IGI Logo

Focusing on high-margin BSS business

IFM business continues to perform decently; reiterate BUY

* UDS reported revenue growth of 13% YoY/3.2% QoQ to INR6.5b, below our estimate of 18% YoY growth. EBITDA margin came in at 6.3% (est. 4.0%), up 60bp YoY. IFM margin rose 30bp QoQ to 4.0%. BSS margin declined 20bp QoQ to 6.7%. Consolidated adj. PAT stood at INR254m (up 97% YoY), above our estimates.

* UDS is shifting its business mix by increasing its focus on the higher-margin Business Support Services (BSS) segment while leveraging the diverse business lines of its subsidiaries. In 1QFY25, the revenue contribution of IFM/BSS segments stood at ~65%/35% vs. 70%/30% in 1QFY24. The company anticipates organic growth of over 20% in BSS and expects the revenue contribution to rise to 40-42%. We estimate a revenue CAGR of 23% for BSS over FY24-26, indicating a strategic move toward higher-margin opportunities that could drive overall revenue growth and profitability. Meanwhile, we expect the IFM business to clock a 13% CAGR over FY24-26, with PBT margins stabilizing at 4-4.5%.

* Margin inched up in 1Q (+60bp YoY), led by IFM business (+210bp YoY on a low base). The management aims for EBITDA margin by acquiring new customers at par or higher margins while focusing on rationalizing the large tail. Moreover, the maturing airport handling business also positions the company for steady EBITDA margin growth going ahead. We expect overall margins of 6.1%/7.0% in FY25E/FY26E.

* Given a solid foothold in IFM business and high-margin BSS business, we expect a CAGR of 17%/32% in revenue/EBITDA over FY24-26E. We reiterate our BUY rating and a TP of INR400 (premised on 18x FY26E P/E on adj. EPS). Our TP implies a 25% upside potential.

Miss on revenue but beat on margin

* Revenue was up 13% YoY and 3.2% QoQ at ~INR6.5b, below our estimate of 18% YoY growth.

* Revenue growth was aided by ~34% YoY growth in BSS, whereas IFM reported a modest growth of ~5% YoY.

* UDS has witnessed a notable shift in its business mix. In 1QFY25, the revenue contribution of IFM/BSS segments stood at ~65%/35%, compared to ~70%/30% in 1QFY24. ? EBITDA margin came in at 6.3% (est. 4.0%), up 60bp YoY. IFM margin was up 30bp QoQ at 4.0%. BSS margin declined 20bp QoQ to 6.7%.

* Consolidated adj. PAT stood at INR254m (up 97% YoY), above our estimate.

* Adj. ROCE stood at 24.2% on annualized basis in Jun’24 vs. 20.7% in Mar’24.

* In 1QFY25, 29/15 logos were added in IFM/BSS businesses.

* Long-standing relationships with customers have 95%/93% retention over a five-year window in IFM/BSS business.

* Launched GenAI-enabled sales Intelligence service with a major global conglomerate.

Key highlights from the management commentary

* By focusing on high-margin customers and value-added services, the company anticipates a steady increase in profit margins moving forward.

* 2Q/3Q are typically stronger quarters for the company due to seasonal factors.

* UDS projects overall revenue growth of 15-16% going forward.

* In IFM business, the company aims to increase market share by focusing on hard services, which have higher margins. It added 29 new logos in IFM. The business is largely focused on the private sector. Moreover, the washroom hygiene business, although small, has high EBITDA margin of 40%.

* The airport business has turned EBITDA positive, with ground handling operations in 20 airports, 10 of which commenced in Q1FY25.

* The BSS segment's revenue share is expected to grow from 36% to 40-42% in the next few years.

Valuation and view

* We see the company benefitting from the long-term trend of outsourcing noncore business operations for greater efficiency and service quality. With continued momentum in the IFM space and an inorganic growth engine in the high-margin BSS vertical, we expect UDS to deliver sustainable and profitable growth.

* We expect a CAGR of 17%/32% in revenue/EBITDA over FY24-26E. With visibility of healthy earnings growth over the medium term and strong value from BSS business, we reiterate a BUY rating and a TP of INR400 (premised on 18x FY26E P/E on adj. EPS). Our TP implies a 25% upside potential.

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