By:
John Grant, AIM student at Marquette University
Summary
• WNS Holdings Limited ADR. (NYSE:WNS) provides business process
management (BPM) services, specifically offering data, voice, analytical and
business transforming services.
• WNS fourth quarter and
fiscal year 2016 reported earnings were phenomenal, the company cleaned up its
balance sheet and started another share buy back program.
• 2017 is looking great
for the BPM industry with tailwinds from a variety of industries and external
factors.
• WNS recently agreed
upon terms to acquire data analytics firm Value Edge Research Services.
• WNS saw a 20% stock
return in the past year, with a forward P/E of 14x and PEG of 1.2 WNS is
positioned for serious gains in the coming year.
Key
points:
On April 28th,
2016 WNS hosted their 4Q16 and FY16 conference call. The company reported 4Q16
EPS of $0.50 (beat by $0.04) and revenue of $135.3M (beat by $0.77M),
representing 7.4% y/y increase, 12.7% constant currency, in revenue. WNS added
eight new clients, expanded nine relationships, and renewed 15 contracts in
4Q16. Adjusted operating and net profit margins remained strong being reported
at 22% and 19.9% respectively.
Over fiscal year 2016,
WNS added 24 clients, expanded 30 relationships, and renewed 69 contracts. At
the top line, annual revenue grew 5.6% y/y, however poor hedging practices and
exchange rates dragged the 11% constant currency revenue growth. Operating
margin and net income expanded by 1 percent and EPS grew 11% to $1.92. The firm
paid off all outstanding debt, finished its first share buy back program (1.1
million shares) and started another share buy back program for 3.3 million
shares over 36 months.
WNS ended FY16 with $175M
in cash and no outstanding debt, making the company financially strong moving
into FY17. Increasing demand for BPM services is being driven across industries
by disruptive trends in integrating data analytics, responding to new
regulatory and compliance developments and improving overall cost structures. These
developments have established 90% visibility to the midpoint of revenue
guidance, representing 11% constant currency revenue growth. In response to the
expected increase of demand, WNS plans to move capital into R&D, improve
employee development, and search for strategic partnerships and acquisitions. Management
is projecting revenue growth of 4% – 10% (8% – 14% constant currency)
representing FY17 revenue of $551M - $583M.
AON announced WNS as
being the #1 company to work for in India, this is very impressive considering
the company increased headcount by 2,500 last year to ~32,500 employees. BPM is
a client facing business that calls for top of the line employees, recognitions
similar to this will continue to retain and draw the best employees.
In March WNS announced
their agreement to acquire Value Edge Research Services Pvt. Ltd., a commercial
research and analytics service provider. Value Edge offers an artificial
intelligence platform via a cloud-based technology platform to assist in
strategic decision-making. They provide services to firms in the pharma market,
however WNS will leverage their technology across a variety of industries and
uses. The acquisition will be funded with cash and is valued at $17.5 million;
Value Edge is projected to add $5 million to FY17 revenues.
What
has the stock done lately?
Major contract wins,
awards, acquisitions, and share buy back programs have been the drivers behind
WNS ADR price growth. WNS’ stock took a major hit after the US Fed decided to
hike the key interest rate by 0.25% in January, however deleveraging their
business and posting strong y/y returns diminished investor’s fear of the US
dollar’s pressure on the Indian rupee.
Past
Year Performance: The stock is currently trading at $30.82
(after May 5th close), representing a 20.35% increase over the past
year. Major banks, such as JP Morgan, have continued to increase their ratings
from neutral to buy on WNS after reporting financial strength and forecasting
higher growth. With a forward P/E of 14.54x and a 3.3 million share buy back
program on the way, I expect to see further stock price appreciation.
Source:
FactSet
My
Takeaway
Completely paying down
their debt and having $173M in cash on their balance sheet should make
investors sleep better at night knowing that whatever The Fed decides to do
with interest rates will not drastically impact WNS financial profile. After a
year of record breaking contract signings, rapidly expanding headcount to keep
up with customer demand, and acquiring Value Edge WNS is more than ready to
take fiscal year 2017 by storm. At its modest pricing I believe WNS’ stock will
return 20%+ in the coming year.
