Rolta India 3Q: P&L story on track :: Retain OP.:: Macquarie Research

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Rolta India
3Q: P&L story on track
Event
 Good 3Q results. 3Q revenues of Rs4.6bn and EBITDA of Rs1.8bn were 2%
and 3% ahead of our expectations, respectively. The profit beat of 20% was
largely driven by higher other income and lower tax.


Impact
 3Q results help mgmt to raise FY11 guidance. Management now expects
FY11 revenue growth of 16-18%, from 12-15% earlier. We think the company
would be able to meet its revenue target and estimate 17% growth in FY11,
followed by 13.5% in FY12. The revised estimates are 1% higher than our
previous forecasts for the company.
 Better order book momentum would have added confidence to FY12
story. Rolta has shown good growth in the GIS order book, with the segment
revenue conversion ratio at 1.3x. However, order book growth in the EDOS
segment has been subdued for the last five quarters. On its earnings call
management talked about the good pipeline in the EDOS segment but
indicated that robust growth to the tune of ~4% QoQ in the segment order
book is still likely to be three quarters away. Rolta would give FY12 guidance
in August, and until then, we would remain conservative in our estimates. (Fig
2 has a detailed order book analysis.)
 Our FY11E capex remains elevated. FY11 capex (ex-acquisition) would
likely come in at the high end of guidance (Rs2.5-3bn). For the nine months to
March 2011 the company’s organic capex already reached Rs2.5bn. We note
that Rolta’s capital intensity has been a key concern for investors and we stick
to our total capex (organic + inorganic) target of Rs4.5bn.
 JV stake sale key reason for surge in other income. We learnt from
management that the cash infusion from the stake sale of the Shaw JV
announced in January boosted the cash balance by Rs1.2bn. In addition to
the yield on this investment, the 3Q ‘other income’ also includes Rs45m that
would flow in for the next seven quarters under the terms of the stake sale.
 Operational metrics. Billing rates for all three segments were largely stable (+/-
1%). The share of subcontracting revenues has shot to above 50% in the GIS
segment. Utilisation across the GIS and EDOS segments was flat vs. last
quarter. For EITS, utilisation was down 30bp vs. the December quarter.
Earnings and target price revision
 FY11 EPS moves up by 7% to factor in 3Q beat. No change to FY12 & FY13.
Price catalyst
 12-month price target: Rs195.00 based on a PER methodology.
 Catalyst: Large deal wins
Action and recommendation
 Retain OP.