Genpact's Potential Is Undervalued

May.21.13 | About: Genpact Limited (G)

The business process management and technology services consulting industry has holistic dynamics as compared to other industries as the business of these companies is highly integrated and in most cases spread across a number of sectors. The prospects of companies operating in this industry come down to global business activity and competitive advantage between companies. Genpact Ltd. (NYSE:G) is the global leader in the business process management and technology services.

Genpact was established in 1997 as a business unit of General Electric's (NYSE:GE) capital wing, GE Capital. Later, the unit started to grow and provide services to the other segments of GE and in FY05 the company became a separate independent entity while maintaining GE as a major client. Genpact's global operations provide substantial strategic advantage to the company as it operates across North America, Europe, Asia-Pacific, South America, Australia and Africa. The company's services range across core businesses and specific industries.

A number of researchers and analysts have pointed out towards various trends which suggest that the global economic recovery will be underway by FY14 with a decent momentum. The status of global equity markets presents proof of this belief. Therefore, a recovery in economic activity will have a positive impact on the revenues of the company and the geographical diversification will help in exploring new revenue targets and mitigating regional risks.

Financial Performance

The company was listed on NYSE in FY07. Since then, the company has posted substantial top line growth and the quality of services has proved superior as in this process, Genpact established itself as a global leader.

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Data Source: Morningstar

The above chart shows the cash flow generation from operating activities over the period of five years in millions of USD. From FY09 onwards, a substantial growth is visible in these cash flows. The company's revenues have produced a CAGR of 18.24% in this period. Similarly, the net income has posted a CAGR of 27.13%.

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Data Source: Morningstar

The above figure illustrates the increase in total assets in the past five years in millions of USD. The company's financial performance and growth in net income and revenues has been maintained within the company in order to pursue future prospects.

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Source: YCharts

The chart above shows the revenues and return on equity produced by the business over the period of five years. The chart reflects the growth that has occurred over difficult economic periods. Therefore, the company's growth prospects are expected to enhance in the future on the back of improvement in the larger economic framework.

Comparative Valuation

As mentioned before, Genpact has shown a substantial growth but at the same time, the markets have not recognized the potential of the company as yet as the business process management and technology services industry isn't one of the most popular industries among investors.

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Source: Morningstar

The table above draws a comparison between Genpact, Automatic Data Processing (NASDAQ:ADP), SGS Ltd. (NYSEMKT:SGS) and Experian Plc. (OTCQX:EXPGY). The table also compares key statistics of Genpact with the industry averages.

The company's undervaluation as compared to its peers and the rest of the industry is quite evident as almost all valuation metrics suggest that the company is priced below the intrinsic value. These metrics propose a substantial upside potential for investors as the company continues to pursue its growth prospects and in the process, stimulates investor interests further. The company's phenomenal average revenue growth of 19.3% in the last three years is unmatched across all competitors as it operates at stronger profit margins than the industry and at the same time, taps into a larger volume through its global network.

Potential Risk Factors

As the company performs its functions in an advisory role across the globe, the major threat comes from a possible slowdown in the global economy. If the analysts' estimates of global recovery in FY14 start to fall short, the company's growth momentum may be broken down to irreparable extent. Therefore, if the debt crisis, which is looming large in the European region, continues to persist, it will have a sizable adverse effect on the size of company's business and growth. Similarly, concerns about the huge debt of the US economy and other threatening economic or financial shocks in US or emerging economies, can produce negative impacts.

Conclusion

According to Morningstar statistics, the company operates at a beta of 1. This means that there is a direct relationship between the performance of the company and the market portfolio. Therefore, the threats posed by the aforementioned risk factors are considerable. However, I find that the company has already shown clear evidence of robust performance under grim circumstances. Furthermore, the company has a global network but it has not been fully explored. Genpact has the space to consider further expansion and exploration of emerging global prospects, and generate substantial growth in the future.

Based on these factors, long-term investors are proposed to pursue a buy recommendation for Genpact as its growth prospects are strong and the market simultaneously undervalues the company's potential. Therefore, the company has substantial upside potential and can prove to be a lucrative opportunity for long-term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.