Debt Other LT Liabilities Application of Funds Net Fixed Assets Intangibles/Goodwill Other LT Assets Current Assets Accounts Receivable Unbilled Revenues Cash & Investments Other CAs Current Liabilities Accounts Payable Unearned revenue Other CLs

10,810 206 9,285 9,491 0 1,148 171 10,810 2,994 0 13 9,041 1,728 0 6,423 890 1,239 533 0 705

11,819 206 9,782 9,988 0 1,461 370 11,819 2,073 1,692 54 9,785 1,785 0 6,186 1,814 1,784 403 0 1,381

18,248 206 11,089 11,295 0 6,747 206 18,248 3,104 5,778 64 12,467 2,726 0 7,199 2,541 3,165 775 0 2,390

17,121 206 12,149 12,355 0 4,501 266 17,121 3,940 5,515 143 11,065 3,600 0 4,062 3,403 3,541 815 0 2,726

19,592 206 14,158 14,364 0 4,924 304 19,592 3,996 6,689 148 13,199 4,554 0 4,908 3,738 4,441 1,010 0 3,430

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Fig 3 Cash-flow statement (`m)

Year-end: Mar FY10 FY11 FY12 FY13 1HFY14

Fig 4 Ratio analysis @ `469

Year-end: Mar FY10 FY11 FY12 FY13 1HFY14

Cash from Operations PBT Operating Profit before WC Chg in Trade Receivables Chg in Other CA Chg in Trade Payables Chg in Other CL Others including taxes Net Cash from Operations Cash from Investments Capex Acquisitions Investments & Others Net Cash from Investing Cash from Financing Equity Issuance Change in Borrowings Dividends including DDT Others Net Cash from Financing

1,429 1,620 (74) (360) (94) (109) 982 (418) (127) 281 (264) 19 273 (360) (99) (167)

1,301 1,645 (297) (510) 312 (202) 948 (649) (545) 222 (972) 360 (480) (93) (213)

1,224 1,922 (730) 625 (366) 1,452 (905) (3,986) (418) (5,309) 5,708 (478) (284) 4,945

1,308 2,359 (857) 280 (351) 1,431 (587) (834) (411) (1,832) (1,764) (480) (438) (2,682)

1,115 1,544 (954) (335) 195 704 (310) 845 (550) 128 (422) 423 0 423

Return Ratios RoCE % (Post Tax) RoIC % (Post Tax) RoE % Cash Ratios CFO:Sales AR days (incl. unbilled) AP days Dupont Analysis RoE (%) EBIT margin (%) Invst Eff. (PBT/EBIT %) Tax load % (PAT/PBT) Total Asset turnover Lever % (Assets/Equity) Valuation ratios P/E (x) P/B (x) EV/EBITDA (x) EV / Operating CF (x)

21 52 0 11 71 27 14 14 115 91 83 114 7.4 1.0 6.1 10.1

8 18 11 9 61 16 11 10 118 82 95 116 9.0 1.0 6.4 10.4

7 13 10 9 64 21 10 8 100 87 103 141 9.1 0.9 5.4 6.8

6 8 8 7 66 17 8 7 89 69 112 150 10.7 0.8 4.4 6.9

8 11 12 7 69 17 12 8 110 72 131 137 6.0 0.7 3.4 5.8

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Fig 5 Key Metrics

Year-end: Mar FY10 FY11 FY12 FY13 1HFY14

Fig 6 Key Metrics

Year-end: Mar FY10 FY11 FY12 FY13 1HFY14

Employees (EoP) Seats (EoP) Employees:Seats

15,615 14,708 106

19,442 17,047 114

23,899 22,234 107

23,100 23,036 100

24,669 24,827 99

Rev/Employee(US$) Rev/Seat (US$) EBITDA/Employee (`)

12,063 12,807 104,256

12,106 13,807 79,999

13,447 14,454 76,877

15,771 16,325 15,815 16,220 96,848 117,366

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Anand Rathi Research

6 December 2013

Hinduja Global Solutions Healthcare spending to drive growth; margins to expand

Fig 1 Hinduja Global Solutions Fact Sheet

Year-end: Mar 4QFY11 4QFY12 4QFY13 1QFY14 2QFY14

Fig 2 Revenue by delivery

Revenues (US$m) Revenue by delivery (%) US (US and Canada) Europe India Philippines Revenue by vertical (%) Telecom and Technology

235

321

364

98

103

36 12 31 21

46 13 26 15

46 12 28 14

49 10 26 15

51 9 25 15

Source: Company, Anand Rathi Research

26 26 23 5 3 4 14

31 22 18 8 8 5 8

31 26 16 8 7 3 7

32 28 16 8 7 3 6

33 26 17 8 7 3 5

Fig 3 Revenue by vertical

Health Insurance Consumer Electronics BFS Media Chemicals and Biotech Others Client Concentration (%)

Source: Company, Anand Rathi Research

Top Client Top 5 Clients Top 10 Clients Top 20 Clients Client metrics Number of Clients Revenue per Active Client (US$m) Workforce Spread (%)

13 45 60 75

11 45 63 79

12 45 63 80

13 46 63 78

13 45 62 78

Fig 4 Client Concentration

106 2.2

485 0.7

535 0.7

543 0.7

NA NA

Source: Company, Anand Rathi Research

India Philippines US Canada UK/Europe Total

71 15 10 0 4 19,442

63 14 9 10 4 23,899

63 15 9 9 4 23,100

61 16 9 10 3 24,433

60 15 10 11 4 24,669

Fig 5 Workforce Spread

Seats Number of seats

Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

17,047

22,234

23,036

23,920

24,827

Anand Rathi Research

Appendix
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Anand Rathi Research Ratings Distribution (as of 28 Feb 2013) Buy Anand Rathi Research stock coverage (184) 65% % who are investment banking clients 4%

Hold 27% 2%

Sell 8% 0%

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