- Wealth PMS (50L+)
On Jan 6th, 2022, Hinduja Global Solutions had released a press note announcing the completion of the sale of its healthcare arm for US$ 1.2 Bn. However, investors aren’t pleased & the stock plunged by 20%. So, what is happening in this Hinduja Group company? What’s in it for the investors? Let’s try to understand in this week’s TLDR.
Hinduja Global Solutions is a market leader in Business Process Management (BPM) services. It has a presence across 7 countries and includes 254 clients. The company operates in 9 business verticals like Healthcare, Technology, Telecom, Consumer, BFSI, etc. The Healthcare division contributes 56% of its overall revenue.
*HGS revenue break-up as of AR 2020-21
In late 2020, the company carved out its healthcare division & was in search of a potential investor. In Aug 2021, the company announced the sale of its Healthcare BPO to Barings PE for an enterprise value of $1.2 Billion. The deal finally concluded in Jan 2022.
The company received a total inflow of $1.08 Billion (~ ₹8046 Cr). The enterprise value of the company stands at ₹ 6700 Cr as of Jan 13th, 2022. The company is trading below its cash on books.
What did investors expect?
The CMP is 3083 /- and Cash per share is at ~₹ 3000/-. So the investors were expecting a big one-time special dividend (something like STAR or BPCL did in the past). However, that didn’t happen. HGS declared a dividend of 150/- per share. A total of 313 Cr outgo for a stake sale worth ~8000 Cr. The company has also increased investment & loan guarantees limit up to 3500 Cr. These announcements baffled the investors pushing the stock down by -20%.
The way forward for investors & the company
The company is looking to reward its shareholders in a tax-efficient manner. On Jan 11th, 2022, the company had released a press note that it is looking for a buyback and potential acquisition opportunity. The management has no mention of delisting the company & would like it to grow the remaining verticals.
The residual business will have a run rate of ₹ 2700-3200 Cr of revenue per year. The earnings will be down by 40%, giving us an estimated PAT of ₹ 250 – ₹ 270 Cr per year. Even assigning a 5Y historical average PE of 10 times, the residual business will be valued at ₹ 2500 to 2700 Cr.
All told, the company may not be in a hurry to utilize the cash proceeds immediately. We have to wait for the quantum of buyback & the potential company they are looking to acquire. The investors may continue to stay with the company as they have shown their intention to distribute the cash and grow the company in-organically.
Vodafone Idea is in trouble, and everyone knows that. But how much trouble? It has a truckload of “AGR” (Adjusted Gross Revenue) percentage share as dues to be paid to the government. And by the truckload, I mean over Rs. 50,000 crore, which I admit will probably need more than a single truck.
They deferred payment on these dues for four years, and the government allowed them to. But the government also allowed them to do one thing: pay the interest for the four years, in advance, by providing equity shares to the government instead. So instead of hard cash, the companies could create shares instead, and use that to pay the government.
At what price? An average price of the share before 14th August 2021. In Vodafone’s case, this falls below Rs. 10 per share. The face value of a Vodafone Idea share is Rs. 10, and you can’t issue under face value, so the company will issue shares at Rs. 10 each.
The amount was calculated to be Rs. 16,000 cr. (Roughly put, Rs. 4,000 cr. per year, or about 8% interest rate, in our calculations). At Rs. 10 per share, they will issue 1,600 cr. shares to the government. The company has roughly 2,900 cr. shares already, of which 72% is held by the promoters (Birla+Vodafone).
This issue to the government changes the game entirely. The government will become the single largest shareholder at 35.8%. Vodafone falls to 28.5% and the Birlas to 17.8%. The government isn’t going to get a board seat, for now at least.
Does this help the company? Not that much. Here’s a look at the balance sheet:
There’s major ugliness still there:
While the conversion of the interest for the next four years into equity is a good thing temporarily, it’s not evident that Vodafone Idea, despite the pedigree of the promoters, is going to make it. The government might do well to slowly sell shares in the market. (Capitalmind note: it could just write call options which over a period of time, will be exercised and thus, shares transferred slowly to the buyers) The share barely has enough significant digits to have a recorded pulse, though.
The other company to do this is TTML (Tata Teleservices Maharashtra), which calculated its four year interest liability to be Rs. 850 cr. which will be issued to the government at Rs. 41.50 per share. That will make the government own 10% of this company. Sounds better than the massive dilution in Vodafone Idea? Well, the share went up from Rs. 35 in October to a whopping Rs. 290 on the day on this announcement and is now in the lower circuit for the last three days. (Price: Rs. 249 as of 14th Jan)
Things don’t look that good here either. The net worth has been negative for a full decade. It’s now -18,000 crores, and the debt is around Rs. 19,000 cr. That means the company is doomed unless they get much more capital from the promoters (Tatas).
Both the companies are on life-support, and optimism in the share prices is probably short-lived unless they get a lot more capital. Let’s enjoy these charts while they last.
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