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My Best Pick
22 December 2017 / Outlook BUSINESSA
few years ago, I had started track-
ing HOV Services when it was trad-
ing at # 35 levels, and covered it ex-
tensively in my valuation workshops
and even on my blog. This Pune-based BPO was set up
in 1989 as Codec Communications. However, its In-
dian operations is not the story — the value lies in
the company’s investment in the Nasdaq-listed Exela
Technologies. But before that, we need to know how
the script unfolded in the past.ART OF UNDERVALUATION
In late 2014 , SourceHOV Holdings, a company in
which HOVS LLC, the US subsidiary of the Indian en-
tity, held an investment, completed a merger with
BancTec Group. Post-merger, HOVS LLC’s stake in
SourceHOV increased from 26. 1 % to 44. 8 %. HOVS
LLC’s investment was then valued at $ 95 million (# 582
crore). Accordingly, additional capital reserve of # 582
crore was recognised as the fair value of investment in
the associate. The 26. 1 % equity stake was proposed to
be sold to the US-based HandsOn Fund 4 LLC, whose
ultimate benefi ciary owners were the promoters of the
Indian listed entity. The deal sounded like a bonanza
for HOV Services shareholders since the stake would
have amounted to # 464 /share. But the valuation was
too low in my view and should have been closer to
$ 250 million. The merged entity, although loss mak-
ing, had nearly a billion dollars in revenues and was
a leading transactions processing company, catering
to several Fortune 500 companies. I was proved right.
A group of minority shareholders moved a petition
before the Company Law Board over the terms of
the deal. The transaction, fi nally, did not consum-
mate owing to shareholder litigation and transac-
tion delays. The company, however, did bring in the
value of $ 95 million into the books of the Indian en-
tity in FY 15 and did an annual impairment test un-
der Accounting Standard 28. While there was no
impairment, HOVS LLC’s share of loss, as per equi-
ty method of accounting prescribed by AS- 23 , was
consolidated in the financial statement. Through
notional, the carrying value of the investment wasreduced to # 20 crore, as on March 31 , 2017 , owing
to adjustment on account of the share of the loss
(equivalent to the percentage of equity holding),
actuarial losses and foreign exchange variations.STREET DANCE
When the deal was fi rst announced, HOV Services
stock hit a high of # 191 in November 2014 but fell
below # 60 in 2015 when the proposed stake sale did
not go through. It recovered though in 2016 , to # 130
levels. But what happened in February 2017 just re-
inforced my view that the investment in SourceHOV
was indeed undervalued. In February 2017 , a busi-
ness combination was announced between Source-
HOV Holdings, Novitex Holdings and Quinpario
Acquisition Corp 2 to form Exela Technologies Inc,
which was to become one of the largest global provid-
ers of transaction processing and enterprise informa-
tion management solutions serving over 3 , 500 clients
across 55 countries.
Though the share price zoomed to a high of # 350
in May 2017 , it now trades at # 270 levels given that
stock price of Exela, which got listed on Nasdaq in
July 2017 at $ 10 , has since halved to $ 5 levels. At # 270 ,
the market cap of HOV is just # 337 crore, while the
current value of its 19 % holding in Exela is # 967 crore
at its share price of $ 5. 20 and taking into account the
rupee at # 64. 75 to a dollar. At $ 10 , the investment val-
ue of Exela was close to # 2 , 000 crore ($ 300 million),
vindicating my assertion that the value was close to
$ 250 million rather than just $ 95 million.WHAT THE COMBINATION IS ALL ABOUT
In July 2017 , Exela Technologies was valued at $ 2. 8
billion, 7. 3 times its post-combination operating prof-
it of $ 385 million projected for 2017 compared with
competitors Broadridge, Genpact, WNS Holdings
and HMS Holdings, which were quoting at 10 - 12 x EV/
EBITDA multiples.
Exela caters to the top 10 US banks, 9 of the top 10
US insurance companies and all the top fi ve US health-
care players. Around 91 % of its business comes from
the Americas, with a majority of revenue coming fromNote: Market related data as on December 1, 2017; Financials for
FY17; Consolidated fi nancials considered wherever applicable
Data: Ace EquityCY17 RETURN151%
TTM P/E (X) 285
stock price# 274
pat-# 146 cr
M-CAP# 343 cr
ROE-0.51% roce0.53%
net sales# 15 cr