IGI Logo

Charting the high margin trajectory…

...by focusing on the Business Support Services (BSS) business

* Updater Services (UDS) reported 13.3% YoY/4.3% QoQ revenue growth to INR6.7b, in line with our estimate of ~INR7.1b. EBITDA margin came in at 6.4% (est. 6.1%), stable YoY. IFM’s PBT margin improved 100bp QoQ to 5.2%. BSS’s PBT margin contracted 80bp QoQ to 5.8%. Consolidated adj. PAT stood at INR280m (up 42% YoY), in line with our estimate of INR264m. The company’s revenue/EBITDA/PAT grew 13%/36%/34% in 1HFY25 vs. 1HFY24. We expect revenue/EBITDA/adj. PAT to grow organically by 19%/26%/23% YoY in 2HFY25. We reiterate our BUY rating and a TP of INR450 (premised on 18x Sep’26E EPS).

Our view: BSS drives growth in 2Q

* UDS is strategically shifting its business mix, prioritizing growth in its highmargin BSS segment while leveraging the diverse capabilities of its subsidiaries. In 2QFY25, the revenue contribution of IFM/BSS segments stood at ~65%/35% vs. ~70%/30% in 1QFY24. The company forecasts organic growth of over 20% in BSS, with revenue contributions expected to rise to 40-42%. We estimate a revenue CAGR of 21.1% for BSS over FY24-27, underscoring this shift toward higher-margin opportunities to drive both revenue growth and profitability. For IFM, we anticipate a 13% CAGR over FY24-27, with margins stabilizing around 5%.

* Margins: EBITDA margin stood at 6.4% (vs. our est. of 6.1%), led by IFM business (+100bp QoQ). This improvement reflects the company’s strategy of exiting low-margin contracts, although there is a trade-off between revenue growth and margin in the IFM business. Management targets a consistent IFM margin range of 5-6%, aiming to enhance EBITDA by onboarding clients with equal or higher margins and rationalizing tail accounts. For the BSS segment, we anticipate stable margins of 9-10%.

Valuation and changes to our estimates

* We broadly retain our estimates, given UDS’s solid foothold in the IFM business and the high-margin BSS business. We expect a CAGR of 16%/30% in revenue/EBITDA over FY24-27. Reiterate BUY with a TP of INR450 (premised on 18x Sep’26E EPS). Our TP implies a 16% upside potential.

Revenue and margins in line

* Revenue was up 13.3% YoY and 4.3% QoQ at ~INR6.7b, in line with our estimate of ~INR7.1b.

* Revenue growth was aided by ~20% YoY growth in BSS, whereas IFM reported a growth of 10% YoY.

* UDS has witnessed a notable shift in its business mix. In 2QFY25, the IFM and BSS segments contributed ~65% and 35%, respectively, compared to ~70% and ~30% in 2QFY24.

* EBITDA margin came in at 6.4%, stable YoY (vs. est. 6.1%). IFM’s PBT margin was up 100bp QoQ at 5.2%. BSS’s PBT margin contracted 80bp QoQ to 5.8%.

* Consolidated adj. PAT stood at INR280m (up 42% YoY), in line with our estimates of INR264m.

* Adj. RoCE stood at 23% on an annualized basis in Sep’24 vs. 23.5% in Mar’24. The company added 74 logos during 2QFY25.

* Denave has become a wholly owned subsidiary of UDS, and further shares were acquired in Athena (74%). Digital onboarding of retailers, virtual audits aided by technology in the retail space, sales intelligence through AI initiatives for global giants, et al. helped Denave penetrate into new avenues.

* Long-standing relationships with customers have 95%/93% retention over a fiveyear window in the IFM/BSS businesses.

Key highlights from the management commentary

* UDS has a strong hold in southern markets and the manufacturing segment. Manufacturing is growing and seeing strong traction, while warehousing, infrastructure, and industrials remain key areas. Telecom handset manufacturers are also showing interest.

* The IFM business is emerging from a cycle where the company has been rationalizing its portfolio, as guided in the previous quarter. The IFM business is emerging from a cycle where the company has been rationalizing its portfolio, as guided in the previous quarter.

* In BSS, strong momentum is seen in audit and assurance business; early signs of hiring in IT are encouraging. The company is actively pursuing acquisitions in the BSS area.

* Denave has become a wholly-owned subsidiary of UDS, and further shares were acquired in Athena (74%). Digital onboarding of retailers, virtual audits, and AIdriven sales intelligence initiatives have helped Denave penetrate new avenues.

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 16%/30% in revenue/EBITDA over FY24-27E. With visibility of healthy earnings growth over the medium term and strong value from the BSS business, we reiterate our BUY rating with a TP of INR450 (premised on 18x Sep’26E EPS). Our TP implies a 16% upside potential.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412