Buy Rolta: TP of Rs195: Takeaways from the con-call, Macquarie Research,

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Rolta India
2Q: Takeaways from the con-call
Event
 RLTA reported 2QFY11 (year-end June) results that were largely in-line with
our and street estimates. (See Fig 1 for detailed quarterly P&L and deviation
from estimates). We have adjusted our numbers for the 50% stake sale back
to JV partner The Shaw Group and are raising our capex forecast for FY11.
Maintain OP with revised TP of Rs195 (vs. Rs220 earlier).

Impact
 Order book remains healthy. Rolta’s revenue conversion ratio remains
robust at 1.1x. On a segmental basis, the GIS order book stands at Rs10.1bn
(up 5% QoQ) and the EITS order book is at Rs4.1bn (Up 4% QoQ). The order
book for EDOS segment is at Rs4.7bn. The EDOS order book number is not
comparable on a sequential basis since it no longer includes the contribution
from the Shaw Group JV following the stake sale. (See Fig 5 for detailed
analysis of Rolta’s order book).
 1H capex remains elevated. Management reiterated its capex guidance (exacquisitions) of Rs2.5 to Rs3bn for FY11. We estimate that accounting for two
acquisitions announced earlier in the year, the 1H capex is close to Rs2.7bn.
As a result, we are raising our total capex outlay to Rs4.4bn in FY11.
 Operational Metrics. The company reported a mild improvement in billing rates
of ~1% for the GIS and EDOS division of the company (vs. 3% in 1Q). EITS
rates were flat in 2Q. Utilization went down 30-50bps due to a lesser number of
working days and more employees availing leaves during this quarter.
 2Q results details. Rolta reported 2Q revenues of Rs4.4bn (up 3% QoQ
and 18% YoY). EBITDA for the quarter came in at Rs1.7bn (up 3% QoQ
and 22% YoY). EBITDA margins reported were 39.4% which was in-line
with our forecast of 39.5%. Adjusted net profit was Rs781m (up 4.5%
QoQ and 24.7% YoY).
Earnings and target price revision
 We have cut our FY11E-13E EPS estimates by 6%, 6% and 7%, respectively,
to account for sale of Shaw Group JV and below the line changes due to higher
capex. We have reduced our target price to Rs195 due to reduced earnings and
using a historical one year forward PER of 10x as target multiple (Fig 4).
Price catalyst
 12-month price target: Rs195.00 based on a PER methodology.
 Catalyst: Large deal wins from Indian Defense forces
Action and recommendation
 Retain OP.  We continue to like Rolta for its niche service offerings. The
concerns on FCF profile persist and elevated capex levels could be a
dampener on the investment thesis. We believe a US$27.5m cash infusion
from the JV stake sale should make investors more comfortable with guidance
of positive FCF in FY11.