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SUBEX AZURE LIMITED (SUBEX)
PRICE: RS.42 RECOMMENDATION: SELL
TARGET PRICE: RS.47 FY12E P/E: 4X
We terminate our coverage on the stock
Subex's performance for 2QFY12 was marginally higher than our estimates.
The company has sold off its activation business (a part of the Syndesis
acquisition made earlier). The business was incurring losses at the EBIDTA
levels. However, the company has declined to give the details of the sales
consideration. We find this surprising though we believe that, the
consideration would have been negligible. Moreover, at the current market
price, we expect Subex to counter problems in repaying the FCCBs worth
$94mn which are maturing in March 2012. We believe that, conversion into
shares may not happen looking at the price differential between the
conversion price and the CMP. We are concerned on the above - mentioned
issues and hence, recommend exiting the stock, till there is more certainty
on the same. We terminate coverage on the stock. We may re-initiate
coverage after getting more clarity on the financials.
Products business
n Product revenues rose by 18% QoQ to Rs.1.17bn. This was largely led by the
growth in revenues in the RMS products business, we opine.
n The order intake continued to be buoyant and amounted to $23.5mn during the
quarter v/s $23mn in the previous quarter.
n America Moviles, one of the largest wireless telcos in Latin America, has chosen
ROC FMS and ROC RA solutions for group wide implementation.
n For 2QFY12, support revenues contributed about 22% of the overall revenues
and Managed services formed about 12% of revenues.
Macro scene stable
n Subex has maintained that, there is a revival in sentiment among clients. The
management indicated increase in number of contracts being placed by clients.
n It also indicated that, they were looking at costs and hence, vendors are forced
to provide better value or immediate cost reduction benefits to customers.
n While Subex is optimistic on the prospects of the industry, most of the larger
players have indicated still sluggish prospects.
n We remain cautious because of the concentrated nature of the market (few
players dominate the same) and the lumpy nature of revenues.
Margins
n EBIDTA margins in products business improved by about 400bps to 30.8%, on
the back of higher revenues and control on costs.
n The company had Rs.7.4mn of operational other income. Interest cost remained
high at Rs.106mn for the quarter and the company had a negative tax provision
of Rs.3.5mn.
n The company made some one time provisions of Rs.387mn towards exchange
differences on restatement of FCCB liabilities and prior period managerial remuneration
expenses, partly set off by gain on sale of assets of activation business.
n This resulted in a net loss for the quarter.
Sale of Activation products business - sale details unavailable
n Subex had sold off its Activation products business to NetCracker USA.
n According to the management, this business had revenues of about $15mn in
FY11 with matching expenses.
n The business recorded revenues of about $3mn in 1HFY12 with EBIDTA loss of
about $4.5mn. Revenues in 2Q were at $2mn with EBIDTA loss of about
Rs.70mn.
n The company had acquired these products as a part of the Syndesis acquisition
done in 2006. The total revenues of Syndesis were at about $40mn at the time
of acquisition and the acquisition was done for $165mn.
n The sold product portfolio formed a significant part of the Syndesis portfolio.
n The company has declined to give details about the sale consideration and other
finer details of the deal. We find this very surprising.
n However, we believe that, the consideration would have been negligible.
Conversion / restructuring of FCCBs
n Subex had restructured about $141mn of FCCBs (out of a total of $180mn). The
company has issued new FCCBs of $98.7mn against the cancellation of these
older FCCBs. The new FCCBs are convertible into shares at a price of Rs.80 per
share (Rs.656 per share earlier).
n The remaining FCCBs are convertible at Rs.656 per share
n The company has already reduced its liability partly by converting some FCCBs
into shares. However, the total outstanding FCCBs still amount to about
$93.8mn. These will mature in March 2012.
n The current price is much lower than the conversion price (Rs.80 and Rs.656 for
the two sets of FCCBs). Hence, we believe that, conversion of FCCBs into shares
may be difficult.
n We also believe that, the company will not have the requisite cash in the balance
sheet by that date, to repay the FCCBs in full.
n According to the management, the company has initiated proceedings to raise
finance (equity or debt) to repay the FCCBs maturing by March 2012.
n We have not assumed any repayment / conversion of these FCCBs pending availability
of further details.
We make changes to our FY12 estimates.
n We expect Subex to report revenues of Rs.4.8bn in FY12E. Product revenues are
expected to be at Rs.4.34bn.
n Product EBIDTA margins are expected to improve in 2HFY12 post the sale of the
loss making business.
n We arrive at a PAT of Rs.793mn in FY12E, leading to an EPS of Rs.11 for FY12E
on current equity capital.
n We have neither considered the MTM gains / losses on the FCCBs nor the other
forex gains / losses in line with the company policy, which treats them as extraordinary
items.
Valuations
n The stock is currently available at low valuations.
n However, lack of clarity on the earlier-mentioned issues may impact the stock
price. Also, uncertainty on these issues makes the earnings estimates and target
price redundant.
Risks
n A delayed recovery in major user economies may impact our projections.
n A sharp acceleration in rupee from the current levels may impact our earnings
estimates for the company.
n Delays in receipt and execution of orders may make earnings volatile in future
quarters while likely impacting the overall revenue and profit growth of the company
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SUBEX AZURE LIMITED (SUBEX)
PRICE: RS.42 RECOMMENDATION: SELL
TARGET PRICE: RS.47 FY12E P/E: 4X
We terminate our coverage on the stock
Subex's performance for 2QFY12 was marginally higher than our estimates.
The company has sold off its activation business (a part of the Syndesis
acquisition made earlier). The business was incurring losses at the EBIDTA
levels. However, the company has declined to give the details of the sales
consideration. We find this surprising though we believe that, the
consideration would have been negligible. Moreover, at the current market
price, we expect Subex to counter problems in repaying the FCCBs worth
$94mn which are maturing in March 2012. We believe that, conversion into
shares may not happen looking at the price differential between the
conversion price and the CMP. We are concerned on the above - mentioned
issues and hence, recommend exiting the stock, till there is more certainty
on the same. We terminate coverage on the stock. We may re-initiate
coverage after getting more clarity on the financials.
Products business
n Product revenues rose by 18% QoQ to Rs.1.17bn. This was largely led by the
growth in revenues in the RMS products business, we opine.
n The order intake continued to be buoyant and amounted to $23.5mn during the
quarter v/s $23mn in the previous quarter.
n America Moviles, one of the largest wireless telcos in Latin America, has chosen
ROC FMS and ROC RA solutions for group wide implementation.
n For 2QFY12, support revenues contributed about 22% of the overall revenues
and Managed services formed about 12% of revenues.
Macro scene stable
n Subex has maintained that, there is a revival in sentiment among clients. The
management indicated increase in number of contracts being placed by clients.
n It also indicated that, they were looking at costs and hence, vendors are forced
to provide better value or immediate cost reduction benefits to customers.
n While Subex is optimistic on the prospects of the industry, most of the larger
players have indicated still sluggish prospects.
n We remain cautious because of the concentrated nature of the market (few
players dominate the same) and the lumpy nature of revenues.
Margins
n EBIDTA margins in products business improved by about 400bps to 30.8%, on
the back of higher revenues and control on costs.
n The company had Rs.7.4mn of operational other income. Interest cost remained
high at Rs.106mn for the quarter and the company had a negative tax provision
of Rs.3.5mn.
n The company made some one time provisions of Rs.387mn towards exchange
differences on restatement of FCCB liabilities and prior period managerial remuneration
expenses, partly set off by gain on sale of assets of activation business.
n This resulted in a net loss for the quarter.
Sale of Activation products business - sale details unavailable
n Subex had sold off its Activation products business to NetCracker USA.
n According to the management, this business had revenues of about $15mn in
FY11 with matching expenses.
n The business recorded revenues of about $3mn in 1HFY12 with EBIDTA loss of
about $4.5mn. Revenues in 2Q were at $2mn with EBIDTA loss of about
Rs.70mn.
n The company had acquired these products as a part of the Syndesis acquisition
done in 2006. The total revenues of Syndesis were at about $40mn at the time
of acquisition and the acquisition was done for $165mn.
n The sold product portfolio formed a significant part of the Syndesis portfolio.
n The company has declined to give details about the sale consideration and other
finer details of the deal. We find this very surprising.
n However, we believe that, the consideration would have been negligible.
Conversion / restructuring of FCCBs
n Subex had restructured about $141mn of FCCBs (out of a total of $180mn). The
company has issued new FCCBs of $98.7mn against the cancellation of these
older FCCBs. The new FCCBs are convertible into shares at a price of Rs.80 per
share (Rs.656 per share earlier).
n The remaining FCCBs are convertible at Rs.656 per share
n The company has already reduced its liability partly by converting some FCCBs
into shares. However, the total outstanding FCCBs still amount to about
$93.8mn. These will mature in March 2012.
n The current price is much lower than the conversion price (Rs.80 and Rs.656 for
the two sets of FCCBs). Hence, we believe that, conversion of FCCBs into shares
may be difficult.
n We also believe that, the company will not have the requisite cash in the balance
sheet by that date, to repay the FCCBs in full.
n According to the management, the company has initiated proceedings to raise
finance (equity or debt) to repay the FCCBs maturing by March 2012.
n We have not assumed any repayment / conversion of these FCCBs pending availability
of further details.
We make changes to our FY12 estimates.
n We expect Subex to report revenues of Rs.4.8bn in FY12E. Product revenues are
expected to be at Rs.4.34bn.
n Product EBIDTA margins are expected to improve in 2HFY12 post the sale of the
loss making business.
n We arrive at a PAT of Rs.793mn in FY12E, leading to an EPS of Rs.11 for FY12E
on current equity capital.
n We have neither considered the MTM gains / losses on the FCCBs nor the other
forex gains / losses in line with the company policy, which treats them as extraordinary
items.
Valuations
n The stock is currently available at low valuations.
n However, lack of clarity on the earlier-mentioned issues may impact the stock
price. Also, uncertainty on these issues makes the earnings estimates and target
price redundant.
Risks
n A delayed recovery in major user economies may impact our projections.
n A sharp acceleration in rupee from the current levels may impact our earnings
estimates for the company.
n Delays in receipt and execution of orders may make earnings volatile in future
quarters while likely impacting the overall revenue and profit growth of the company
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