Genpact: Growth Pegged On AI Consumption Business Models

Global professionals’ services company, Genpact Limited (NYSE:G) was “named to the Forbes List of America’s Best Large Employers 2023”, a move indicating its clear focus on talent in business performance. Genpact’s share price has risen 11.43% (YoY) and is trading 2.8% below the 52-week high of $48.85. The company offers services such as modern accounting and digital transformation to help deliver results including revenue growth.

Thesis

Genpact intends to continue using data-tech-AI services to give it a long-term competitive advantage as a pivot for new business models. By partnering with clients using data-driven AI, G is likely to attain supply-chain agility, boost sales and improve team performance. It affirmed its guidance to clients of an operating income margin of about 16.8% (YoY) in the full year 2023, the fastest margin rate expansion in the company’s history.

Revenue growth

Genpact’s Q4 2022 revenue of $1.11 billion, a rise of 9.38% (YoY) beat analysts’ estimates by $26.62 million while its EPS of $0.75 beat estimates by $0.06. In the full-year analysis, total revenue stood at $4.37 billion, indicating a growth of 9% (YoY). This revenue was dominated by 2 main segments: data-tech-AI services at $1.96 billion +16% (YoY) and digital operations at $2.41 billion, a growth of 3% (YoY). As the numbers show, despite having a lower revenue margin, there was a relatively faster adoption of data-tech-AI services among clients. The company gave a positive outlook in its full-year 2023 financial report with the revenue guidance set at $4.64 billion to $4.75 billion.

Genpact creates a competitive advantage for its clients by applying its data-tech-AI services to transform their businesses. The company operates with more than 115,000 employees located in over 30 countries worldwide. At stake here is business intelligence that involves the combination of analytics, data mining/ visualization, and infrastructural development.

In its Q4 2022 earnings report, Genpact stated that it saw an 18% (YoY) growth in clients’ businesses when it used data-tech-AI services to design and create business solutions. There was optimum growth in supply-chain services, commercial/ sale, and risk services.

More Opportunities in cloud-based technologies

As companies gear up for spin-offs to redefine their separate portfolios, Genpact is working to leverage cloud-based technologies that are specific to these companies. Genpact itself was a division within General Electric since 1997 and only became independent in 2005. In the past year, GE's price return has declined almost 7% (YoY) against G's 11% gain in the same period.

Over the years, the company has continued to strengthen its relationship with clients by supporting data solutions on platforms such as Google cloud systems, Microsoft Azure, AWS, SAP, Snowflake, Oracle, and others.

Genpact offers automotive consulting, and in Q4 2022 it was chosen by a large tech provider in the industry to modernize the tech stack and convert it to the AWS cloud. At the same time, it was expected to consolidate the company's automotive operations on a global range. This consolidation helped the client comprehend the costs involved in repair, maintenance, vehicle financing, and insurance at a wider scope. In the health sector leveraging cloud technology has helped medical firms reinvest funds (through cost savings) into long-term growth drug projects. This segment also involves data management and migration of the data infrastructure to the cloud for effective decision making, especially in finance and underwriting.

In supply chain management, Genpact is involved reimagining sales and operations planning (S&OP) to transform supply chain frameworks and raise profit objectives. The company explained in its Q4 2022 earnings report that it was contracted by a tech firm to implement supply-chain planning software, Kinaxis (OTCPK:KXSCF) on its cloud platform to deliver agile business operations.

There is an insatiable need to not only use accurate data but certify real-time accessibility using AI. Currently, we have ChatGPT, an AI chatbox created by OpenAI (a company backed by Microsoft), and other generative AI examples. However, Genpact is yet to conduct a full integration of ChatGPT into its controls despite the advantage of speed and the ability to streamline data operations at scale. This situation also exists among other generative AIs that have not yet been integrated into its data services. Genpact will need to train staff on this integration and position itself to take up this emergent opportunity.

Market Consideration

By 2030, the global generative artificial intelligence market is expected to reach $109.37 billion growing at a CAGR of 34.6% from 2022-2030. This demand will be aggravated by the need to modernize industrial workflow. Genpact engages in the configuration and implementation of automated intelligent workflow to improve efficiency and productivity. Using generative AI, the company will help clients reduce downtime, promote safety (as it lowers human interaction) and enhance quality.

Popular generative AIs currently in the market include OpenAI’s ChatGPT, DALL-E, Midjourney and Bing AI (owned by Microsoft). Overall, the power of AI cannot be underestimated if we consider the impact TikTok has had over the years. In 2022, TikTok generated about $11 billion in advertisement revenue with its valuation set at $100 billion to $150 billion. Social media in the current age leverages AI to build customized feeds and advertisements. Generative AI creates and analyzes text, images and videos making these tools essential marketing inventories especially for future ecommerce.

Valuation

Genpact’s P/E GAAP (TTM) ratio stands at 25.26, about 6.30% above the industry average of 23.76. The company’s enterprise value is $9.78 billion, with total debt at $1.70 billion against a cash balance of $652.14 million. G needs to increase its cash flow to accelerate growth and deleverage- since it cannot pay its debt using cash. The price-to-book (TTM) ratio is 57.43% higher than the industry average at 4.76 against 3.02 indicating that G is slightly overvalued.

Risks to be considered

Genpact has more than 100,000 employees spread across different countries around the world. At a time when the world is facing inflationary pressure (especially in the US and Europe, where it has the majority of its clients), an increase in wages without pricing adjustments will lower the company’s profit margin.

Genpact incurred an $11 million charge in Q4 2022 after it conducted a divestment that saw it realize reduced net realized value. In Q4 2021, the company record lower adjusted operating income with net income down 28.6% (QoQ) to $73.1 million. In Q4 2022, Genpact’s net income dropped 6.4% (QoQ) to $89.7 million. This decrease was due to higher transactional costs incurred by the company coupled with higher investment activity. However, this amount represented an increase of 22.7% (YoY).

Genpact’s cash reserve has declined 27.97% (YoY) to $652.1 million from a high of $905.3 million as of Q4 2021. On a positive note, the company reduced its total debt by 15.1% (YoY) to $1.7 billion with retained earnings at $780 million.

Also, the 4 year average dividend yield stands at 0.83% which is about 46.03% lower than the sector median of 1.54%. However, in the past 1 year the yield rose 4.35% (TTM) to 1.05% against a dividend rate of $0.55.

Bottom Line

Genpact’s improved performance in Q4 2022 as well as in FY 2022 indicated the company’s resilience amidst a volatile global technological environment. Data-tech AI services contributed 45% of total revenue while digital operations contributed the remaining 55%. Genpact witnessed improved cloud-based data business operations including supply-chain management, sales, and risk services that rose in the quarter. The company is yet to integrate key generative AI services such as ChatGPT that can streamline data operations with great speed levels. G stock is trading less than 3% below the 52-week high and I believe that it is currently overvalued. I will recommend a hold rating for now.