ROLTA:Creditable margin and order intake,:: Edelweiss

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ROLTA INDIA
Creditable margin and order intake, but immediate re-rating unlikely


􀂃 Revenue and net profit in line with expectations
Rolta India’s (Rolta) Q1FY11 revenues and net profits were in line with our
expectations while EBITDA margins were ahead of expectations. Revenue, at INR
4.3 bn, grew 3.8% Q-o-Q and net profit, at INR 679 mn, jumped 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 (10% offshore
and 2-5% onsite). Increasing proportion of high margin solutions revenue and
reducing employee base were key margin boosters.
􀂃 Charting out key positive and negatives
Positives: (a) Key notable for the quarter was the free cash generation that
stood positive for the first time after many quarters (FCF of INR 300 mn for the
quarter); (b) new order intake of INR 5.2 bn has been the highest ever for
Rolta. Total order book as at 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 that
continues to see wider acceptance of its Geospatial Fusion solution; (c) book-tobill
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 quarter.
Negatives: (a) Growth in engineering segment was flat (up 0.7% Q-o-Q) and is
expected to remain so for rest of the quarter of the fiscal (growth of 8-10% in
FY11 over FY10); (b) margins in the EICT segment continue to remain at 12%
indicating limited 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 by diluting the existing equity (enabling
resolution to raise up to USD 150 mn passed by the board).
􀂃 Outlook and valuations: Immediate re-rating unlikely; maintain ‘BUY’
Rolta has maintained its guidance of 12-15% revenue growth and over 15% net
profit growth for FY11. We see valuations at 9.8x FY11E and 8.6x 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. On relative basis the stock is rated ‘Sector Performer’.