Release Date: February 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Hinduja Global Solutions Ltd (BOM:532859, Financial) reported a double-digit growth in top line across business process management services and digital media services.
- EBITDA and margin expansion improved significantly on a year-on-year basis from 11% to approximately 16%.
- Profit before tax before exceptional items stood at INR16.2 crore compared to a loss of INR28.4 crore, indicating a strong turnaround.
- The company has signed technology partnerships, such as with Form1 Partners in the UK, to strengthen its market offerings.
- The digital media business launched a new product, NetX, which has been well-received and is expected to be a game-changer for the connectivity and networking landscape in India.
Negative Points
- Despite the improvements, the profit after tax (PAT) was down due to exceptional items and significant tax reversals.
- Economic uncertainty driven by high interest rates continues to affect decision-making and lengthen sales cycles.
- A large part of operations remains work-from-home, leading to the closure of centers in El Paso, Texas, and Alabang, Philippines.
- Other income showed a slight dip of about 15% on a quarter-on-quarter basis.
- The nine-month performance showed mixed results with operating revenues up only 2.4% and total EBITDA down due to a reduction in other income.
Q & A Highlights
Q: IT industry is facing headwinds due to slowness in demand from developed markets. What is the sense that HGS has been getting in terms of sectoral headwinds, and how is the global BPM market responding? What is the outlook for FY25?
A: Decision-making cycles are still slow due to high interest rates and economic uncertainty. However, new opportunities in generative AI are expected to drive growth significantly. This technology is seen as transformational and will level the playing field between established big players and newer small players like HGS.
Q: Sales growth in the last quarters has been subdued. How do we see FY25 turning out in terms of revenue growth and profitability?
A: The quarter-on-quarter performance is positive. While specific guidance is not provided, growth is expected to be in line with traditional rates, and efforts will be made to improve margins.
Q: How will generative AI impact the BPM business, and will it lead to cost deflation?
A: Generative AI will likely improve service levels and reduce hold times, converting delays into revenue. While fewer people may be needed to answer queries, technology will handle more tasks, leading to improved margins.
Q: What is the major growth driver for the company in the next three years, and what strategy is in place to stabilize margins?
A: Generative AI is the single most important growth driver. As more technology is deployed, margins are expected to improve.
Q: Has HGS developed its own proprietary model of generative AI, and what investments have been made?
A: HGS has developed a solution called Agent X, with an investment of approximately $3.5 million. This solution is tailored for specific markets and clients.
Q: How have foreign exchange fluctuations impacted this quarter's results?
A: There was a loss of about INR10.62 crore due to FX fluctuations, compared to a gain of INR22.4 crore in the previous quarter. This is primarily due to restatement of assets in different currencies.
Q: Are there any hedging strategies in place to mitigate FX fluctuations?
A: For actual cash flows, forward covers are taken. However, for balance sheet items, hedging is not typically done as it can sometimes worsen the problem.
Q: What factors are driving revenue and margin improvement?
A: Strong performance in the Canadian business, TekLink, and digital business, along with cost correction measures, have driven improvements. Additionally, reducing onshore delivery footprint and moving work offshore has added to profitability.
Q: What is the strategy for the digital media and broadband business, and how much more investment is required?
A: Investments in technology have already been made. The focus is now on optimizing these investments and leveraging synergies with HGS. Growth is expected from providing integrated solutions and entering new markets.
Q: What is the strategy for utilizing the company's cash reserves?
A: The cash reserves will be carefully deployed in acquisitions or for investing in business growth. The company continues to scout for M&A targets to grow its capabilities.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
