BLS International Services Ltd. share price target

Stellar earnings with record high margin; outlook promising

Strong start paves the way for future growth

Key player in the niche oligopolistic market

Key player in niche oligopolistic market

In view of the large UK contract win and growth visibility in the visa business, we maintain our BUY rating with a TP of Rs 265, based on 20x FY20 EPS. BLS International posted mixed set of numbers in 1QFY19, with muted revenue growth but strong operational performance. Revenue stood at Rs 2.01bn, down 1.6% QoQ lower than our est. of Rs 2.12bn. EBITDA margin expanded 792bps QoQ (highest ever) to 24.6% (our est. was 17.0%) due to higher revenue contribution from VAS services (Spain) which is higher margin.

We increase our revenue estimate by 28/54% and PAT est. by 11/30% for FY19/20E. We expect Rev/EBITDA/PAT CAGR of 15/7/13% for FY18-20E. BLS International posted muted set of numbers in 4QFY18, but the new contract win from United Kingdom Visas & Immigration (UKVI) with strategic alliance with Sopra Steria (French IT company) is a game changer. The total contract value for BLS is GBP 110mn (Rs 10bn) over three year period with margin of ~22%. The UK contract is bigger than Spain and will start contributing from Oct-18. BLS will open 60 offices (capex of GBP 1mn) in UK and process ~0.5mn visa (renewals) at average realization of GBP 80/application. We have assumed Rs 1.64/3.37bn revenue from UK in FY19/20E.

In view of the termination of Punjab e-governance contract, uncertainty regarding receivables and no near-term growth visibility, we maintain our SELL rating with a TP of Rs 170, based on 20x Dec-19E EPS. BLS International posted a mixed set of numbers in 3QFY18, with beat on revenue, but miss on margins (-450bps QoQ to 18.7% vs our est. of 22.7%). Revenue stood at Rs 2.03bn, up 8.8% QoQ, led by 9.5% QoQ rise in the Visa segment (~75% of rev). Growth in visa business was led by pick-up in Spain visa applications and contribution from newer contracts (Afghanistan). The Punjab e-governance revenue stood at Rs 0.50bn (~25% of rev).

In view of the termination of Punjab e-governance contract, uncertainty regarding high receivables and no near-term growth triggers we downgrade our rating to SELL with a TP of Rs 160, based on 20x Dec-19 EPS (earlier 25x) and adjusting for one-time write-off impact of Rs 10/share. Punjab government has terminated the five year e-governance contact awarded to BLS International in Mar-16. This came in as a major negative surprise as we were expecting closure of only some financially unviable centers out of total 2,147 seva kendras operated by BLS.

Maintain BUY with a TP of Rs 300, based on 25x Sep-19 EPS. BLS International witnessed a mixed set of numbers in 2QFY18, with a miss on revenue, but beat on margins (+105bps QoQ to 23.2% vs our est. of 20%). Margin expansion was led by a greater contribution from the higher-margin Spanish Visa (~25%) and Punjab e-governance businesses (~30%). Revenue came in Rs 1.86bn, down 4.4% QoQ, led by 6.4% drop in the Visa business (~75% of rev). Visa revenue was soft, owing to seasonality. However, it is expected to revive in 2H, led by a rise in Visa applications in Spain, higher realisations led by VAS services, and contributions from new contracts.

Maintain BUY with a TP of Rs 270, based on 25x FY19E EPS. BLS International reported a strong set of numbers in 1QFY18. Strong beat on margins (+453bps QoQ to 22.2%) was led by integration of the higher-margin Spanish visa business and absence of one-time costs incurred last quarter. Revenue was Rs 1.95bn, up 0.4% QoQ and 57.1% YoY. The Spain visa revenue stood at ~Rs 270mn (considering only 50%). The company processed ~0.45mn visas, with an average realisation of Rs ~1,200/visa.

We recently met the management of BLS International Services (BLS) to understand its business model. BLS is a specialist provider for outsourcing visa, passport and attestation services to governments across the world. The company operates in more than 48 countries and has processed ~18 million applications since 2005, when it entered the business by being a service provider to the Embassy of Portugal. In 2016,...

We initiate coverage with a BUY, and a TP of Rs 271, based on 25x FY19E EPS. BLS International (BLS) is globally the second largest visa processing player (after VFS Global). It has operations in 48 countries, and processes visas for countries like Spain, UAE, Russia and China. The company has processed ~18mn applications over the last twelve years. BLS reported healthy revenue growth of 25.7% (Rs 6.35bn) with EBITDA margin expansion of 570bps (13.0%) in FY17.

BLS International (BLS) is a visa & passport processing company and debuted on NSE in June 2016 (earlier listed in Delhi Stock Exchange). It has recently won a five-year Punjab e-Governance project for providing 223 citizen services through 2,147 centers (Seva Kendras).

Valuation & Outlook: BLS’ revenue and EBITDA has grown at a healthy FY13-16 CAGR of 45/34%. In FY16 EBITDA margin stood at 7.3% however based on net revenue basis, the margin is much higher at ~40%. Niche focus, strong execution and an asset light model have enabled healthy RoE of 31% in FY16. We expect the Revenue/PAT to grow at a robust CAGR for FY16-18E supplemented by Punjab e-governance project. We believe that the valuations are attractive, given its potential to deliver super-normal earnings growth ahead and strong return ratios.