Genpact Moving Towards Stabilization

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By Hanson So on May 17, 2014 Consumer Staples, Energy & Solar

Genpact reported first-quarter results that were above expectations, growing total revenue 5% and global client (non-GE) revenue 8.1% year-over-year. Revenue of $528 million was above our estimate of $521 million and the consensus of $526 million, driven by strength in financial services, healthcare, consumer goods and life sciences. Adjusted operating margin (which was above expectations) was 16.4% (up 110 basis points sequentially and unchanged from the same quarter in the prior year), driven by a foreign-currency tailwind and operating efficiencies, partly offset by higher sales investments. Adjusted EPS were $0.24, slightly ahead of the consensus of $0.23. The company now has 81 clients with an annual run-rate of more than $5 million (up from 63 in the year-ago period). Overall, we were happy to see the company executing on the plan laid out earlier this year.

While one might consider it too early to conclude in its favor, we believe Genpact’s execution must be viewed in the context of the company’s 4%-6% growth in 2014, significantly lower than the overall industry growth of 10%-12%. In addition, with operating margin targets reset (15%-15.5%, below its typical 16%-16.5% range), we believe management has more flexibility to spend on its salesforce and other strategic opportunities. We believe investors are focused on Genpact’s growth trajectory in 2015 and 2016, and if the company executes well (to which we are favorably biased), the company will be positioned for upside surprises. While we are positive on the story, we acknowledge that it has become a “show-me” story with the company having to prove itself.

This, in turn, may result in the stock being rangebound in the near term as investors continue to stay on the sidelines until they gain greater confidence in the company’s ability to execute. Genpact shares trade at 14 times our 2015 EPS estimate of $1.17, a discount to the peer group of IT BPO offshoring companies. Over the next several quarters as the company executes well, we believe the stock will reverse from being traded at a discount to in line to premium.

We maintain our Outperform rating. Our discussion continues on the following page. May 06, 2014 Stock Rating: Outperform Company Profile: Aggressive Growth Symbol: G (NYSE) Price: $16.95 (52-Wk.: $14-$21) Market Value (mil.): $3,929 Fiscal Year End: December Long-Term EPS Growth Rate: 15% Dividend/Yield: None 2013A 2014E 2015E Estimates EPS Q1 $0.23 A$0.24 NA Q2 $0.32 $0.24 NA Q3 $0.33 $0.26 NA Q4 $0.25 $0.28 NA FY $1.13 $1.02 $1.17 CY $1.02 $1.17 Sales (mil.) 2,132 2,257 2,456 Valuation FY P/E 15.0x 16.6x 14.5x CY P/E 16.6x 14.5x Trading Data (FactSet) Shares Outstanding (mil.) 231 Float (mil.) 144 Average Daily Volume 1,727,264 Financial Data (FactSet) Long-Term Debt/Total Capital (MRQ) 0.0 Book Value Per Share (MRQ) 5.7 Return on Equity (TTM) 18.4 Two-Year Price Performance Chart Sources: FactSet, William Blair & Company estimates