Hinduja Global Solutions Limited (HGS) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. A very warm welcome to the Hinduja Global Solutions Limited Q1 FY 2022 Earnings Conference Call. From the senior management of the company, we have with us today on the call, Mr. Partha DeSarkar, Executive Director and Chief Executive Officer; Mr. Srinivas Palakodeti, Chief Financial Officer; Mr. R. Ravi, Vice President. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ravi Ramalingam, Vice President of Hinduja Global Solutions Limited. Thank you, and over to you, sir.

Thank you, sir. Thank you, ladies and gentlemen, in this call. I R. Ravi, Head of Investor Relations at HGS, wishing all a very good evening and a warm welcome to the first quarter FY '22 results conference call. To discuss the first quarter results, I'm joined by Mr. Partha DeSarkar, Executive Director and Chief Executive Officer; and Mr. Srinivas Palakodeti, the Global CFO. Before we begin the conference call, I would like to mention that some of the statements made during the course of today's conference call may be forward-looking in nature, including those related to the future financials and operating performances, benefits and synergies of the company's strategy, future opportunities and the growth of market of the company's service and solution. Further, I'd like to mention that some of the statements made in today's conference call may be forward-looking in nature and may involve risk and uncertainty. During the Q&A session, questions should be asked only related to the Q1 FY '22 financials and business performance. While asking questions during the Q&A session, please restrict the questions for the quarter under with you. The management may not be commenting on many of the speculatory news that have been doing around in the social media. Before I hand over the call to the Partha DeSarkar, I would like to mention that if there's a call drop during the course of the conference call, please bear with the management. Because of the COVID-19 call, all of us are taking calls on mobile from different locations, hence call drops for COVID are going to be proving a recurring proper. Before I hand over the call to Mr. Partha DeSarkar to review the Q1, I would like to give a brief overview of the company. For Q1 FY '21, we did a $754 million of revenue with 55 delivery centers across. We are in 7 countries. At the end of Q1 FY '22, we have a total number of employees of 42,769, with 252 BPM clients. In the services area, we have done 4.5 billion annual voice minutes, raised 325,000 annual chat sessions, 150 million plus health care experiences managed in 34 languages we have supported. Our key strengths are the company and the promoter of the company have not pledged any share, the company with a net cash of around INR 420 crores from INR 136 crores in FY '21. We have reported a strong free cash flows. For FY '21, we reported around 49% of EBITDA and free cash. And in Q1, we've reported 137%. The stability is 60% of our revenues are coming from long-tenured clients for more than 10 years with us. We have a proven method of right-shore outsourcing, onshore and nearshore and offshore operations. The client-centric our CSAT score is an all-time high, and we are an employee-centric company. For -- between FY '16 and FY '21, we have grown our revenues by around 10.9% CAGR. And at the PAT level, the growth has been 27.2% for the same period. For FY '21, we have reported an EPS of INR 161 and declared a dividend of around 0.40 per share. The global BPM spend has been growing at a rate of 5.1%, and you can see the slide in the investor section. The revenue of the global BPM was around $161 million -- $161 billion in 2017, and that is expected to go to $207 billion with a growth of around 5.1% CAGR. The Global BPM services forecast, we broadly divided it into 2 parts, the traditional BPO as well as the BPaaS. And BPM sector is growing, but the composition of services is changing. HGS is evolving to the global trend, handling complex voice calls, human plus mission engagement, solution orchestrator approach. Now I would like to invite Partha DeSarkar to provide perspective on the performance of the first quarter financials. Over to you, sir.

Thank you, Ravi. And thank you to all of you who've joined us on this call to take -- taking time to join us on this call to hear about our performance for the first quarter. We -- from the results that you would have seen, this has been a very strong quarter for us. We've had great traction in client wins. The volumes continue to be very strong across the health care business and the U.K. public sector business. I want to make special reference to the U.K. public sector business. That is something new for us. Many of you who've been following us for a long time know that the U.K. business has been struggling in the past, but has really picked up tailwinds since April of 2020, and that momentum continued into April of 2021 as well, one of the fastest-growing businesses and geographies for us and a large part of our clients come from the U.K. public sector. We continue to work from home even though the pandemic is now kind of better from the levels that we saw in April and May. We have not really opened up our offices considering the fact at any point of time. Home and the advantage that we see out of working from home is the fact that it helps us in managing many of our operating costs. So travel cost, transportation cost, utility and maintenance costs, all of these costs are reduced because people are working from home. And unless there is a big change in the safety coming from COVID, we expect to continue to work that way. The next slide, which is Slide 7, talks about the growth in both rupee terms and in dollar terms. You would see that in rupee terms, our revenues have grown from INR 12,359 million to INR 15,505 million. That represents a 25.5% growth. The EBITDA has grown from INR 1,458 million to INR 2,321 million, which is almost a 60% growth. Profit before tax has a handsome growth as well. It's double of -- it's almost double of what it was last quarter, INR 755 million compared with INR 1,642 million, which is about 117.5% growth. And the profit after tax of INR 492 million compared with INR 1,170 million, a 137.7% growth. So in rupee terms, obviously, these numbers are pretty spectacular, and I just wanted to give you some context of that. Those of you who remember our quarter 1 performance of last year, would remember that quarter 1 was the first quarter in which COVID had actually hit. We had a lot of trouble in April. It started to getting sorted out by May. And by June, by end June, we had recovered almost complete productivity. As a result of that, our revenues, profitability in quarter 1 was much lower than our normative profitability. That is why when you compare quarter 1 of last year with quarter 1 of this year, even though COVID continues to be an issue, our numbers are looking so much better because of the fact that operating in a work-from-home environment, trying to manage safety of our employees, while COVID is still unmitigated. We, therefore, have now made it the new normal, and we have figured out how to do this thing well. And that is the impact that you see in our revenue growth and our profitability number. The table below gives you the similar growth in U.S. dollar terms. Revenue growth growth of 28%, EBITDA growth of 63%, PBT growth of 122% and PAT growth up 143%. So these are high-level numbers for the quarter when we compare that with the previous year's similar quarter. On Slide 9, I want to take you through the key takeaways, which has really been a great quarter. Growth has been fantastic, driven, again, as I would like to mention, by the U.K. public sector, which has been putting up a stellar performance. A lot of the work that we do for the U.K. public sector are around the vaccination support that we provide for the National Health Service, NHS. And that is something, as you know, U.K. has rolled out a very ambitious vaccination program, and we do provide support for the U.S. -- U.K. Government for that particular program. We also had a employee satisfaction survey done in quarter 4, and we were very heartened to see the employee satisfaction score actually was the highest in the many years. And our employee attrition was also last year at a very low number. As you know, this is a people business, and therefore, having high employee satisfaction, good employee tenure and low level of attrition are crucial for these businesses. Thankfully, last year in the midst of such a global pandemic, we managed to hit a high even in employee satisfaction. For the rest of the year, open enrollment is on course. We are setting up 2 new centers, 1 in Jamaica and the other 1 in Northern Ireland, and we have a pretty significant hiring plan for the coming quarters as well. We are actually trying to see if we can replicate the success of health care into some other verticals. So we're looking at financial services. Technology, media, telecom also is a fairly strong vertical for us. So we are exploring options for that. Everybody's talking digital. Let me tell you a little bit more about what digital means for us, so that it doesn't sound like the digital cliche and the digital drum that everybody is banging now. We do believe that our growth in the coming year and our business in the coming decade will be driven by AAA. And what I mean by AAA is analytics, artificial intelligence and automation, being the 3 pillars of success. And on top of that, you add cloud to it. We are talking about a new kind of of HGS post this divestiture, I would call it HGS 2.0. That essentially is a technology-led company into the customer experience transformation space. For the first 2 decades of our existence, we've been in the customer experience team for a very long time, for the first 2 decades. In the third decade, you will see us leading with transformative customer experience management through technology. And that is where the AAA that I talked about will come in. We're also going to invest in building our capability in cloud. As I talk about technology-led services company, nearly we would also have to bolster our presence and technology capabilities. And that's why we are also looking out for a string-of-pearls acquisition strategy to fill up whatever capability gaps that we have out there. Work at home will continue to remain the future of our work. We will probably end up adopting a hybrid model as and when the COVID situation improves the worldwide. As of now, we don't really have visibility as to whether the COVID situation is on the way to improvement or not, whether the third wave is going to be real or not. So we continue to take a very risk-covered safe strategy. As I told you, this is a very efficient model of working because it helps us manage our costs better. Now I want to talk a little bit about the divestiture that all of you have heard about. We have divested our health care business to Baring's Private Equity Asia. In spite definitive agreements to sell our health care services to the funds affiliated with BPEA, one of the largest private alternative investment firm in Asia. You would have seen the value that it has unlocked to all of HGS shareholders because we've been able to close the transaction at INR 1.2 billion, subject to working capital closing adjustments. We expect it to complete this between 90 to 120 days, subject to shareholder and other regulatory approvals. We will transfer all our client contracts, about 20,000 employees, assets related to health care services business. We do have some health care clients in a digital and HRO payroll processing business, those will continue to remain with us as part of the HGS' portfolio. Once it closes, this will bring in a fair amount of cash into the system. Our plan to utilize the cash are the following: invest in the organic growth of the business, invest in larger sales engine, look at acquisitions to fill up capability gaps in the string-of-pearls strategy that I talked about. You would, of course, be very -- we'll, of course, be very careful of the fact that there is quite a few -- our shareholders have been very, very loyal to us, and we would look at opportunities to unlock value for them as well. What shape and form that is going to take? It's not something that we will be able to discuss in detail in today's call. Also, please remember this is only a definitive agreement that has been signed yesterday. The closing of the transaction is about 90- to 120-day out and the cash flow come only post closing, subject to working capital changes and taxes. Coming back to business as usual. FY '22 has opened pretty strong. You've seen our numbers. And we do believe that the momentum will continue for the rest of the year. With that, I'm going to hand it over to Pala to give you a financial update of how we are doing. With that, over to you, Pala.

Thank you, Partha. I just want to check, are you able to hear me?

Yes, yes, Pala.

Thank you. So good afternoon, everyone. Thank you for joining us on our Q1 FY '22 earnings call. I will briefly touch on the financials of the company. We have seen strong revenue growth. As Partha mentioned, it's about 28.5% in dollar terms over the same period last year, so that's a very high growth level. In rupee terms it is slightly muted at 25.5%. That's because for the -- USD INR was about INR 75.42 for the quarter ended June '20, and it was at INR 73.62 for the quarter ending June '21. So clearly, the rupee has appreciated during these periods under comparison. And as a result, some of the growth has got shaved off, leading to 25.5% growth in rupee terms. On top of this, we have seen a very strong EBITDA growth, 59.2%, over the same period last year. And margins have also expanded from 11.8% to 15%. So a strong revenue growth and margin expansion has resulted in PBT being higher by about 117% and PAT is being higher by about 138% on a year-on-year basis. On a sequential basis, there is a small drop in revenue, about 0.8% in rupee terms. Bear in mind that Q4 is typically a very strong quarter because of the impact of open enrollment. This year, with the strong performance of the business, especially in the U.K., the revenue dropped between Q4 of FY '21 and Q1 of FY '21 -- '22 is muted. At the PBT level, again, it's at the same level, slightly lower by about 2%. So overall, a very strong performance both on the revenue side and even stronger performance on the PAT side compared to the quarter ended June '20. From a delivery perspective, India accounts for about 24%; 16% for Philippines; U.S., U.K., Canada account for the rest with Jamaica coming in at about 6.5%. From origination perspective, U.K. -- U.S.A. accounts for about 68%; Canada accounts about 10%; U.K., as we mentioned earlier, has shown very strong growth, so from a single-digit sub 10 percentage of total revenues, it now accounts for 16% of the total revenues. From a vertical perspective, health care continues to be the biggest vertical. This includes health insurance, pharmaceutical, health care, that has come in at about 55.5%. In -- coming to our balance sheet, in terms of debt. The total debt we have as of June 30 is INR 3,790 million, out of which about 52% are in the form of term loans. Rest is in the form of working capital. 60% of our debt, which is linked to LIBOR. Rest are all fixed -- are typically fixed interest loans, either in India or overseas. Our balance sheet continues to be strong. During this quarter ending June '22 -- sorry, June '21, we reduced INR 145 million of debt between March '21 and June '21. And at the overall level, we are a net cash company with about INR 4,200 million of cash in excess of debt. And this has increased by roughly -- about 330 million between -- sorry, INR 230 million between June and March. Our CapEx for the quarter was INR 448 million. We have seen a significant reduction in DSO days. The DSO days, which stood at 72 days of revenue has come down to 68 days as of June '21. So a strong growth in EBITDA, reduction in DSO days and CapEx in line with what we had in the previous year has led to significant cash generation with EBITDA to free cash flow conversion at about 137%. Clearly, this is an outlier. As we go through the rest of the year, we would see some drop in the conversion between EBITDA to free cash flow. But at the overall level, it is -- we expect it to be strong looking at the performance of the company. Our ROCE also continues to be strong, and for the quarter on an annualized basis comes to about 25%. Coming to forward covers. We do continue to take forward covers on -- in buckets of rolling 12 months, 24 and 36 months. So as for FY '22, we have a forward cover rate of about 77%, which is significantly higher than the current spot rates. For FY '23, we have hedges of about $64.5 million, at INR 80.5. As we go into the next bucket for FY '24, the volumes have come down to about $28 million, but the rate is very attractive at INR 83.9 for the dollar. In Philippines, we have covered for FY '22 on $104 million at PHP 48.6 to the dollar, and we have some forward covers in FY '23 at a rate of PHP 49. Coming to our overall financial profile. As of 31st -- 30th June 2021, we have net worth of INR 22,000 million or about $296 million. Our book value per share is about INR 1,054. Based on yesterday's market price of INR 3,082, we -- and based on our trailing 12 months, our EPS is INR 193.4, and it is trading at a P/E ratio of 16% on a trailing 12-month basis. As we said earlier, we have gross debt of INR 379 million, cash of about -- sorry, INR 3,790 million, total cash of INR 7,990 million, resulting in net debt -- sorry, net cash of INR 4,200 million. Our gross debt to equity is very comfortable at 0.17 to net worth. Our performance has been recognized by the stock markets. Over the last 12 months, over a 1-year period, HGS share price has gone up by about 252%, higher than NIFTY50 or CNX IT, which have gone up in the range of 26% to 47%. As of yesterday, the market cap is somewhere in the range, a little over INR 6,000 crores. That's all for the financial section of the presentation. Now I open the floor -- I'll give it back to the moderator and request him to open the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Siddharth Oberoi from Prudent Equity.

Congratulations, and thanks a lot for this fantastic deal. My question was that what is the rationale for selling? I just saw the interview on CNBC, where you said that the prime objective was to create shareholder value. So exactly how this value got created? Would you like to like pay back the amount to the shareholders or that somebody is assigned this value to this business? If you just clarify this.

Well, if you've seen the CNBC interview, I did clearly mention that our struggle and a failure for past 2 decades has been to be able to make the market understand what this business is all about. This is a very specialized domain-intensive health care business. And even in investor meetings that we've had, we've struggled to be able to explain what this is. And therefore, the value unlocking was just not happening. So we had a couple of choices. One was to make it private and then list abroad, which is a very complex process, as all of you know. And therefore, we looked at another option of being in a private equity player to see whether a minority investment would unlock value for us. While negotiating with various private equity players, we found that there is a lot of interest in buying of the business completely at very attractive valuations and once we saw the attractive valuations we realized that it is there for us to be able to completely diverse this business. So you realize that it is accretive for the shareholders. In what shape and form the shareholders are going to get the wallet? It is a little premature. As I told you, we've just signed the transaction yesterday. We haven't really closed the transaction yet. That is about 90 to 120 days away. So in what shape or form, I'm not in a position to discuss that right now on this call. As and when the cash comes in and as and when we have further deliberations on the Board, we will be able to come up with a concrete plan.

All right. And also, what's left in the business remaining? It's like about INR 2,600 crores of revenue with 10% EBIT margins around. Is that correct? 47% of the FY '21 business?

Pala, you want to take that question?

Yes. So Siddharth, you're right. So the business, which is proposed to be divested is about 53%. And the 47% is a business which is -- it has digital. It has payroll processing. It has the, what we call CES business, Customer Engagement Services, what we deliver out of U.S., U.K. and -- sorry, originating from U.S., U.K. and Canada being delivered both from India, Philippines, U.S., Canada, Jamaica and U.K. So it's still a fairly large business and with a diversified portfolio. As Partha mentioned earlier, the U.K. business continues to perform very well. And a significant portion of the growth, which you are seeing in Q1 of FY '22 over Q1 of FY '21, has come in from the U.K. business.

Okay. So right now, like you have spoken about this pose of acquisition. Have you identified anything right now?

Well, while looking at acquisitions, it is a part of our ongoing story. If you look at ongoing -- acquisition is something that we have done many in the past and will continue to be our part of growth and capability building in the future. So is there something definitive right now, I won't be able to talk about that. But yes, we look at multiple deals at any point of time. So there is a deal pipeline for acquisitions that we have at any point of time. Nothing to the stage that I can say -- that I can discuss and definitely confirm today.

[Operator Instructions] The next question is from the line of Maan Vardhan Baid from Laurel Investment Advisors.

Congratulations on a good set of numbers. Just wanted to understand that post this deal, who will be the key management performance will continue? So from a leadership perspective, what can one expect going forward?

So I will continue with -- to be the CEO of this company. Pala, who is on this call with me, will continue as the CFO. The Head of the Healthcare business is going to transfer over. His name is Ramesh Gopalan. Along with, there are 2 other members of our leadership team who will be transferring over to the new entity. One is my CTO, Mr. C. Subramanya; and another is Head of Strategic Initiatives from an HR perspective, Mr. Anthony Joseph. So of my team, a total of 3 of my direct reports will transfer into the new health care business.

Fair enough. And sort of wanted to understand that now of what -- with -- what is sort of the business that we continue to operate post this deal? How would our focus change in these businesses? Will -- is there scope of us venturing into health care in some other way? Or is there a no complete agreement with regards to health care, et cetera?

Yes. There is a limited period noncompete into health care. So we won't be able to operate in the health care space, while that noncompete is there.

Okay. And so till that time, where would our focus be? And what is the duration of this noncompete?

Our focus will continue to be in the customer experience space. But in the last 2 decades, we've really been focusing on the labor intensive part of the customer experience space. What we are going to focus on in our third decade of existence will be how do we drive transformation in customer experience space by bringing in technology. So therefore, it's going to be a lot more technology-led going forward.

And sort of the remaining piece, where do our EBITDA margin stand in the remaining piece?

We don't give guidance by line of business. So I won't be able to give you specific numbers. But Pala, you want to discuss some -- you want to give some kind of a qualitative answer?

Yes. So let me take that. Thanks, Partha. So as said, we don't give EBITDA by individual vertical or that kind of analysis. All I can say is that this continue -- this is a business what is going to be left after the health care business is divested, It's the U.K. business, which continues to perform very well. We have a strong onshore presence in North America and which has a good mix of onshore and offshore business, plus we have the HRO business, and what we are calling as our digital services. So we have a business with a reasonably good margins. And as Partha said, we now move -- become a technology-led BPO, and clearly that's where our focus and investments will be.

The next question is from the line of Dipesh Mehta from Emkay Global.

Continuing on the previous question, can you say for FY '21, what was the margin for the remaining business versus health care, which is historical? I'm not asking for forward-looking statement. Second thing is on the balance sheet related thing, can you help us understand what cash and debt will be transferred to the residual business? And what would move to the called out kind of thing, which is likely to be sold to the private equity? And third question is after the consideration which we receive, if you can provide how much we would like to retain for future growth? And how much we would like to return back to shareholders?

Okay. So let me take the question. This is Pala here. So as far as the transaction with the PE fund is concerned, the value of [ INR 1,200 ] million is on a debt-free cash-free basis. And of course, that will be subject to customary adjustments such as working capital. So from a conceptually, the buyer will get a business which is completely debt-free and cash-free and with adequate vertical working capital. So if you look at the debt position as of 30th of June, which stands at INR 379 crores, that will remain with HGS and will not be transferred. As I said, we have about INR 420 crores of cash. That would also remain with HGS and will not be transferred. In terms of FY '21, as I said earlier, we don't give financial -- revenue margin -- sorry, the margin splits or EBITDA splits by vertical. So I'm sorry, I will not be able to share that right now.

And the third question about use of the cash proceeding?

So Partha touched on that, right? So we will use the -- we are still, I said, some time away from closing. The Board is deliberating on it. As I said, the end use could be reduction of debt investments in the business acquisitions, and some form of reward to the shareholders. The specifics are being worked out. So right at this stage, it would not be right for me to say anything beyond this.

And on the first question about now because we have already decided to -- and we entered into agreement to sell that business. And I think at least from investor perspective, it makes sense you to say some data about that business, right? What is going out of the company? What will remain? And what profitability to operate? When it used to be part of consol entity, if you don't want to say, it's fine. But when you are planning to carve it out and exiting that business, it is, I think, advisable if you share some statistics how the new entity will look like? What margin profile that entity will have?

Sure. We will share that separately.

Pala, just to interrupt you. Dipeshji, till now, we have not given the breakup of EBITDA between health care and non-health care. Since it is unpublished and price sensitive at this point of time, we will be able to comment on that. But definitely, I will tell Pala to give that breakup in subsequent announcement so that you will have this detail. Once we release it to everybody in public, then we can have a discussion.

[Operator Instructions] The next question is from the line of Akash Chaturvedi from Alpha Alternative.

Can you give us an idea about the tax impact for the deal?

Yes. So this business, while we are selling it off, it is effectively being businesses sold in India, Philippines, Jamaica and U.S. So it would be the tax rates applicable in each of the geographies form of the way the transaction is happening. So our estimate is the tax rate would be in the range of 22% to 23%, given it's being done as a sale in India and Philippines.

Does that answer your question, Akash?

Yes.

[Operator Instructions] Next question is from the line of Apurva Prasad from HDFC Securities.

I had a couple of quick ones. So I wanted to get this correct. The residual business margin, is that double-digit and a 500 basis point differential? I'm referring to, I think, the media commentary by Partha. Would that be a correct assessment?

Sorry, what was the question, once again?

Yes. So the margin profile of the residual business, would that be double digit with the 500 basis point differential the business that is sold?

Approximately, yes. But as I said, as we look into the pro forma of the business that is left forward. We will be able to give you better information and more qualified information in a couple of months, in the next couple of months.