Rolta India - Play on Indian IT spending:: Macquarie Research

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Rolta India
Play on Indian IT spending
Event
 Rolta is a mid-cap Indian IT services player providing Geospatial Information
System services (Defence, utilities and city mapping), Engineering Design
services (plant design, ship design and mechanical design) and IT services
specializing in IT security business and network management. More than 60%
revenues are generated from the Indian market, with very high exposure to
India’s defence sector.

Impact
 End market difference… Rolta derives its revenues from being a niche
player in the arena of Geospatial design – GIS (51% of revenues) and
Engineering and Design Automation – EDOS (25% of revenues). Traditional
IT Services – EITS are only 24% of revenues of the company. India accounts
for ~60% of total revenues.
 …accounts for divergent cash flow trajectory. The key concern on the
stock has been the high capital intensity of the company in past three years.
Rolta positions itself as a solutions-oriented company and attributes low cash
flow conversion vs peers to investments in developing IP. Based on our
interaction with management, we believe peak capex is behind and the
company should be able to meet its positive FCF guidance in FY11.
 Order book status provides confidence in top-line guidance. Rolta has
guided for 12–15% top-line growth in FY11 and FY12. The current order book
of Rs19bn implies a book to revenues conversion ratio of 1.1x. This gives us
comfort that the company should be able to meet its guidance in FY11 and
deliver another year of ~12% top-line growth in FY12.
 Revenue mix tilting in favour of higher margin segment. The GIS
business has the highest EBITDA margin, 52%, amongst the three segments.
The share of this segment in revenues has increased to the 51% level from
45% a year ago. 53% of the current order book comes from this segment,
providing comfort in margin trajectory from these levels.
Action and recommendation
 Rolta’s business model has significant differences compared to other Indian
IT vendors. As such, comparison with other mid-tiered Indian IT vendors on
traditional parameters like employee strength, utilisation and pricing skews the
investment analysis. We expect the cyclical upturn should help Rolta meet its
outlined revenue and FCF targets and believe valuations are undemanding.


Rolta India Aide Memoire
1. It appears that you are on track to meet the revenue and profitability guidance for FY11. What are your thoughts on FY12?
2. On the recent stake sale back to JV partner – is there a concern that domestic growth prospects are not as attractive as
they were a year ago?
3. Your revenue conversion ration has remained healthy, what gives you confidence that you would be able to replenish the
deal pipeline as you execute the current order book?
4. Your capex guidance for FY11 stands at Rs2.5 to Rs3bn. How have you been trending on this?
5. Investors have been very keen to see you turn FCF positive. What has been the bottleneck in the past and why do you
think FY11 would be different?
6. You have incurred substantial capex in FY09 for starting a new campus in Gurgaon. Can you share the seating capacity of
this centre and how far out in the future would this suffice for your growth plans?
7. What kind of debt levels are you comfortable with and what is your game plan to deleverage the balance sheet?
8. Are there any gaps in your product portfolio that you would like to plug inorganically?
9. How would you describe competitive environment in your three different segments? Has the economic downturn altered
the landscape materially?
10. Can you walk us through what are the moving parts in your P&L that would be hit due to switch to IFRS from next fiscal
year?