The coronavirus outbreak has thrown the entire economy off track. The central bank has infused some liquidity, and there is now some anticipation of growth. The stock market is also seeing some sort of recovery. The S&P BSE Mid-cap index that had corrected by almost 30 percent in March 2020 has now recouped and is trading 30 percent up from the lows of March.
Let us have a look at mid-cap companies in the range of NR 7,000 to INR 36,000, to check where promoters have increased their stakes by more than 1.5 percent during the time frame of January to March 2020.
And while the results of the ongoing pandemic are uncertain, promoters buying stakes of their own company could well be a sign of bullishness.
We will be analyzing two companies: one an IT company with a PE promoter, and another, a hotel company with one of the best promoter groups in the country.
Mphasis was acquired by the Blackstone Group in 2016. Ever since the acquisition, it has had a turnaround story. Operating margins had sagged to around 15 percent in March 2016. However, these have now risen by 300+ bps in March 2020. And as revenues increased, the company also managed to reach more than 90 portfolio companies of Blackstone. When the pandemic struck, and the stock corrected by over 25 percent, Blackstone managed to act fast. They also scooped up a 4 percent stake in the company, taking the total holding to 56.2% by March-end.
Mphasis offers applications, infrastructure management, and BPO services. Its business is divided into two segments. Direct international accounted for 68 percent of the revenue for FY19, and DXC/HP business, which accounted for 28 percent of the revenues.
The major revenue of the company comes from application maintenance and development services, knowledge processing, infrastructure management, and other allied services. Concentration towards BFSI, communication, IT, and entertainment verticals helped to safeguard the company for the effects of the pandemic. The DXC business is now witnessing multiple changes. These include changes in leadership, business acquisitions as well as the expansion of offshore presence. This will lead to a cut in the business from DXC and put more pressure on growth on other business verticals.
In the last three years, the revenue of the company has increased by 13 percent. Net profit has grown by 14 percent. And while a win of the total contract value of $715M in FY20 in the direct international segment and business from Blackstone portfolio companies will provide revenue visibility, there remain risks of lower discretionary spending by clients.
Nevertheless, the company has cash and current investments worth INR 1500 crores, excluding short term borrowings. This will help the company to overcome the COVID crisis. However, a delay in payments by clients will lead to an increase in receivable days, causing an increase in the short term borrowings. Stock price corrected by almost 10 percent in the past year, and is trading presently at a PE of 13.9, in comparison to the five year median of 16.2.
IHCL (Indian Hotels Company Limited)
Ever since the entry of the new CEO Puneet Chhatwal in late 2017, IHCL has been following a five-year turnaround strategy. As per this strategy, the management is looking at improving the operating margin by 8 percentage points. This would be done through asset-light business, divestment of non-core assets, and differentiated brands for different customers. Before the pandemic hit, the management was right on track.
The travel and tourism industry accounts for around 9.2 percent of the GDP of the country. It is a great misfortune that the industry had to bear the brunt of the pandemic. IHCL experienced a 52 percent fall in the revenue per available room, which is a metric that is used to measure the sales that have been generated per room. Numbers are only falling with each passing month. However, the management managed to act quickly. It has now introduced the strategy of Reset 2020 to look at the challenge in new ways.
The company is also evaluating new revenue stream options and their feasibility. These include food delivery, asset monetization of non-core assets, reduction of fixed and overhead costs, and deferring non-essential CAPEX.
The company has raised a long term debt of INR 835 crores since March 2020 to create rainy day liquidity. And when stock prices halved in March, the promoters raised stake by 1.66 percent to 40.75 percent.
During the last three years, sales have increased only by 3.5 percent. However, net losses have turned into profits of INR 354 crores. This goal could be achieved by improving the operating margin of 6.5 percentage points and also increasing other incomes. The balance sheet, however, remains stretched with a debt to equity of 0.52. Owing to the capital raised, this would go up further. Support and trust from the TATA group will likely help the company to emerge from the crisis. Stocks have halved in the last year, and are now trading at a PE of 27.53 in comparison to the five-year median of 66.5.