Helios & Matheson Information Technology: A Renewed Growth Story

Huge cash reserves, negligible debt levels, higher growth rates and higher profitability are some of the characteristics of the Indian IT industry over the past few years. While various Indian IT companies are searching for new avenues across new verticals and new geographies for their growth after reaching to their near to saturation levels, Helios and Matherson Information Technology (HMIT) is rapidly moving up the ladder and reaching new sky every year, offering investors a renewed growth story in domestic IT sector. 

Diversified business model

HMIT sounds like a foreign company, however, the company has roots in India and promoted by Indians. The company commenced its operation in 1991, offering number of powerful IT solutions to its global clients driven by a seamless global delivery model. With its vast experience in this domain, the company have built a strong presence and deep customer relationship across the globe. The enormous experience in the IT field coupled with infrastructural and marketing investments over last 23 years have made HMIT to deliver high quality solutions through world class knowledgeable human resource, through its US, Singapore and India offices. The company headquartered in Chennai, India. 

HMIT is medium size IT service provider with major presence in US which contributes to more than 60 per cent of its revenues. the company’s focus area is primarily BFSI (Banking, Financial Services and Insurance) and health care which contribute more than 62 per cent to its revenues. Interestingly, for last couple of years, both the verticals showed considerable growth in favour of the company. Its strength has been its relationship-based approach that has led to a strong portfolio of large blue chip clients. HMIT predominantly provides services including application development and maintenance, System Integration and enterprise solutions, independent verification & Validation, infrastructure and Cloud Computing services, etc.  With 70 per cent revenues coming from onsite work and concentration on non-discretionary services combined with the ability to meet clients’ requirements, HMIT has the potential to maintain and scale up its accounts.

India IT Industry

The Indian IT sector remained one of the fasted growing sector contributing considerable to the domestic economy directly and indirectly over past few years. Despite of challenging domestic and global business environments, India continued to be preferred outsourcing destination with lion’s share in global outsourcing market over last few years. However, India’s continued cost competitiveness and effective solutions catering to the global demand guaranteed the industry’s consistent growth rate over the years despite of these challenges. As per NASSCOM (National Association of Software and Services Companies) report, Indian IT industry is likely to maintain a growth of 12-14 per cent in FY14. NASSCOM has also forecasted the Indian IT industry to achieve an expected revenue target of USD 225 billion by 2020. For this target the IT industry needs to grow by about 13 per cent on a Y-o-Y basis for the next seven years. The IT spending across the globe is expected to pick up in coming soon. The developing countries especially US have started showing early signs of revival along with European economies. India being most preferred outsourcing destination is expected to experience considerable growth in Indian IT industry over couple of years. 

Currently, the Indian IT sector accounts for less than 5 per cent of the global technology spending. This provides Indian IT industry huge opportunities of growth. However, the IT companies are expected to face competition from other players in industry. Further, due to US restrictions on visas and rising visa costs, most of the Indian IT companies are increasingly subcontracting onsite jobs to local employees in the US. Additionally, a new immigration bill is under consideration in the US. If this bill, implemented, will significantly raise employee costs for the onsite workers. This would adversely affect margins of Indian IT companies. However, the Indian IT companies are increasingly adopting the global delivery model, under which, these companies are setting up development centres in Latin America, Southeast Asia and Eastern European countries. With this the companies will be able to take the advantage of low cost and will be able to cater to the local market. Such development centers will help to reduce the risks of the new immigration bill and will increase the probability.

New verticals to drive its performance

HMIT has continuing focus on improving its services portfolio with an ultimate of developing and growing its business. To stand apart from the peers, the company constantly is investing and focusing on emerging trends and new technologies. As a part of diversification strategy, HMIT is now focusing on the new generation offerings – social media, analytics, cloud computing and mobility (SMAC). The company conducted few test runs for the same in first quarter of current financial year 2014. It has concrete plans to invest significantly for these new generation offerings – SMAC to move in the value chain. According to Mr. Muralikrishna, the company has done considerable investments in terms of infrastructure, up-gradation of technological skills and experienced domain executives for the same. The HMIT management is confidence over SMAC to contribute meaningfully to its revenues in coming future. 
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Improving financials leading to better profitability

Over past few years, HMIT acquired several companies across the globe in order to strengthen its presence in both geographies and verticals. However, this inorganic growth has achieved at the cost and funding these acquisitions through debt funding. The debt burden was seen clearly on the company’s balance sheet as the debt equity ratio during FY11 touched to 1.05. However, HMIT was able to reduce its long term debt equity ratio to 0.46 during last financial year 2013. However, the company’s balance sheet still shows Rs 139 crore as of 30th September 2013. However, HMIT was able to manage its interest cost between 4 to 4.5 per cent of its total income for last 9 quarters. Further, Mr. Muralikrishna, MD & CEO said, “HMIT is not looking for any acquisition target in near future, as we have fantastic inorganic growth. We have almost 25 million dollar clients and we are now religious focusing on serving them better. There is no question of increasing debt levels further from current levels unless and until there will be significant lucrative investment avenue available.” Further, he expressed his confidence about the repayment of current long term debt and said “the existing debt will be repaid gradually in coming 2 to 2.5 years considering HMIT’s present cash flow”. 

Hence, it is very clear that HMIT has the necessary infrastructure for the next two years and is expecting no capital expenditure beyond routine replacement/renewal, which is capable of being funded with internal accruals, thus ensuring improvement in profitability. HMIT’s asset turnover ratio was also showing improving trend and stood at 1.04 in FY13 against 0.74 in FY12. The capacity addition seems to be improving from a lower utilisation scenario. Further, what this shows is further improvement in asset utilisation over the next two years will strengthen the profitability outlook for HMIT. More interestingly, for the last nine quarters, its average sequential growth per quarter in revenues has been 8.90 per cent. The same for its EBITDA and net profit is 9.59 per cent and 14.46 per cent respectively, which shows a drastic improvement in profitability and a distinct path of outperformance.

Investment rationale 

One area that appears to be of concern is that 31.67 per cent of HMIT’s promoter holding has been pledged because of financial assistance for the company’s business. However, the promoters have not pledged new shares in the last few years and rather the promoters increased their stake in the company to 46.02 per cent as of 31st December 2013 from 40.38 per cent as of 31st December 2012. Mr. Muralikrishna explained, “There has been FCCB conversion worth of USD 8 million issued in 2006. Because of this, our promoters’ shareholding got diluted. Hence, our promoters have increased their stake in the company by the way of preferential allotment of equity shares”. This clearly signifies that there seems to be no requirement considering the current and prospective position of the company. The increased promoters holding also give us more confidence on management and its strategy for future business growth. 

HMIT is clearly on its way towards improvement in its fundamentals ensuring outperformance in the coming years. Moreover, signs of a robust performance have been visible from its growth in net sales and net profit during last nine quarters. Furthermore, on profitability front, the company showed expansion in its both EBITDA and net margins on both sequential and yearly basis. For last nine months, HMIT showed a handsome 258 basis points in its net margins. Further, its yearly net margins for FY13 showed an expansion of 132 basis points against net margins of 6.04 per cent in FY10. On valuation front too, HMIT’ stock is available at a PE ratio of 4.61x times trailing twelve months EPS of Rs 20.94. The company’s valuation is way lower than its medium sized peers and the IT industry as a whole, making it rather attractive. Hence we recommend our readers to take exposure in this IT Company which has a track record of uninterrupted profits for 60 straight quarters and dividend distribution since inception.