Q3FY24 Review: Updater Services: Healthy traction in BSS segment continues

13 Feb 2024 , 02:20 PM

UDS’ adj. Ebitda grew 74% YoY to Rs446mn, inline with estimates; however, adj. PAT jump of 2.4x to Rs274mn missed est. due to higher D&A and lower interest income. While the higher-margin Business Support Services (BSS) saw robust revenue growth, Integrated Facility Management (IFM) revenue grew by a modest 6% YoY as the company focused on profitable contracts. UDS expects IFM revenue growth to rebound to 15%+ in the next 2-3 quarters. BSS segment should continue solid growth; within this, employee background checks related to IT have been weak with other verticals partly compensating. Analysts of IIFL Capital Services largely maintain estimates and raise their TP to ₹450 from ₹418 on rolling forward to March25. As liabilities to promoters of acquired companies are mostly paid down in the next 2-3 years, reported PAT and adjusted PAT should converge. Analysts of IIFL Capital Services hence estimate adjusted EPS Cagr of 21% over FY23-26, but reported EPS may jump 4x. The stock trades at 18x/16x 1YF reported/adjusted EPS. 

In-line Ebitda led by favourable mix change: 

Overall revenue grew 18% YoY led by the acquisition of Athena and strength in BSS segment (55% reported and 33% organic revenue growth). Adj. Ebitda growth was led by favourable mix change. Adj. PAT jumped 2.4x to Rs274mn but was below analysts of IIFL Capital Services est. due to higher D&A. 

Positive management commentary: 

Key takeaways from the earnings call: 1) UDS can grow at 3x real GDP growth; 2) IFM revenue growth should rebound to mid-to-high teens in the next 2-3 quarters; 3) Athena should hardly see any impact from the RBI’s NBFC crackdown as it handles selling mostly for banks; 4) Employee background verification checks were adversely impacted (20%+ down YoY) as IT hiring is significantly down; 5) IT hiring recovery could take two more quarters but other verticals such as BFSI are stepping up; 6) Audit and assurance business has been doing well. 

Analysts of IIFL Capital Services maintain estimates; new TP ₹450: 

Analysts of IIFL Capital Services maintain estimates as the upgrade in BSS segment offsets the cut in IFM. They estimate 16% revenue Cagr over FY23-26, and adjusted Ebitda margin expanding 130bps thanks to steady improvement in IFM, recovery in BSS margin led by revival of IT demand, and Ebitda break-even in the global flight services business.