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Revenue in line; net profit ahead of estimate
Rolta India’s (Rolta) Q2FY11 revenue was in line with our estimate while net
profit was ahead of estimate driven by lower tax incidence. Revenue, at INR 4.4
bn, grew 3.2% Q-o-Q and adjusted net profit, at INR 714 mn, rose 5.1% Q-o-Q.
While EBITDA margin, at 39.4% (down 30bps Q-o-Q), was ahead of the
estimated 38.8%, gross margin declined 190bps to 49.3%. Lower SG&A
spending (170bps Q-o-Q) led to EBITDA margin expansion. During the quarter,
the company also reported INR 761 mn profit on sale of stake in Shaw Rolta JV.
Charting out positives and negatives
Positives: (a) Free cash generation continued to be positive at INR 350 mn;
(b) new order intake of INR 4.6 bn is among Rolta’s highest. Total order book as
at quarter end at INR 19.0 bn (INR 18.8 bn previous quarter). Order book
excludes orders of Shaw JV in the engineering segment; (c) book-to-bill ratio
continued to remain strong for EGDS and EITS segments at 1.2x; (d) debtor
days reduced to 130 from 144 in the previous quarter; and (e) improving
traction in the EICT business with gradual margin improvement to follow.
Negatives: (a) Revenue from engineering segment continued to remain flat (up
0.9% Q-o-Q); (b) margins in the EITS segment continued to remain at 12% and
no success in terms of shifting work offshore from TUSC (company acquired in
Jan 2008); and (c) though cash flow generation has been positive, we believe
FCF generation has to jump significantly to repay FCCB proceeds by FY12 end,
which otherwise may result in capital raising, thereby diluting existing equity.
Outlook and valuations: Attractive; maintain ‘BUY’
Rolta is seeing a sustained improvement in its operating margins, now at 40%,
with continued solution selling in the EGDS segment. Its FY12E and FY13E EPS
stands at INR 19.3 and INR 22.7, respectively, at which the stock trades at a P/E
of 7.0x and 5.9x, respectively. Though potential equity dilution continues to
remain an overhang, with 16% earnings growth over the next two years, we
believe current valuations are attractive. Thus, we continue to maintain ‘BUY’
recommendation on the stock. On relative return basis the stock is rated ‘Sector
Outperformer’.
Key highlights
• Consolidated revenue, at INR 4.4 bn, grew 3.2% Q-o-Q and 17.5% Y-o-Y. Gross
profit for the quarter stood at INR 2.2 bn, a sequential decline of 0.7%. Gross
margins dipped 190bps on account of high cost of laterals and subcontracting costs
during the quarter.
• EBITDA stood at INR 1.7 bn, up 2.5% Q-o-Q and 22.2% Y-o-Y. EBITDA margins fell
marginally by 30bps Q-o-Q at 39.4%. Lower SG&A spending helped maintain flat
EBITDA margins by offsetting the impact of lower gross margins.
• Net profit, excluding gain from stake sale in Shaw Rolta, stood at INR 714 mn, up
5.1% Q-o-Q and 3.4% Y-o-Y. Net profit margin (excluding exceptional gain), at
16.2%, jumped 30bps Q-o-Q. Tax rate during the quarter stood at 16.9% (14.5%
previous quarter).
Segmental performance
• Enterprise Geospatial and Defence Solutions (EGDS): Consolidated revenues, at
INR 2.2 bn, rose 4.4% Q-o-Q and 20.4% Y-o-Y. While gross profit stood at INR 1.4
bn, gross margin dipped 180bps sequentially to 60.4%. EBITDA margin declined
sequentially 80bps and now stands at 52.1%. Utilisation for the quarter stood at
78.4%, down 30bps sequentially. Strong traction in this segment for its geospatial
Fusion solution. The company’s order book grew 5.0% sequentially. On reported
basis, realisation posted an uptick of 1.3% Q-o-Q.
• Enterprise Design and Operation Solutions (EDOS): Rolta reported consolidated
revenue of INR 1.1 bn, up a tepid 0.9% Q-o-Q and 14.7% Y-o-Y. EBITDA margin
stood at 40.3%, an improvement of 10bps over the previous quarter.
• Enterprise IT Solutions (EITS): The EITS segment’s revenue, at INR 1,071 mn,
grew 2.9%. EBITDA margin, at 11.8%, was marginally down 10bps from the previous
quarter. Order book increased 4.5% (highest in past 11 quarters) from the previous
quarter.
• Order book uptick continued: Rolta’s order book (excluding INR 550 mn from
Shaw JV) grew 1.1% sequentially. Current order book stands at INR 19.0 bn. EGDS
and EITS segments grew their order book by 5.0% and 4.5% sequentially,
respectively.
• Capex for H1FY11 at INR 1.7 bn.
• FCF for the quarter stood at INR 350 mn versus INR 300 mn in the previous quarter.
• Tax rate: Management expects FY12 tax rate to be in the 14-15% range; post FY12
it will be in the 18-20% range.
• DSOs decline: Debtor days stand at 130 days vis-à-vis 144 in the previous quarter.
Company Description
Rolta is one of the leading providers of GIS and engineering design and automation
(EDOS) services. In GIS, Rolta provides and develops digital map-based solutions,
servicing customers in segments like defence, environmental protection, utilities,
emergency services, and public planning. In EDOS, Rolta focuses on computer-aided
plant design and mechanical engineering solutions. The company provides a combination
of software skills and component manufacturing services through its EDA group. It also
provides security and IT infrastructure, software development, testing, and gaming
services through its EICT group. The company’s past twelve months (TTM) revenues
stood at INR 16.8 bn (USD 370 mn) and it employs over 4,212 people.
Investment Theme
Outsourcing of engineering services is expected to reach USD 38-50 bn by 2020 against
USD 2 bn currently, as per the Nasscom-Booz Allen Hamilton study. As one of the
leading offshore engineering services firms for the manufacturing industry, Rolta is
poised to grab the increasing opportunities. Nevertheless, in the current environment, as
capex spending has eased, Rolta has seen uptick in new orders. Moreover, with
increased emphasis and spending plans on upgrading defence technologies, opportunity
for Rolta is significant. In addition, visibility for JV with Thales Group is also looking up.
We see Rolta placed in a strong position to explore the high opportunity segments of GIS
and engineering along with its focus on transitioning towards solutions approach.
Key Risks
Key risks to our investment theme include: (a) substantial proportion of revenues from
non-annuity sources; (b) slow down of in GIS segment; (c) inability to monetize the
Fusion solutions could impact profitability; and (d) inadequate free cash generation to
repay the FCCB and ECB debt.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Revenue in line; net profit ahead of estimate
Rolta India’s (Rolta) Q2FY11 revenue was in line with our estimate while net
profit was ahead of estimate driven by lower tax incidence. Revenue, at INR 4.4
bn, grew 3.2% Q-o-Q and adjusted net profit, at INR 714 mn, rose 5.1% Q-o-Q.
While EBITDA margin, at 39.4% (down 30bps Q-o-Q), was ahead of the
estimated 38.8%, gross margin declined 190bps to 49.3%. Lower SG&A
spending (170bps Q-o-Q) led to EBITDA margin expansion. During the quarter,
the company also reported INR 761 mn profit on sale of stake in Shaw Rolta JV.
Charting out positives and negatives
Positives: (a) Free cash generation continued to be positive at INR 350 mn;
(b) new order intake of INR 4.6 bn is among Rolta’s highest. Total order book as
at quarter end at INR 19.0 bn (INR 18.8 bn previous quarter). Order book
excludes orders of Shaw JV in the engineering segment; (c) book-to-bill ratio
continued to remain strong for EGDS and EITS segments at 1.2x; (d) debtor
days reduced to 130 from 144 in the previous quarter; and (e) improving
traction in the EICT business with gradual margin improvement to follow.
Negatives: (a) Revenue from engineering segment continued to remain flat (up
0.9% Q-o-Q); (b) margins in the EITS segment continued to remain at 12% and
no success in terms of shifting work offshore from TUSC (company acquired in
Jan 2008); and (c) though cash flow generation has been positive, we believe
FCF generation has to jump significantly to repay FCCB proceeds by FY12 end,
which otherwise may result in capital raising, thereby diluting existing equity.
Outlook and valuations: Attractive; maintain ‘BUY’
Rolta is seeing a sustained improvement in its operating margins, now at 40%,
with continued solution selling in the EGDS segment. Its FY12E and FY13E EPS
stands at INR 19.3 and INR 22.7, respectively, at which the stock trades at a P/E
of 7.0x and 5.9x, respectively. Though potential equity dilution continues to
remain an overhang, with 16% earnings growth over the next two years, we
believe current valuations are attractive. Thus, we continue to maintain ‘BUY’
recommendation on the stock. On relative return basis the stock is rated ‘Sector
Outperformer’.
Key highlights
• Consolidated revenue, at INR 4.4 bn, grew 3.2% Q-o-Q and 17.5% Y-o-Y. Gross
profit for the quarter stood at INR 2.2 bn, a sequential decline of 0.7%. Gross
margins dipped 190bps on account of high cost of laterals and subcontracting costs
during the quarter.
• EBITDA stood at INR 1.7 bn, up 2.5% Q-o-Q and 22.2% Y-o-Y. EBITDA margins fell
marginally by 30bps Q-o-Q at 39.4%. Lower SG&A spending helped maintain flat
EBITDA margins by offsetting the impact of lower gross margins.
• Net profit, excluding gain from stake sale in Shaw Rolta, stood at INR 714 mn, up
5.1% Q-o-Q and 3.4% Y-o-Y. Net profit margin (excluding exceptional gain), at
16.2%, jumped 30bps Q-o-Q. Tax rate during the quarter stood at 16.9% (14.5%
previous quarter).
Segmental performance
• Enterprise Geospatial and Defence Solutions (EGDS): Consolidated revenues, at
INR 2.2 bn, rose 4.4% Q-o-Q and 20.4% Y-o-Y. While gross profit stood at INR 1.4
bn, gross margin dipped 180bps sequentially to 60.4%. EBITDA margin declined
sequentially 80bps and now stands at 52.1%. Utilisation for the quarter stood at
78.4%, down 30bps sequentially. Strong traction in this segment for its geospatial
Fusion solution. The company’s order book grew 5.0% sequentially. On reported
basis, realisation posted an uptick of 1.3% Q-o-Q.
• Enterprise Design and Operation Solutions (EDOS): Rolta reported consolidated
revenue of INR 1.1 bn, up a tepid 0.9% Q-o-Q and 14.7% Y-o-Y. EBITDA margin
stood at 40.3%, an improvement of 10bps over the previous quarter.
• Enterprise IT Solutions (EITS): The EITS segment’s revenue, at INR 1,071 mn,
grew 2.9%. EBITDA margin, at 11.8%, was marginally down 10bps from the previous
quarter. Order book increased 4.5% (highest in past 11 quarters) from the previous
quarter.
• Order book uptick continued: Rolta’s order book (excluding INR 550 mn from
Shaw JV) grew 1.1% sequentially. Current order book stands at INR 19.0 bn. EGDS
and EITS segments grew their order book by 5.0% and 4.5% sequentially,
respectively.
• Capex for H1FY11 at INR 1.7 bn.
• FCF for the quarter stood at INR 350 mn versus INR 300 mn in the previous quarter.
• Tax rate: Management expects FY12 tax rate to be in the 14-15% range; post FY12
it will be in the 18-20% range.
• DSOs decline: Debtor days stand at 130 days vis-à-vis 144 in the previous quarter.
Company Description
Rolta is one of the leading providers of GIS and engineering design and automation
(EDOS) services. In GIS, Rolta provides and develops digital map-based solutions,
servicing customers in segments like defence, environmental protection, utilities,
emergency services, and public planning. In EDOS, Rolta focuses on computer-aided
plant design and mechanical engineering solutions. The company provides a combination
of software skills and component manufacturing services through its EDA group. It also
provides security and IT infrastructure, software development, testing, and gaming
services through its EICT group. The company’s past twelve months (TTM) revenues
stood at INR 16.8 bn (USD 370 mn) and it employs over 4,212 people.
Investment Theme
Outsourcing of engineering services is expected to reach USD 38-50 bn by 2020 against
USD 2 bn currently, as per the Nasscom-Booz Allen Hamilton study. As one of the
leading offshore engineering services firms for the manufacturing industry, Rolta is
poised to grab the increasing opportunities. Nevertheless, in the current environment, as
capex spending has eased, Rolta has seen uptick in new orders. Moreover, with
increased emphasis and spending plans on upgrading defence technologies, opportunity
for Rolta is significant. In addition, visibility for JV with Thales Group is also looking up.
We see Rolta placed in a strong position to explore the high opportunity segments of GIS
and engineering along with its focus on transitioning towards solutions approach.
Key Risks
Key risks to our investment theme include: (a) substantial proportion of revenues from
non-annuity sources; (b) slow down of in GIS segment; (c) inability to monetize the
Fusion solutions could impact profitability; and (d) inadequate free cash generation to
repay the FCCB and ECB debt.
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