Buy BLS International Services; target of Rs 300: HDFC Securities
HDFC Securities’s research report on BLS International Services
BLS International witnessed a mixed set of numbers in 2QFY18, with a miss on revenue, but beat on margins (+105bps QoQ to 23.2% vs our est. of 20%). Margin expansion was led by a greater contribution from the higher-margin Spanish Visa (~25%) and Punjab e-governance businesses (~30%). Revenue came in Rs 1.86bn, down 4.4% QoQ, led by 6.4% drop in the Visa business (~75% of rev). Visa revenue was soft, owing to seasonality. However, it is expected to revive in 2H, led by a rise in Visa applications in Spain, higher realisations led by VAS services, and contributions from new contracts. We like BLS’ business model, as it is a niche G2C service provider, with growing sustainably at high-teen margins, low working capital requirements and high return ratios. Growth capital can be funded largely by internal accruals, providing scope for sustained growth. Near-term concerns are mounting receivables (Rs 1.33bn in 1HFY18 vs Rs 0.60bn in FY17), and a slowing Visa business. High receivables suggest that no payments have been received from the Punjab govt. in the last six months.
Niche focus, strong execution and an asset-light model resulted in a healthy RoE of 35% in FY17. We expect revenue/PAT to grow at a CAGR of 13/38% respectively over FY17-20E, led by the Spanish Visa contract and Punjab e-governance project. Maintain BUY with a TP of Rs 300, based on 25x Sep-19 EPS.
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