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Rolta India
In line qrt; order intake likely to improve
„In line qrt; valuations attractive
Rolta reported an in line 2Q, with revenue growth of 3% QoQ, in line with
BofAMLe and PAT growth of 5%, 2% ahead of our est. We cut FY12 & FY13E rev
by 3% to factor revenue loss from sale of stake sale in Shaw JV, we cut earnings
by 5% and 2% to factor impact from higher depreciation charge. We cut our PO to
Rs210 from Rs220. We retain our Buy given our view that cash flows are likely to
turn positive and valuations at 8X FY11e & 6x FY12e appear attractive for 22%
EPS CAGR.
GIS/ IT drives growth; pick up in order book likely
Rolta’s 2Q revs were in line with estimates and were driven by growth in GIS
(51% revs, 4% QoQ) and IT solutions (24% revs, 3% QoQ). Engineering services
vertical remained subdued. The order book stood at Rs19bn, up 11% yoy. On the
analyst call, management highlighted that deal pipeline in GIS/ IT solutions
remains healthy and significant pick up in 3Q order intake is likely.
Steady EBITDA margins; EBIT affected by higher deprn
While EBITDA margins at 39.4% were in line with our estimate, EBIT margins
missed BofAMLe by 80bps and were affected by higher depreciation. Higher
depreciation was driven by increased utilization of new SEEPZ facility.
Retains guidance; FCF to turn positive
Mgt maintained its guidance of 12-15% yoy growth in revenues and over 15% yoy
growth in profits, despite the Shaw JV stake sale. We expect the stock to re-rate
on back of significant improvement in FY11 revenue visibility, likely continued
momentum in order intake levels and our view that FCF will turn around in FY11
Growth driven by GIS & IT solutions
Revenues during the quarter rose 3% QoQ and was driven by growth in GIS
(mapping/ defence) and growth in IT solutions business.
Muted order intake in 2Q; 3Q recovery likely
Though order intake for the quarter was bit muted, it was on back of strong
growth in intake levels during 1Q. Besides, management indicated that pipeline in
GIS was strong and order intake should pick up in 3Q.
Stable EBITDA margins; high depreciation affects EBIT
While EBITDA margins at 39.4% was in line with our estimate, EBIT margins
missed BofAMLe by 80bps and were affected by higher depreciation. Higher
depreciation was driven by increasing occupation levels in new SEEPZ facility.
With capex likely to moderate next year and new facility to be fully utilized by 4Q,
depreciation in our view should peak by 4Q. Depreciation as % of sales estimated
to decline from 18% to around 15% by 4Q FY12 in our view.
Sells stake in Shaw JV; to pursue Nuclear opportunities
with other EPC majors
Earlier during the quarter Rolta announced that it has sold its 50% share in Shaw
Rolta Ltd to its JV partner, Stone & Webster Inc - a subsidiary of The Shaw Group
Inc. Shaw JV contributed ~USD10mn (~3%) to revenues during FY10. JV was set
up in 2004 to provide offshore engineering services for Shaw's global projects
and to focus on EPC business in India, including nuclear projects. Rolta received
USD27.5mn immediately and will receive USD8mn over next two years for stake
sale. Rolta intends to use cash proceeds to pay off part of the debt.
The stake sale also enables Rolta to pursue opportunities (which had an
exclusivity agreement with Shaw) with other EPC majors to offer its engineering
design services for Nuclear energy segment.
Price objective basis & risk
Rolta India (RLTAF / XLROF)
Our PO (local stock) of Rs210 is at 12x FY11E PE, in line with the historical
average. Our PO (for the GDR) of USD4.4 is at par with the local PO. Risks: a)
Non-annuity nature of business. b) Risk related to possible acquisitions. c)
Industry-wide risk of increasing wages, increasing taxes, and rupee appreciation.
Upside Risks : significant wins from defense for Thales JV and earlier than
anticipated recovery in engineering and enterprise solutions business.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Rolta India
In line qrt; order intake likely to improve
„In line qrt; valuations attractive
Rolta reported an in line 2Q, with revenue growth of 3% QoQ, in line with
BofAMLe and PAT growth of 5%, 2% ahead of our est. We cut FY12 & FY13E rev
by 3% to factor revenue loss from sale of stake sale in Shaw JV, we cut earnings
by 5% and 2% to factor impact from higher depreciation charge. We cut our PO to
Rs210 from Rs220. We retain our Buy given our view that cash flows are likely to
turn positive and valuations at 8X FY11e & 6x FY12e appear attractive for 22%
EPS CAGR.
GIS/ IT drives growth; pick up in order book likely
Rolta’s 2Q revs were in line with estimates and were driven by growth in GIS
(51% revs, 4% QoQ) and IT solutions (24% revs, 3% QoQ). Engineering services
vertical remained subdued. The order book stood at Rs19bn, up 11% yoy. On the
analyst call, management highlighted that deal pipeline in GIS/ IT solutions
remains healthy and significant pick up in 3Q order intake is likely.
Steady EBITDA margins; EBIT affected by higher deprn
While EBITDA margins at 39.4% were in line with our estimate, EBIT margins
missed BofAMLe by 80bps and were affected by higher depreciation. Higher
depreciation was driven by increased utilization of new SEEPZ facility.
Retains guidance; FCF to turn positive
Mgt maintained its guidance of 12-15% yoy growth in revenues and over 15% yoy
growth in profits, despite the Shaw JV stake sale. We expect the stock to re-rate
on back of significant improvement in FY11 revenue visibility, likely continued
momentum in order intake levels and our view that FCF will turn around in FY11
Growth driven by GIS & IT solutions
Revenues during the quarter rose 3% QoQ and was driven by growth in GIS
(mapping/ defence) and growth in IT solutions business.
Muted order intake in 2Q; 3Q recovery likely
Though order intake for the quarter was bit muted, it was on back of strong
growth in intake levels during 1Q. Besides, management indicated that pipeline in
GIS was strong and order intake should pick up in 3Q.
Stable EBITDA margins; high depreciation affects EBIT
While EBITDA margins at 39.4% was in line with our estimate, EBIT margins
missed BofAMLe by 80bps and were affected by higher depreciation. Higher
depreciation was driven by increasing occupation levels in new SEEPZ facility.
With capex likely to moderate next year and new facility to be fully utilized by 4Q,
depreciation in our view should peak by 4Q. Depreciation as % of sales estimated
to decline from 18% to around 15% by 4Q FY12 in our view.
Sells stake in Shaw JV; to pursue Nuclear opportunities
with other EPC majors
Earlier during the quarter Rolta announced that it has sold its 50% share in Shaw
Rolta Ltd to its JV partner, Stone & Webster Inc - a subsidiary of The Shaw Group
Inc. Shaw JV contributed ~USD10mn (~3%) to revenues during FY10. JV was set
up in 2004 to provide offshore engineering services for Shaw's global projects
and to focus on EPC business in India, including nuclear projects. Rolta received
USD27.5mn immediately and will receive USD8mn over next two years for stake
sale. Rolta intends to use cash proceeds to pay off part of the debt.
The stake sale also enables Rolta to pursue opportunities (which had an
exclusivity agreement with Shaw) with other EPC majors to offer its engineering
design services for Nuclear energy segment.
Price objective basis & risk
Rolta India (RLTAF / XLROF)
Our PO (local stock) of Rs210 is at 12x FY11E PE, in line with the historical
average. Our PO (for the GDR) of USD4.4 is at par with the local PO. Risks: a)
Non-annuity nature of business. b) Risk related to possible acquisitions. c)
Industry-wide risk of increasing wages, increasing taxes, and rupee appreciation.
Upside Risks : significant wins from defense for Thales JV and earlier than
anticipated recovery in engineering and enterprise solutions business.
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