HGSL 1QFY18

1. Anand Rathi Share 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. Disclosures and analyst
certifications are present in the Appendix.
Anand Rathi Research India Equities
Technology
Company Update
India I Equities
Key financials (YE Mar) FY15 FY16 FY17 FY18e FY19e
Sales (` m) 28,076 33,247 37,110 38,336 40,498
Net profit (` m) 1,651 1,010 1,792 1,932 1,921
EPS (`) 79.7 48.7 86.5 93.2 92.7
Growth (%) -2.8 -38.8 77.4 7.8 -0.6
PE (x) 6.4 10.4 5.9 5.4 5.5
PBV (x) 1.0 0.9 0.8 0.7 0.6
RoE (%) 13.1 9.0 14.2 13.6 12.1
RoCE (%) 12.3 10.9 15.6 16.7 16.5
Dividend yield (%) 4.0 3.0 2.0 2.0 2.0
Net debt/equity (x) 0.2 0.3 0.2 0.1 0.0
Source: Company, Anand Rathi Research
Mohit Jain
Research Analyst
+9122 6626 6531
mohitjain@rathi.com
Shobit Singhal
Research Associate
+9122 6626 6511
shobitsinghal@rathi.com
1,58,329.51 1,58,329.51
`
Rating: Buy
Target Price: `700
Share Price: `508
Key data HGSL IN / HGSL.BO
52-week high / low `638 / `461
Sensex / Nifty 31449 / 9794
3-m average volume $0.1m
Market cap `11bn / $164.5m
Shares outstanding 21m
Shareholding pattern (%) June'17 Mar'17 Dec'16
Promoters 67.5 67.6 67.6
- of which, Pledged - - -
Free float 32.5 32.4 32.4
- Foreign institutions 7.9 7.4 7.6
- Domestic institutions 2.0 3.0 3.4
- Public 22.6 21.9 21.4
Change in Estimates Target Reco 
14 August 2017
Hinduja Global Solutions
On strong FCF generation, robust balance sheet; Buy
Boosted by growth in BFSI (19% y/y) surpassing that in its healthcare
vertical (14% y/y) for the first time since Q1 FY14, Hinduja Global
Solutions reported a steady quarter, with revenue of $144m, up 1.9%
q/q, 5.7% yoy (CC growth was 6.4% y/y). On adjusting for forex
accounting, the EBITDA margin was 10.8%, down 256bps qoq, 92bps
y/y. Positive for the quarter were debt reduction of `586m and capex
down 25% y/y to 4.3% of revenue. No major change in estimates or
target of `700 (7.5x FY19e EPS).
Steady quarter but weak client metrics. Revenue growth in Q1 was
supported by BFSI (8% of revenue) and Healthcare (47%). Telecoms (22% of
revenue, down 6% y/y) continues to be faced with growth challenge. The
top-20 clients (71% of revenue) grew just 4.3% y/y in dollar terms (down
0.9% q/q), slower than the company. Further, clients in higher revenue
buckets fell during the quarter, indicating deterioration in client metrics and
some currency impact (HGS measures it in rupee terms).
Lower capex equals high FCF generation. On adjusting for a forex loss,
the operating margin was down 256bps q/q, 92bps y/y, to 10.8%, hit by
currency movements and a rise in headcount (a net 1.4% increase). Lower
capex (down 25% y/y) led to a significant rise in FCF generation (`784m),
utilised to repay debt of `586m and helping strengthen the balance sheet. In
the last 12 months, debt has come down by `2.032m, an achievement for the
company; net debt now stands at `1,187m. There is a strong case for an
increase in dividend payout (13% in Q1 pre-tax).
Valuations. We largely retain our FY18e and FY19e earnings and the target
price. The stock now trades at 5.5x FY19e PE and 2.6x EBITDA, making it
an attractive Buy. Our `700 target implies 38% potential. Risks: Currency
movements, reversion to a high-capex model, and automation technologies.
Relative price performance
Source: Bloomberg
HGSL
Sensex
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Aug-16
Sep-16
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Estimates revision (%) FY18e FY19e
Revenues ($ m) 0.3 (0.5)
EBITDA (4.8) (5.3)
Net Profit (2.0) (2.4)

2. 14 August 2017 Hinduja Global Solutions – On strong FCF generation, robust balance sheet; Buy
Anand Rathi Research 2
Quick Glance – Financials and Valuations
Fig 1 – Income statement (` m)
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
Net revenues 28,076 33,247 37,110 38,336 40,498
Revenue growth (%) 12.1 18.4 11.6 3.3 5.6
- Oper. expenses 24,904 30,152 32,678 33,938 36,026
EBIDTA 3,173 3,095 4,432 4,397 4,472
EBITDA margins (%) 11.3 9.3 11.9 11.5 11.0
- Interest 386 401 429 316 207
- Depreciation 1,052 1,364 1,432 1,501 1,629
+ Other income 201 230 -24 166 120
- Tax 284 549 755 814 835
Effective tax rate (%) 14.7 35.2 29.6 29.6 30.3
+ Associates / (minorities) - - - - -
Adjusted PAT 1,651 1,010 1,792 1,932 1,921
+ Extraordinary items - - - -0 -
Reported PAT 1,651 1,010 1,792 1,932 1,921
Adj. FDEPS (` / sh) 79.7 48.7 86.5 93.2 92.7
Adj. FDEPS growth (%) -2.8 -38.8 77.4 7.8 -0.6
Source: Company, Anand Rathi Research
Fig 3 – Cash-flow statement (` m)
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
Adjusted PAT 1,651 1,010 1,792 1,932 1,921
+ Non-cash items 1,052 1,364 1,432 1,501 1,629
Cash profit 2,703 2,374 3,224 3,433 3,549
- Incr. / (decr.) in WC -369 1,189 -1,101 -187 369
Operating cash-flow 3,072 1,185 4,325 3,620 3,181
- Capex -2,099 2,799 2,056 2,262 2,000
Free cash-flow 5,171 -1,614 2,269 1,358 1,181
- Dividend 485 374 249 242 242
+ Equity raised -4,944 406 42 0 -0
+ Debt raised -732 1,803 -2,216 -2,656 -1,411
- Investments 18 15 -56 5 5
- Misc. items - - - 0 -
Net cash-flow -1,007 205 -98 -1,544 -477
+ Op. cash & bank bal. 4,550 3,543 3,748 3,650 2,105
Cl. Cash & bank bal. 3,543 3,748 3,650 2,105 1,628
Source: Company, Anand Rathi Research
Fig 5 – Price movement
Source: Bloomberg
Fig 2 – Balance sheet (` m)
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
Share capital 207 207 207 207 207
Reserves & surplus 10,535 11,576 13,180 14,870 16,549
Net worth 10,742 11,783 13,388 15,078 16,756
Total debt 5,891 7,650 5,969 3,314 1,903
Minority interest - - -20 -19 -19
Def. tax liab. (net) -32 13 -523 -523 -523
Capital employed 16,602 19,446 18,815 17,850 18,117
Net fixed assets 4,290 5,294 5,827 6,588 6,960
Intangible assets 3,461 3,893 3,984 3,984 3,984
Investments 87 102 46 50 55
- of which, Liquid 7 - - - -
Working capital 5,221 6,410 5,309 5,122 5,490
Cash 3,543 3,748 3,650 2,105 1,628
Capital deployed 16,602 19,446 18,815 17,850 18,117
Working capital (days) 67.9 70.4 52.2 48.8 49.5
Book value (` / sh) 518.4 568.5 645.9 727.5 808.5
Source: Company, Anand Rathi Research
Fig 4 – Ratio analysis @ `508
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
P/E (x) 6.4 10.4 5.9 5.4 5.5
Cash P/E (x) 3.9 4.4 3.3 3.1 3.0
EV / EBITDA (x) 4.1 4.7 2.9 2.7 2.4
EV / sales (x) 0.5 0.4 0.3 0.3 0.3
P/B (x) 1.0 0.9 0.8 0.7 0.6
RoE (%) 13.1 9.0 14.2 13.6 12.1
RoCE (%) 12.3 10.9 15.6 16.7 16.5
Dividend yield (%) 4.0 3.0 2.0 2.0 2.0
Dividend payout (%) 29.4 37.1 13.9 12.5 12.6
Net debt / equity (x) 0.2 0.3 0.2 0.1 0.0
Debtor (days) 76.9 79.5 74.2 74.2 74.2
Payables (days) 24.6 20.8 17.9 17.9 17.9
CFO:PAT 115.9 144.4 224.9 194.9 169.9
CFO : sales 6.8 4.4 10.9 9.8 8.1
RoIC % (post-tax) 12.1 7.7 13.5 13.0 12.1
Source: Company, Anand Rathi Research
Fig 6 – EBIT
Source: Company
HGSL
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3. 14 August 2017 Hinduja Global Solutions – On strong FCF generation, robust balance sheet; Buy
Anand Rathi Research 3
Result Highlights
Q1 FY18 Results at a Glance
Fig 8 – Quarterly result
Year-end: Mar (` m) Q1 FY18 % q/q % y/y FY17 FY16 % y/y
Sales ($ m) 144 1.9 5.7 554 507 9.3
Sales 9,272 (1.4) 1.9 37,110 33,247 11.6
EBITDA 1,002 (20.3) (6.0) 4,432 3,095 43.2
EBITDA margin (%) 10.8 -256 bps -92 bps 11.9 9.3 263 bps
EBIT 635 (28.5) (13.3) 3,000 1,731 73.4
EBIT margin (%) 6.8 -259 bps -120 bps 8.1 5.2 288 bps
PBT 579 (0.4) (23.2) 2,547 1,559 63.3
Tax (164) 6.3 (30.1) (755) (549) 37.4
Tax rate (%) (28.3) -180 bps 283 bps (29.6) (35.2) 560 bps
Net Income 415 (2.9) (20.0) 1,792 1,010 77.4
Source: Company Anand Rathi Research
Fig 7 – Segment-wise results
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Q/Q % Y/Y %
Revenues ($ m) 136 135 142 141 144 1.9 5.7
Growth YoY % 16 11 6 5 6 61bps -1019bps
Volume growth % 10.0 8.4 7.2 1.3 1.3 -2bps -876bps
Revenues (` m) 9,095 9,052 9,563 9,400 9,272 -1.4 1.9
Eff. exchange rate 66.9 66.9 67.5 66.6 64.5 -3.2 -3.6
Employees (EoP) 40,938 43,793 43,750 44,237 44,877 1.4 9.6
Revenue productivity ($ ‘000/employee) 3.3 3.1 3.2 3.2 3.2 0.5 -3.5
CoR (excluding D&A) (6,038) (6,067) (6,352) (6,112) (6,227) 1.9 3.1
As % of revenue -66 -67 -66 -65 -67 -214bps -77bps
SG&A (1,991) (2,021) (2,066) (2,032) (2,043) 0.5 2.6
As % of revenue -22 -22 -22 -22 -22 -42bps -14bps
EBITDA 1,066 964 1,145 1,257 1,002 -20.3 -6.0
EBITDA margin % 12 11 12 13 11 -256bps -92bps
EBIT 732 591 790 888 635 -28.5 -13.3
EBIT margin % 8 7 8 9 7 -259bps -120bps
Other income 139 12 34 (209) 36 -117.0 -74.3
Forex gain / loss 54 (50) (21) (235) (9) -96.3 -116.3
PBT 753 492 720 581 579 -0.4 -23.2
PBT margin % 8 5 8 6 6 6bps -204bps
Taxes (234) (118) (248) (154) (164) 6.3 -30.1
ETR % -31 -24 -34 -27 -28 -180bps 283bps
PAT 519 374 472 427 415 -2.9 -20.0
PAT margin % 6 4 5 5 4 -7bps -123bps
Source: Company, Anand Rathi Research

4. 14 August 2017 Hinduja Global Solutions – On strong FCF generation, robust balance sheet; Buy
Anand Rathi Research 4
Conference Call Takeaways
Company
 The focus on FCF and operational efficiencies would continue for the
rest of FY18. However, margins may be affected by currency
movements, minimum wage increases in some states in India (making
tier-2 call centres less viable) and weakness in India’s telecoms sector
(HGS’ India business brings 16% to its revenue). Management would
try to soften the impact by transferring the workforce to states where
minimum wages are not applicable.
 Minimum wages in Canada could also come by Q4 FY18. The impact
of this could not be directly transferred to customers by an increase in
pricing but various offset levers are available like higher offshoring,
some price increases, and government subsidies.
 Capex is expected to hold in the range of `1.6bn-1.8bn, of which
`395m has already been expensed in Q1 FY18.
 Debt now stands at `6.0bn (term loans: 33%,) rest is working capital
loan. The requirements of working capital could increase in response
to growth in revenues
 New centres opened in Indore with 700 seats. Two Durgapur centres
will be consolidated into one.
Business outlook
 H2 FY18 would be better than H1. Cost pressures in Indian telecoms
would be seen due to consolidation in the telecoms industry generally.
 The company is positive on the Healthcare sector and believes that it
would continue to grow at a healthy rate in FY18.
Notes from the last two quarters’ conference calls
From Q4 FY17
 Q1 FY18 revenue growth would exhibit the usual seasonality (weak
H1, strong H2). Margins would be similar to Q1 FY17 as currency
headwinds are likely.
 Higher dividend/buy-back to be considered later as cash generation is
expected to be strong. The first priority currently is to repay debt,
followed by some capital allocation ($10m-15m) towards M&A.
 Forex loss for the quarter was `230m.
From Q3 FY17
 Q4 is expected to be little softer than the very strong Q3.
 HGS expects to maintain its margins in the current environment than
attempt expanding them through higher offshoring.

5. 14 August 2017 Hinduja Global Solutions – On strong FCF generation, robust balance sheet; Buy
Anand Rathi Research 5
Factsheet
Fig 9 – Revenue
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Revenues ($ m) 136 135 142 141 144
Source: Company Anand Rathi Research
Fig 10 – Revenue by area
(%) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
North America 28 28 29 29 28
Canada 12 10 10 10 10
Continental Europe 10 10 7 7 7
India 32 34 35 35 36
Philippine 18 18 19 19 19
Source: Company Anand Rathi Research
Fig 11 – Revenue by vertical
(%) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
BFSI 7 7 7 7 8
Telecoms 25 24 22 22 22
Hi-tech / PES (cons. elec) 14 14 13 13 13
Life Sciences (chem, biotech & ins) 43 46 49 48 47
Media and Entertainment 3 3 2 0 4
Others 7 7 6 9 6
Source: Company Anand Rathi Research, * Clubbed in “others”
Fig 12 – Client concentration
(%) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Top client 17 18 18 18 19
Top-5 clients 47 49 50 52 52
Top-10 clients 60 61 61 63 62
Top-20 clients 72 73 72 73 71
Source: Company Anand Rathi Research
Fig 13 – Revenue by currency exposure
(%) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
North America 65 66 68 68 65
Canada 12 11 10 10 11
Continental Europe 10 10 7 7 8
India 13 14 14 15 16
Source: Company Anand Rathi Research
Fig 14 – Workforce spread
(%) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
North America 5 8 9 9 9
Canada 6 5 5 5 5
Continental Europe 4 4 3 3 3
India 68 66 65 67 67
Philippine 17 17 18 16 16
Total 40,938 43,793 43,750 44,237 44,877
Source: Company Anand Rathi Research
Fig 15 – Seats
(%) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Active clients 189 185 185 183 187
Revenue per active client ($ m) 0.7 0.7 0.8 0.8 0.8
Source: Company, Anand Rathi Research

6. 14 August 2017 Hinduja Global Solutions – On strong FCF generation, robust balance sheet; Buy
Anand Rathi Research 6
Valuations
The stock trades at 5.5x FY19e PE and 2.6x EV/EBITDA, attractive
considering the capex reduction (in Q1 FY18 down 25% yoy, dipping
below 5% of revenue) and consequent greater free-cash-flow generation
(much higher EBITDA and discipline in working capital). Therefore, we
maintain our target multiple at 7.5x (reflecting slower revenue growth,
dependence on one vertical and our view of BPO being at higher risk than
IT due to new technologies). We maintain our Buy rating with an
unchanged target price (`700, at 7.5x FY19e PE).
Firstsource and HGS are experiencing slow organic growth at the industry
level, and growth seems to be concentrated in a few verticals. Of the two,
though, HGS is growing more rapidly organically, but heavily depends on
one vertical: Healthcare. The US is currently traversing a phase of
regulatory uncertainty and that includes healthcare (The Affordable Care
Act). This also constrains our target multiple for HGS.
At the industry level, we are setting a discount to BPO companies
compared to IT-services companies since the latter are higher up the value
chain than the former. We believe that, at this stage, automation threats
may be greater for BPO companies than for IT-services companies.
Therefore, on being exposed to these counters, one needs to build in a
margin of safety in terms of valuations.
Consequently, we believe that HGS is quite close to its peak growth and
margin profile. But valuations have potential if the company can
consistently deliver on free cash-flows and dividends.
Fig 16 – Change in estimates
FY18 FY19
(` m) New Old Chg % New Old Chg %
Revenues ($ m) 594 592 0.3 628 631 (0.5)
Revenues 38,336 39,476 (2.9) 40,498 42,047 (3.7)
EBITDA 4,397 4,619 (4.8) 4,472 4,723 (5.3)
EBITDA margin % 11 12 -23 bps 11 11 -19 bps
EBIT 2,896 3,087 (6.2) 2,843 3,060 (7.1)
EBIT margin % 8 8 -26 bps 7 7 -26 bps
PAT 1,932 1,971 (2.0) 1,921 1,969 (2.4)
Source: Company, Anand Rathi Research
Fig 17 – PE band (one-year forward)
Source : Bloomberg, Anand Rathi Research
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HGSL

7. 14 August 2017 Hinduja Global Solutions – On strong FCF generation, robust balance sheet; Buy
Anand Rathi Research 7
Risks
 Capital allocation: HGS is shifting from a capital-intensive business
model to a low-capex one, and is expected to take up additional areas
on rent to the extent possible. This, if sustained, has the potential to
improve its balance sheet and cash-flows. However, any reversion to
the capex-heavy model would be a huge negative.
 Long-term risks due to automation: We reckon that the BPO sector
could see slower-than-industry revenue growth on account of the
impact of automation on the industry.

8. Appendix
Analyst Certification
The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the
compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange
Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have
no bearing whatsoever on any recommendation that they have given in the Research Report.
Important Disclosures on subject companies
Rating and Target Price History (as of 14 August 2017)
Date Rating
TP
(`)
Share
Price (`)
1 28-Oct-14 Buy 980 651
2 09-Apr-15 Buy 940 574
3 09-Nov-15 Buy 670 471
4 13-Dec-16 Buy 650 533
5 10-Feb-17 Hold 700 605
6 23-May-17 Buy 700 528
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below:
Ratings Guide (12 months)
Buy Hold Sell
Large Caps (>US$1bn) >15% 5-15% <5%
Mid/Small Caps (<US$1bn) >25% 5-25% <5%
Research Disclaimer and Disclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014
Anand Rathi Share and Stock Brokers Ltd. (hereinafter refer as ARSSBL) (Research Entity) is a subsidiary of Anand Rathi Financial Services Ltd. ARSSBL is a
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its employees and associates responsible for any losses, damages of any type whatsoever.
HGSL
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