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Genpact: Headcount Growth And AI Could Push The Price Up
GGenpact(G) Seeking Alpha·2024-07-11 13:14

Investment Thesis - Genpact Limited reported an average headcount increase of 9.7% in the last quarter, alongside new investments in sales and marketing to support growth in the global artificial intelligence market, leading to expectations of accelerated unlevered free cash flow (FCF) from 2025 to 2029 [1][30] - The price target for Genpact is set at 66−66-67 per share based on a discounted cash flow (DCF) model, while previous M&A transactions suggest a valuation exceeding 129pershare,indicatingthestockiscurrentlyundervalued[1][30]BusinessOverview−GenpactLimitedoperatesasaglobalprofessionalservicesfirm,providingdigital−ledinnovationanddigitally−enabledintelligentoperationstoFortuneGlobal500clients[2]−Thecompanyhasover131,000employeesacrossmorethan35countries,contributingtoadiversifiedbusinessprofilethatmayleadtolessvolatilefuturenetsalesgrowthcomparedtopeerswithlessgeographicdiversification[3]FinancialPosition−Genpactmaintainsastrongbalancesheetwithsignificantcashandaccountsreceivable,indicatinglimitedneedfordebtfinancing[4]−Theasset/liabilityratioisgreaterthan1x,andnetleverageappearslimited,suggestingastablefinancialpositionthatsupportshiringandmarketinginvestments[4]GrowthExpectations−ThecompanyreportedaGAAPEPSof129 per share, indicating the stock is currently undervalued [1][30] Business Overview - Genpact Limited operates as a global professional services firm, providing digital-led innovation and digitally-enabled intelligent operations to Fortune Global 500 clients [2] - The company has over 131,000 employees across more than 35 countries, contributing to a diversified business profile that may lead to less volatile future net sales growth compared to peers with less geographic diversification [3] Financial Position - Genpact maintains a strong balance sheet with significant cash and accounts receivable, indicating limited need for debt financing [4] - The asset/liability ratio is greater than 1x, and net leverage appears limited, suggesting a stable financial position that supports hiring and marketing investments [4] Growth Expectations - The company reported a GAAP EPS of 0.64 and sales of 1.13billioninthelastquarter,bothexceedingexpectations,withanalystsforecastingnetsalesgrowthof31.13 billion in the last quarter, both exceeding expectations, with analysts forecasting net sales growth of 3% in 2024, 5.8% in 2025, and 8% in 2026 [10][13] - The global artificial intelligence market is projected to grow at a CAGR of 36.6% from 2024 to 2030, which is expected to positively impact Genpact's net sales [18][30] Segment Performance - The Financial Services segment is anticipated to drive net sales growth due to increased demand for financial crime services, with the global market for these solutions valued at approximately 1.30 billion in 2023 and expected to grow at a CAGR of 5.7% from 2024 to 2032 [21] - The Consumer and Healthcare segment also saw a 4.6% increase in quarterly revenue, contributing to overall growth expectations [21] Stock Demand Factors - Ongoing stock repurchases and recent dividend increases are expected to enhance stock demand and lower the cost of capital, with the company repurchasing 864,925 shares at an average price of 34.67pershareinthelastquarter[21][30]−Thedividendincreasedby1034.67 per share in the last quarter [21][30] - The dividend increased by 10% in 2023 and by 11% in 2024, further supporting stock demand [21][30] Valuation Insights - A review of previous transactions in the tech industry suggests a median EV/NTM sales ratio of 5.51x, implying a total valuation of 129 per share for Genpact based on projected revenues [23][26] - The current trading multiple of 10x forward 2024 earnings is considered low for a company expected to grow at 11% year-over-year in 2026 [13][30]