A Blind Bet : Hovs Services Ltd

Hovs Services Ltd (HOVS) is engaged in providing BPO and KPO Services (Here).

It is a profit making company, with an EPS of Rs 1.14/- for 2012 on standalone basis, and EPS of Rs 3.91/- on consolidated basis, The CMP of stock is 96.30. (Here)

If we look at the business model of BPO and KPO of HOVS, we may find that the price of stock is little stretched, but unlike small IT companies, They don't have debt, but they have an investment in SourceHov LLC (Here).

SourceHOV, with approximately $525 million in revenue, is a mid-size BPO and KPO firm serving customers in more than half of the Fortune 100 companies with domain expertise in document centric applications in health care payers and providers, finance and banking, public sector, publishing, legal, insurance, manufacturing and commercial industries, including specialised consulting services for construction management, tax benefits, legal claims settlements and economic consultancy.

The company counts over 12,600 employees operating from over 80 delivery centres in six countries including the US, Mexico, Canada, India, China and the Philippines (Here).  Citi Venture Capital International (CVCI) owns 65% stake in the company,HOV Services has 27.2% interest in the company.

Also Read (Here),(Here),(Here) to understand SourceHOVS LLC past M&A transaction.

Recently it was quoted in newspaper that CVCI was looking to exit HOVS LLC, and the rumoured asking price was around $ 1.20 billion (Here), Then there was a new grapevine that CVCI has appointed Morgan Stanley for sale of SourceHovs LLC, and they have got the bids at $1 Billion. (Here) (Here).

Till here there was no communication from HOVS about its 27.2 % stake in SourceHovs LLC. HOVS holds the stake in the company via its 100 % US subsidiary (Here), HOVS had on 28th Oct, 2013 had intimated that it has a step down subsidiary, which holds 27.20 % stake in SourceHovs LLC (Here), and the rumour for sale in media may be true only for CVCI. 

But on 1st Jan,2014, HOVS informed stock exchanges about the appointment of Morgan Stanley & Co LLC by SourceHOV LLC to explore various strategic options. The Company through its US based wholly owned subsidiary (WOS) owns stake in SourceHOV LLC. also it further said that such appointment of Morgan Stanley & Co LLC has been approved by SourceHOV on December 29, 2013 and the Company is now intimating the Stock Exchange (Here).

By now it is clear that HOVS holds 27.20 % stake in SourceHovs LLC and some strategic options like sale, Placements may take place. Also believing  rumour in print media that CVCI wants to exit cannot be ruled out it is a PE player and they are always open to buying and selling at right price. Also the tentative figures can range from  $800 million to $1.20 billion, with some news report of bid at $ 1.00 billion.

Now if we consider that HOVS is entitled to 27.20 % of the booty, it that would be the vale of its stake, The amount comes to around $ 272 Million (Considering the price of a billion). That comes to value of Rs 1632 Crores($1 = Rs 60). The market cap of HOVS as of now is Rs 120 Crores.

Assuming that company is able to sell its stake in SourceHovs at a billion dollar, or SourcesHovs is able to get a valuation of Billion dollar, The vale of HOVS stake would be huge, It converts up to Rs 1300 per Share. Also if it is able to sell the stake it may realise at least 1300 Crores after taxes, which will be converted at Rs 1045/- per share. 

There is no stake sale which has happened yet, but there are confirmation from the company about its strategic options and there lies probabilities of the event happening, also if the stake sale does not happen in near futures, we at least got to understand the value of its investments

With CMP of 96.30, and with expectation of big valuation of almost more than Rs 1000 /- per share in SoureHovs LLC. Along with its standalone business in India, I believe the share is available at a deep discount to its derived value (There should be some discounting of holding company but not at 90 %)

If the sale happen, we can expect a hefty dividend, (Promoters hold almost 50 %,) along with some 11 % held by Technocrats, who may ask for dividends along with public.

The Risk reward ratio in buying the stock is favourable and market may take a very long time to discover it fair value.

I would also qualify that I have worked on the valuation parameters of the deal only, and I have not yet seen the pattern of corporate Governance in Company. I have not seen in detail about the background of promoters except that They hold office in SourceHovs LLC. Also all major Investors and Promoters are related here (Here).

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this company.

I welcome your critical comments and suggestions.

PS : I have some position in the stock, So I can be Biased.