Rolta - Creditable margin performance; order book also strengthens :: Edelweiss

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Rolta - Creditable margin performance; order book also strengthens
(RLTA IN, INR 170, Buy)
Rolta India’s (Rolta) Q1FY11 revenues and net profits were in line with our expectations and
EBITDA margins were ahead of expectations. Revenues, at INR 4.3 bn, grew 3.8% Q -o-Q and
net profits, at INR 679 mn, were up 8.8% Q-o-Q. EBITDA margins, at 39.7% (80bps
improvement over previous quarter), were creditable given that salary hikes were effected
during the quarter. Increasing proportion of high margin solutions revenue and reducing
employee base were key margin boosters. Rolta has maintained its guidance of 12-15%
revenue growth and over 15% net profit growth for FY11. We see valuations at 10x FY11E
and 8.4x FY12E undemanding. However, the 15% growth is unlikely to enthuse investors and
hence immediate re -rating is unlikely. We have a ‘BUY’ recommendation on the stock.
Positives: (a) Key notable for the quarter was the free cash generation that stood positive for
the first time after many quarters; (b) also, new order intake of INR 5.2 bn has been the
highest ever for Rolta. Total order book as at the quarter end stood at INR 18.8 bn (up 5.5%
Q-o-Q and 13% Y-o-Y). New order booking was strongest in the GIS segment tha t continues
to see wider acceptance of its Geospatial Fusion solution; (c) book-to-bill ratio improved
significantly (see table 1 below) across all three business segments; (d) increase in IP-based
revenues to ~16% of total from ~10% in the previous quarte r led to margin improvement.
Negatives: (a) Growth in engineering segment flat (up 0.7% Q-o-Q) and for the full year this
segment is expected to stay flat at the current revenue run rate; (b) margins in the EICT
segment continue to remain at 12% and no success in terms of shifting work offshore from
TUSC (company acquired in Jan ’08); (c) debtor days continue to be high at 144; (d) though
the cash flow generation has been positive, we believe FCF generation has to increase
significantly for it to repay the FCCB proceeds by FY12 end, which otherwise may result in
capital raising, thereby diluting the existing equity.
n Key highlights
Consolidated revenues, at INR 4.3 bn, jumped 3.8% Q-o-Q and 22.0% Y-o-Y. Gross
profits for the quarter stood at INR 2.2 bn, a sequential growth of 4.7%. Gross margins
improved marginally by 50bps on account of higher IP-based revenue and improved
realizations.
Margin uptrend continues: EBITDA stood at INR 1.7 bn, up 6.0% Q-o-Q and 35.3% Y-o-
Y. EBITDA margins improved 80bps Q-o-Q at 39.7% inspite of a 7% overall wage hike.
Increase in gross margins and lower SG&A spend resulted in this improvement. Rolta has
done well in improving margins by 600bps over the past six quarters to 39.7%.
Net profit, at INR 679 mn, was up 8.8% sequentially and 40.3% Y-o-Y on account of
higher EBITDA margin and other income. Net profit margin, at 15.9%, was up 80bps Qo-
Q. Tax rate decreased during the quarter to 14.5% (15.5 % previous quarter).
n Segmental performance
GIS: Consolidated revenues, at INR 2.2 bn, rose 3.7% Q -o-Q and 26.0% Y-o-Y. EBITDA
margin increased sequentially by 140ps and now stand at 52.9%, highest in the
company’s history, on account of increasing solution sales and pricing despite utilisation
declining 70bps, now at 78.4%. Rolta has increased operating margins by 440bps in the
past three quarters. It is witnessing strong traction in this segment for its Geospatial
Fusion solution. The company’s order book grew by 8.1% sequentially. On reported
basis, realisation posted an uptick of 3.1% Q -o-Q.