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Cash Call

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Mudar Patherya New Delhi

HTMT Global offers everything you want in a company in tough market conditions.

A fluid world prices solidity at a premium. Oh, but that is baba aadam ke zamaane ki wisdom. Today even solidness is being extensively discounted.

The one stock where this is most visibly evident is HTMT Global. This company figures among the leading 15 Indian BPO vendors with an entrenched presence in voice-based services and a growing presence in non-voice transaction processing services.

It would be simplistic to pronounce that the company is available at a discount to its intrinsic value; in HTMT Global, it is serious enough to become a case study for all those B-school students who otherwise taqseem away their summers conducting thesis on deeply profound philosophies like ‘The future of the mutual fund industry in India’ and ‘Risk appetites of fixed income investors’.

 

But first the raw case for investing: HTMT Global is priced by the market at a market capitalisation of around Rs 240 crore (last week’s closing); the company possesses Rs 625 crore of cash on its books with negligible debt, despite reporting rising earnings over the last five quarters (pre-adjustments) and the possibility of delivering an EBIDTA of Rs 160 crore in the current fiscal.

This is why I like the company.
* Completely focused on vertical based service offerings like customer care and transaction processing. No software, no IT products. Focused ITeS company. Addressable market opportunity of $90-127 billion.

* Business classified as mission-critical, comprising the back-end hosting of the client’s customer management services. Existing client base of about 78 across India, Philippines and North America with no client attrition even in a challenging October and November.

* Delivery capabilities spread across India, Philippines, the US and Canada. Offshore centres located in Bengaluru, Mysore, Chennai, Mumbai, Hyderabad and Durgapur (India) and Manila (Philippines); onshore/near shore centres are located at Montreal (Canada) and Peoria, St. Louis, Waterloo, and El Paso (USA).

* About 76 per cent of revenues generated from voice-based services, largely linked to customer care (presales, sales, after sales, help desk support, product support and billing) Non voice-based offerings (24 per cent of sales) comprise healthcare adjudication services and insurance claim processing. Safe vertical selection; no customer from the mortgage or BFS segments; nearly 90 per cent of the business is inbound as distinct from telemarketing.

* Business stability secured through enduring customer relationships. Business reality highlighted by the need for stable back-end vendors. Relationships weighted more around capability and long-term pricing contracts than short-term bargain hunting by customers; also influenced by the ability of specialised vendors like HTMT Global to enhance client’s customer satisfaction and retention leading to growing volumes. Relationship pivoted around high Service Level Agreement scores, placing the company among top three BPO vendors for customers and reflected in a 50 per cent increase in business from two customers in the last couple of quarters.

* Posted growing profits in strong rupee environments over some of the last few quarters before the rupee weakened sharply. Business viability protected by an attractive 30-40 per cent wage and quality arbitrage opportunity for clients

* Negligible gearing has protected viability at a time when a number of international competitors with stretched balance sheets have exited the business in the last few months, enhancing an opportunity to improve market share. Fancy a balance sheet size of Rs 969 crore as on September 30, 2008 and a debt position of Rs 89 crore!

* Profitable balance of onshore (based in US) and offshore (India and Manila) business models; onshore business caters to clients needing back-end support for high end products; provides the company with an exposure to cutting-edge industry practices; provides a reference that leads to customer acquisition in other geographies; provides evidence to US policy makers that the company is creating jobs in US.

* Robust and growing domestic presence. The company was one of the first players to tap the domestic market for BPO services, which now contributes about 19 per cent of sales (Airtel is a client since 2005 contributing 15 per cent of sales).

* The US presence is conducted through a subsidiary called Affina, which shares a part of the profits with the erstwhile US owner; the agreement expires in December 2008 following which all the inflow will be retained; even as US margins are lower than in India, Affina turned profitable in the last two quarters of 2008-09.

* Proposed renegotiation of agreements with customers in January 2009 will translate into enhanced earnings.

* Increasing headcount by 3,000 this year to a total of 17,000; a Vashi (Mumbai) centre was commissioned in June 2008, a Chennai centre in September 2008 and a centre in North India is expected to go on stream by the end of this financial year.

* Significant cash buffer is a balm for weak nerves. Prior to de-merger of the combined entity, the Hinduja Group exited from the erstwhile Hutchison Essar in July 2006. The group sold its 5.1 per cent stake in the telecom service provider for $450 million in cash. Post de-merger, HTMT Global Solutions received its share of $110 million cash from the stake sale as a part of the stake was held by its Mauritius-based subsidiary ‘Pacific Horizon’. The company’s net cash on books is higher than its market capitalisation!

* There is a positive earnings momentum: EBIDTA margins have broadly climbed from 12.7 per cent to 18.9 per cent in the last six quarters; pre-tax and pre-adjustment profits have climbed from Rs 20.24 crore to Rs 33.65 crore during the period; topline has increased from Rs 143 crore to Rs 190 crore, indicating a sweet spot for the business.

Pray, then what could be the reason behind the company’s abysmal discounting? Theories abound.

Issues
* There is a perception that the company is largely supported by revenues from companies within the Hinduja Group; the reality is that not more than Rs 40 lakh was derived from BPO revenues for Hinduja Hospital of the company’s overall revenues of Rs 750 crore in 2007-08.

* The company generated $110 million from stake sale. The perception is that the company is under-utilising the war chest in terms of its potential. The reality is that the company has kept these funds in Mauritius; if it brings this money into India, there could be a tax implication of 33 per cent; the invested funds are generating a modest return of a little less than 5 per cent (post-tax). The war chest is being protected to acquire assets or companies or brands prudently. Even as the company maintains that this will be done only if the inorganic gambit is shareholder-accretive, investors have lost nerve.

If the strategy in panic-driven times is to sit on liquid assets, then it might help to remember a company where you can buy a rupee for a little more than just 30 paise! A wise investor had once said that the most profitable investing is when making money is as simple as simply going over and picking up cash that others have left around. Mudar runs Trisys, India’s largest annual reports consultancy. Responds with speed at mudar@trisyscom.com (unless you ask him for tips!). Yet to break into the piggy bank and buy HTMT Global stock.

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First Published: Dec 01 2008 | 12:00 AM IST

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