These two mid-cap companies recently witnessed an increase in promoter holding
29-Jun-2020 •Rajan Gulati
Although the Covid-19 pandemic has thrown the economy out of gear, the stock market has seen some recovery buoyed by the anticipation of swift economic growth and liquidity infusion by central banks across the world. S&P BSE Mid-cap index, which corrected by almost 30 per cent in March 2020, has recouped substantially and is now trading 30 per cent up from March's low. We looked at mid-cap companies (m cap- Rs 7000- Rs 36000 cr) to check where promoters have increased their stake (>1.5 per cent) during January-March 2020. No doubt, the impact of the ongoing pandemic is uncertain; however, promoters buying stakes in their own company can be a sign of bullishness. We got two companies- an IT company with a PE promoter, while the second one is the most iconic hotel company with India's best-known promoter group.
Ever since Mphasis got acquired by the Blackstone Group in late 2016, it has been a turnaround story. Operating margins, which sagged to around 15 per cent in March 2016, have come up by 300+ bps (1 per cent equals 100 Bps) in March 2020. Further, revenue numbers improved, as the company was able to reach 90+ plus portfolio companies of Blackstone as its potential customers. No wonder then, when the Covid-19 pandemic struck the markets in March and the stock corrected by more than 25 per cent, Blackstone acted fast and scooped up an additional 4 per cent stake in the company, thereby taking its total holding to 56.2 per cent by the end of March 2020.
Mphasis is involved in providing application, BPO and infrastructure management services. It divides its business mainly in between two segments; a) Direct International (68 per cent FY19 revenue) b) DXC/HP Business (28 per cent). DXC, an IT and digital services company, provides Mphasis with the legacy HP business.
The company mainly derives its revenue from application maintenance and development services (63 per cent of FY19), infrastructure management services (14 per cent), knowledge processing and other allied services. A high concentration towards the BFSI (~60 per cent of revenue) and communication, entertainment and IT (~17 per cent) verticals safeguarded the company from the adverse effects of the pandemic. However, DXC business is seeing multiple changes like leadership change, expanding offshore presence and business acquisitions. These changes may lead to a cut in business from DXC and put more strain for growth in other business verticals.
Over the last three years till March 2020, the company's revenue increased by 13 per cent YoY, while net profit grew by around 14 per cent. While a deal win of the total contract value of $715M in FY20 in the direct international segment, along with business from Blackstone portfolio companies, should provide revenue visibility, lower discretionary spends by clients and DXC business uncertainty remains risk areas. Nevertheless, the company is sitting on ~Rs 1500 crore cash and current investments, excluding short-term borrowings, which should enable it to get over the covid crisis, while grabbing an inorganic growth opportunity. However, delay in payment by clients can lead to increasing receivables days (41 days as of FY19) thereby leading to increase in short term borrowings. In the last one year, the stock price has corrected by almost 10 per cent and currently trades at a PE of 13.9 compared to its five-year median of 16.2.
IHCL (Indian Hotels Company Limited):
Ever since, its new CEO, Puneet Chhatwal, joined the company in late 2017, IHCL, which runs Taj Hotels, has been following a five-year turnaround strategy of Aspiration 2022. Under this strategy, the management aims to improve operating margin by eight percentage points through asset-light business, more managed hotels than owned, divestment of non-core assets and differentiated brands for different customers. In fact, the management was on course before the pandemic hit.
More than any other industry, the travel and tourism industry, accounting for around 9.2 per cent of India's GDP, has borne the brunt of the Covid-19 pandemic. In fact, IHCL experienced a 52 per cent drop in its revenue per available room (RevPar), a metric to measure sales generated per room, just in the month of March. And since then, the situation has only worsened. But the management acted quickly and introduced the strategy 'Reset 2020' to address the challenge.
Under this strategy, the company is exploring new revenue streams like food delivery, reducing various fixed and overhead costs, deferring non-essential capex and further taking the asset monetisation process of its non-core assets. Besides, to create rainy day liquidity, the company has raised long-term debt of Rs 835 crore since March 2020. Nevertheless, when the stock price almost halved in March, its promoters (Tata Sons) raised its stake by 1.66 per cent to 40.75 per cent as of March 2020.
While during the last three years till March 2020, the company's sales increased by only 3.5 per cent YoY, net losses turned into profits of Rs 354 crore. This was achieved through the improvement of its operating margin of around 6.5 percentage points and the increase of other income. However, the balance sheet remains stretched with a debt to equity of 0.52 as of March 2020. This would further go up owing to the capital raised. However, the support and trust of Tata Group are likely to help the company to emerge from this crisis easily. The stock has almost halved in the last one year and is currently trading at a PE of 27.53 as compared to its five-year median of 66.5.
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