48
My Best Pick
22 December 2017 / Outlook BUSINESSinformation and transaction processing services (ITPS)
followed by healthcare services and legal-loss preven-
tion services. The company has also announced a buy-
back of up to 5 million shares over the next 24 months.
Exela’s Q 3 FY 17 revenue was $ 358 million, while EBIT-
DA was $ 88 million. The revised revenue guidance for
2017 has been pegged at $ 1 , 450 million-$ 1 , 470 million
and EBITDA in the range of $ 350 million to $ 370 mil-
lion. Though at the net level, there will be a loss.
So, then why did the Exela’s stock price halved rap-
idly with its market cap dropping from $ 1. 5 billion to
just under $ 780 million? To begin with, Exela’s share-
holder equity is just $ 42 million, largely decimated
by the accumulated post-combination loss of $ 456
million. I suspect it has a lot to do with QPAC’s poor
performance history and continuing negative cash
fl ows. The debt, as on Q 2 FY 18 , stood at $ 1. 41 billion.
The buyback measure announced by Exela may just
be an assertion to stabilise the price and assure the
Street that things are well on track. However, the
operating sentiment remains challenging and highly
competitive in the ITPS & health care services seg-
ments and not to mention the half a billion dollar
of accumulated losses. However, a couple of US fund
managers such as David Einhorn of Greenlight Cap-
ital have found value in Exela and have picked up
meaningful stakes recently, given that its EV is down
to $ 2 billion and the EV/EBITDA, too, is attractive at
6 x compared with peers.
Coming back to HOV Services, the Indian arm gen-
erated # 16 crore consolidated income in FY 17. But
since a large part of the value for the stock comesfrom Exela, the performance of Indian operations
is secondary. However, it’s worth mentioning HOV’s
foray into environmental solutions, where it has
completed projects in Kochi and Ratnagiri for ar-
tifi cial reefs to prevent beach erosion. Interestingly,
a fi xed deposit of # 8. 6 crore was pledged with HDFC
Bank on behalf of its step-down subsidiary, HOV En-
vironment Solutions (HOVESPL), for a loan. This has
now been converted into a loan at 9. 1 % to HOVESPL.
No provision has been made even though HOVESPL
has a negative net worth. HOV, however, states that
its foray into environment solutions will take fi ve
to seven years to scale up, and it will recover the
expenses in due course.TRUE VALUE
At # 270 levels, HOV is available at a 65 % haircut on its
current investment value in Exela. Eff ectively, HOV is
available for just over $ 50 million, while its one-fi ft h
stake in Exela is valued at $ 150 million. I am assum-
ing here that the promoters will not continue to un-
dervalue the stake in Exela and unlock value going
ahead. Assuming a rupee-dollar rate of 64. 75 , I have
computed what HOV Services share price should be
based on diff erent haircuts and at diff erent levels of
Exela stock price. If Exela moves back to $ 10 and the
haircut improves to 50 % and the rupee stays at 64. 75 ,
HOV will touch # 744 levels. There are variables at
play in HOV, but then investing was always an art and
never a science. b
In his valuation training workshops, the writer uses HOV Services and
other companies as illustrations to determine value versus priceAmerican pie
How Exela trades and the holding discount assigned will infl uence HOV Services’ stock price movement
Exela quote on Nasdaq in $ 5.2 5 10 15 20
Exela per share in INR at #64.75 337 324 648 971 1,295
Value of 2.87 cr shares (19%) held by HOV in #cr 967 930 1,860 2,788 3,717
Market cap in #cr of HOV at 10% of holding value^9793186279371
HOV stock price at above market cap in # 78 75 149 223 297
Market cap in #cr of HOV at 20% of holding value 193 186 372 558 743
HOV stock price at above market cap in # 154 149 298 446 594
Market cap in #cr of HOV at 30% of holding value 290 279 558 836 1,115
HOV stock price at above market cap in # 232 223 446 669 892
Market cap in #cr of HOV at 40% of holding value 387 372 744 1,115 1,487
HOV stock price at above market cap in # 310 298 595 892 1,190
Market cap in #cr of HOV at 50% of holding value 484 465 930 1,394 1,859
HOV stock price at above market cap in # 387 372 744 1,115 1,487
Source: Jeena Scriptech Alpha Advisors