Smart Movers

Smart movers

With Modi’s call for developing 100 Smart cities, there are some players which would likely benefit most as they would cater to the high-tech infrastructure requirements which form the building blocks of these cities.

At the moment 100 cities remains a tentative figure, with much still to be pinned down. The budget speech only officially identified cities along the Amritsar-Kolkata Industrial Master Plan, which covers seven states. Although they weren't named in the budget, seven cities have also been named along the Delhi-Mumbai Industrial Corridor, some which would overlap with the Amritsar-Kolkata plan.

Officially, the budget only pointed out three cities in the Chennai-Bengaluru Industrial Corridor: Ponneri in Tamil Nadu, Krishnapatnam in Andhra Pradesh and Tumkur in Karnataka.

So what would be the companies that would benefit from this move? Here’s my take:

Sterlite Technologies (ST):- This is a leading global provider of Telecom (Optic Fibre and Cables) and Power Conductors, from Anil Agarwal’s Vedanta stable. These products and solutions would typically form the backbone of any other components that would make up the smart cities. As things stand today, not many cities are geared up for this sort of thing yet. And if things have to be built from scratch, there would be a huge surge in demand for optical fibre and transmission lines which are ST’s forte.

D-Link: - This company is household name in networking items such as routers, switches and wireless products (in fact they have a near monopoly with MTNL’s broadband service). These products would also be a key component of Smart cities from a technology infrastructure perspective. Again, Smart cities would be a boost for this company due to its critical products.

These are 2 of the most obvious choices which come to mind. Of course there would be other firms such as those in construction industry (IRB, L&T) which also would greatly benefit from this initiative.

Turning around fast

While researching investment ideas over the last year or two, I was drawn to the BPO sector mainly because of the news of Firstsource Solutions buyout by Sanjeev Goenka group. 

This was a much vaunted stock once upon a time (in early 2000) when ICICI Bank was its parent. This was then the BPO arm of ICICI Infotech, the IT arm of ICICI Bank. It then renamed it as ICICI Onesource. Over the next few years, it did well enough to attract the attention of PE investors such as Sequoia and Temasek (Govt. of Singapore). Even then, it has a significant strength of 5000+ employees.

Over the next 5 years, from 2005, it prospered thru global strategic partnerships and acquisitions such as Metavante (a Fidelity arm) and Med-Assist of US. It renamed itself a FirstSource Solutions (FS) and focused on the healthcare sector thru its acquisitions. It also got listed on the Indian markets in 2007. By then, it had become one of the biggest BPO in the country with strength of nearly 15000+ employees and had diversified into other verticals such as Telecom & Media and BFSI.  Its growth continued with big deals such as USD 80 million outsourcing deal with BarclayCard US.

Post the global meltdown in 2008, FS also suffered along with its peers. It had FCCB related issues which was a big drag on the stock and rising finance costs had a huge impact on the bottom-line of the company. There were hardly any dividends paid since its IPO. 

The company has multiple delivery locations in India, USA, UK, Philippines and Sri Lanka through its various subsidiaries. Some of the services offered by the company include transaction processing, collections and receivables management, customer relationship management (CRM), claims processing, pricing and adjudication in healthcare sector, etc.

In FY2013, RP-Sanjiv Goenka Group acquired majority stake in the company (@12/share) and the company raised Rs. 274.55 crores through preferential allotment of shares to the new promoter group. Among its other investors, it has its former parent ICICI Bank with nearly 5% stake and Rakesh Jhunjunwala with nearly 4%. Along with surplus funds and with the capital received from new equity infusion, the company was able to redeem outstanding FCCB’s which were due on December 4, 2012. And with this redemption the company currently has very comfortable debt to equity.

The current market capitalization of the company is nearly Rs. 2500 crores and @38, it quotes @P/E of nearly 17. Driven by improved financial and operational performance coupled with new management, the stock price has more than tripled in the past few months. However, once the management stabilizes the company, and there are clear signs of the same, the company should start on a growth trajectory again.