Buy Updater Services Ltd For Target Rs.460 by Motilal Oswal Financial Services Ltd
A steady quarter
Short-term hiccups expected in BSS business
* Updater Services (UDS) reported revenue growth of 9% YoY/2% QoQ to INR7.0b, below our estimate of ~INR7.5b. Core EBITDA margin came in at 6.7%, up 40bp YoY (vs. est. 6.1%). IFM’s PBT margin was up 10bp QoQ at 5.3%. BSS’s PBT margin was up 40bp QoQ at 6.2%. Consolidated adj. PAT stood at INR312m (up 52% YoY), above our estimate of INR276m. The company’s revenue/EBITDA/PAT grew 11.8%/34.6%/101% in 9MFY25 vs. 9MFY24. We expect revenue/EBITDA/adj. PAT to grow organically by 13.3%/13.8%/14.2% YoY in 4QFY25. We reiterate our BUY rating and a TP of INR460 (premised on 18x Dec’26E EPS)
Our view: IFM drives growth in 3Q
* IFM segment (~65% revenue contribution) saw steady growth, driven by operational improvements and low-margin contract rationalization, with a focus on high-value contracts. IFM margins should improve as the company continues to focus on high-margin contracts. While BSS faced headwinds due to loss of clients in Athena business, we expect slowed momentum for the next couple of quarters. Recent challenges in Athena are expected to ease as new client acquisitions in non-BFSI segments start contributing from 1QFY26.
* We estimate a revenue CAGR of 17% for BSS over FY24-27, underscoring a shift toward higher-margin opportunities to boost revenue growth and profitability. For IFM, we anticipate a 13% CAGR over FY24-27, with improved margins.
* Margins: Core EBITDA margin was 6.7% (est. 6.1%). With its strategy to optimize low-margin contracts in IFM and high-margin business in BSS, along with operational leverage, we believe the company can accrue margins by ~20bp/60bp over FY26-27E. We expect operational leverage to improve margins by 20-25bp in FY26E, with contributions from high-margin businesses.
Valuation and changes in our estimates
* We broadly retain our estimates, given solid foothold of UDS in the IFM business and the high-margin BSS business. We expect a CAGR of 15%/26% in revenue/EBITDA over FY24-27. Reiterate BUY with a TP of INR460 (premised on 18x Dec’26E EPS). The recent correction in the stock price (down ~23% from peak) makes valuations relatively comfortable. Our TP implies a 36% upside potential.
Miss on revenue and beat on margins
* Revenue grew 9% YoY and 2% QoQ to INR7.0b, below our estimate of ~INR7.5b.
* Revenue growth was aided by 9% YoY growth in IFM, whereas BSS reported a growth of 7% YoY.
* EBITDA margin came in at 6.7%, up 40bp YoY (est. 6.1%). IFM’s PBT margin was up 10bp QoQ at 5.3%. BSS’s PBT margin was up 40bp QoQ at 6.2%
* Consolidated adj. PAT stood at INR312m (est. INR276m), up 52% YoY.
* Adj. RoCE stood at 22.3% on an annualized basis in Dec’24 vs. 23.4% in Mar’24. The company added 95 logos during 3QFY25.
* Long-standing relationships with customers have 95%/93% retention over a fiveyear window in the IFM/BSS businesses.
Key highlights from the management commentary
* The company is focusing on increasing cross-sales between the IFM and BSS segments to enhance synergies.
* UDS is confident of achieving 2.5-3x higher growth than the economic growth rate (between 15-20% organically) without compromising margins.
* Growth acceleration is expected, particularly in the global airport handling business.
* In IFM, its focus on operational excellence and the optimization of low-margin contracts has started yielding positive results, though there are opportunities to further optimize low-margin contracts.
* Denave remains at the forefront of technological innovation for the group. Despite some churn in sales enablement due to technology, new client acquisitions are anticipated, and remote agent adoption efforts are expected to yield results. Margins are expected to stabilize.
* Athena experienced the loss of key clients in 9MFY25, resulting in flat revenue. One client closed operation in India, and another underwent restructuring.
* Athena is adding clients in the non-BFSI segment, with positive results anticipated from 1QFY26. Full-year revenue is expected to remain flat at ~INR1,350m.
* The company expects operational leverage to boost margins by 20-25bp YoY, with contributions from higher-margin businesses
Valuation and view
* We believe the company will benefit from the long-term trend of outsourcing non-core 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 15%/26% in revenue/EBITDA over FY24-27. Reiterate BUY with a TP of INR460 (premised on 18x Dec’26E EPS). The recent correction in the stock price (down ~23% from peak) makes valuations relatively comfortable. Our TP implies a 36% upside potential.
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