Wednesday, May 11, 2016

67th AIM Equity Update by John Grant. WNS Holdings ADR (WNS): “Seeking WiNS in this Emerging Market Stock”

WNS Holdings Limited ADR (WNS, $30): “Seeking (Emerging Market) Alpha”

By: John Grant, AIM student at Marquette University
Disclosure: The International AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

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.