HOV SERVICES  cmp 92

HOVS is one of the largest end-to-end BPO companies, providing healthcare, finance and accounting, e-content management, document lifecycle, presentment, HR assist, and strategic consulting services across key verticals such as BFSI, Healthcare, Government, Telco, Publishing, Retail, Commercial and Industrial Manufacturing industries.

The motto of the company is “Exceed Expectations”.

True to the word, the company exceeded expectations of shareholders on the downside in terms of share price.

Reason: It sold of its stake in various subsidiaries namely 100% Stake in Bay Area Credit Services, 100% interest in HOV AR Management Services, and 30% minority stake in TRAC Holdings to Rustic Canyon for a consideration of 12 Million usd.  In doing so the company effectively booked exceptional loss of 132 crores and hence reported a loss at net level in FY 10.

FINANCIALS

After all this mess clean-up, the company reported the following results for Q1 FY 11.

Sales    182 cr   vs 223 cr (decline in revenues is due to divestment of subsidiaries)

NP        17.64 cr  vs  12.27 cr  ( improvement in margins is evident)

Interest payment has reduced from 9.41 cr to 7.36 cr.

Quarterly EPS  is at 14.13.

Total outstanding shares are at 1.25 cr and total market cap is at around 115 crores.

Debt as on march 2010 was around 520 crores which is expected to go down.

Dividend declared during fy 10 was Rs 4.

Promoter holding is around 49%-- no pledging  (around 9% shares were re classified as non promoter from promoter category—hence q-on q reduction in promoter shareholding)

Company bought back around 63000 shares at an avg price of 32 during buyback which finished in Jan 2010.

INVESTMENT THEME:

If one were to annualise the quarterly eps of 14, we get an annualised EPS of around 56.  So we are surprised why the stock is available at a pe of roughly 2 and market cap to sales of around 0.15?   And that is where the dilemma occurs.

Sometimes we are faced with a situation which is just “too good to be true”.   In such situations, one begins to wonder if there are skeletons hidden in the cupboard waiting to come out.  I tried hard to find out whether there are any significant negatives in this company.  Except debt and the write off, I couldn’t find too much.

Currency fluctuations could impact earnings.

Technically, after recent run up to 115 in April 2010 from a low of 24, the stock is currently consolidating  between 80-100 since 2 months.

If the company continues with its performance and maintains the first quarter results going forward for next few quarters, there could be some rerating and good gains.

Company paid Rs 2 interim dividend in fy 10 and declared another Rs 2 final div for which record date is 21 aug.  After declaring the q1 fy 11 results, another Rs 2 interim dividend is declared for fy 11 for which record date is not yet declared.

Now it needs to be seen if the “Exceed Expectations” theme applies to the company on upside.

Acknowledgement :  This scrip has been brought to my notice by a senior TEDDIE, master . thanks sir.

Now that Hit sir has done the hard work of setting up a thread & story, I will add a few points, mostly negative, in the interest of more informed decision-making by members:

1. Promoters, in the past were involved with some firms in US, which ran into problems/legal disputes. To name a few, Bay Area Credit service, Interparm & Osicom .
2. AR business arm which contributed about 17% to HOV's topline is gone, so revenue growth will have to be made up by other streams.
3. EBIDTA margins of 17% and NPM of 9.6% is lower compared to few other companies in this space, probably because it's not into some of the high-end jobs.
4. Q-o-q net profits declined by 10% in Q1-FY11.
5. Business is not straightforward to understand, complex structure of subsidiaries, cross-country operations, forex issues etc.
6. No brokerage report on this stock either side, at least I've not seen. (I'm calling this a negative since for a micro-cap, it can act as a basic information filter).
7. No MF holding (I'm calling this a negative since it can be a hedge against unabated management action potentially).
8. I feel markets would like to give this company a few more quarters to demonstrate its earnings record, before any re-rating is done.

 Disclosure – I'm invested here recently.

1. Results are on expected lines.
2. Previous year numbers are not comparable due to sale of ARM division wef Jan-10.
3. Interest outgo has q-o-q reduced sequentially.
4. 2nd half should see volume growth with addition of one additional site each in China and Chennai.
5. Would like to see how markets treat the stock over next 6 months.