The Evolution of ROLTA
ROLTA with core competencies in EGES ( Enterprise Geospatial and Engineering Solutions – which also includes DHLS ( Defense and Homeland Security ) and EITS ( Enterprise IT Solutions) initially manufactured high end graphic workstations and serviced the domestic market to garner the first mover advantage in the geospatial space. Once the competition started catching up, the company decided to move out of the manufacturing to focus on services and later on solutions. As a result of its success in the automated mapping and facilities management segment of the Indian market, Rolta stepped up its global operations by executing geospatial and engineering design services projects, by setting up subsidiaries in US, EU and ME, thus overseas revenues have now accounted for 56% of FY13 revenues. At the same time, Rolta also took advantage of the its strengths in the digital mapping to enter the Indian defense market by executing number of geospatial projects, to create a platform for sophisticated and large C3ISR (Command, Control, Communication, Intelligence, Surveillance and Reconnaissance) military program.
After penetrating the Indian Defense market with reasonable success, Rolta (between 2003 – 2007) entered into strategic joint ventures with global leaders like Thales of France (to expand the addressable Indian defense market) and also with Stone & Webster of US, for executing end-to-end engineering design projects globally, and more so in the nuclear vertical. Subsequently in FY2011, Rolta exited the joint venture with Stone and Webster by monetizing it, with a gain of Rs1bn.
Game Plan to invest in IPs and Solutions
In 2008, the company realized that continuing with its services’ focused strategy would lead to margin erosion, as the lower end of the bread and butter services like (1) based mapping and image processing and (2) GIS data and system integration work were getting increasingly commoditized. In order to ensure that, the company did not slip on the margin front, the management took the decision to embark on an IP led model to serve segments like (1) business data overlay, (2) business intelligence functionality, (3) advanced analytics and decision support and (4) technical support and maintenance. The business transformation which the company undertook were on account of the following reasons:
1. In the geospatial business, the company needed to move up the value chain to address the “enterprise wide integration” and “business intelligence” and provide cutting edge solutions to the Indian defense forces. At the same time, MOD (Ministry of Defense) also started encouraging qualified local private sector companies to participate in the large programs by classifying them as “BUY India” and “MAKE India”, with the provision for availability of technology in India anda high indigenous content. Thus, Rolta acquired (overseas companies and IP’s worth USD200mn) and developed own IPs and solutions in the geospatial domain and expanded its capabilities to address the large upcoming indigenous defense programs.
2. In the engineering domain, to expand, stabilize and sustain its business, the company apart from focusing on Capex cycle, needed to address the Opex lifecycle of enterprises in petrochemicals, refineries and power plants. Thus, Rolta went on a slew of acquisitions and also developed IPs and solutions and expanded its capabilities to address the operational excellence and reliability requirements of the various plants. The IP acquisitions strengthened the back-end, and what was still the missing piece was, to penetrate the US geography much more aggressively.
3. Rolta needed to build strong front-end marketing capabilities, particularly in US for access, credibility and differentiation. It acquired companies which had astrong track record, giving it access to numerous and large marquee clienteles. In addition, these acquisition enabled offices at key locations, highly qualified key personnel in the form of consultants, access to high growth verticals, like banking /finance, retail, manufacturing and healthcare. These acquired companies have since been augmented with offshore capability resulting in lower pricing and increased margins.
Because of the acquisitions – the company could move the average order size from US$ 5 – 12mn range to upwards of US$15 – 30m. By combining domain knowledge in geospatial (2D and 3D mapping), engineering (for plant design and layout) and through IT services, Rolta won reasonably large contracts from customers like Northern Power Grid of UK, (contract size of US$15mn), Memphis Light Gas & Water of USA, ( contract size of US$31mn) and a US$25mn order from Abu Dhabi Municipality with stiff competition from some of the global vendors. In addition to the above, Rolta won a reasonably large size order from SADARA, (joint venture company between Saudi Arabian Oil Company and Dow Chemical Company).
Rolta is now able to effectively provide innovative solutions to large and rapidly growing industry verticals like Defense and Homeland security, Government, Infrastructure, Environment, Transportation, Utilities (includes oil and gas, petrochemicals, power and telecom), banking/financials and insurance, manufacturing, retail and healthcare. Not only the order size are increasing, the foot print of customer base too are increasing, with multi-year non-linear license revenues are likely to grow at a fair clip. Rolta now, is a multinational organization with presence in many nations and has executed projects in over 45 countries.
1. Rolta offers end-to-end solutions for geospatial applications for 2D and 3D mapping, spatial (multi-dimensional) image processing and data analysis and integration through its Geospatial Fusion.
2. For the Engineering vertical, Rolta’s services and solutions cover the entire life-cycle for the process industries, from engineering design, to operational excellence with its Rolta’s OneView.
3. IP led approach has enabled the company to play in the mainstream IT solutions and services markets with differentiated offerings.
The company offers complete services for implementing enterprise level applications and system integration on multiple technology platforms. Rolta’s expertise encompasses EBS (enterprise wide business solutions), ERP (enterprise resource planning), RBA (real-time business analytics), EPM (enterprise process management) BI (business intelligence) and CRM (customer relationship management). In addition, it offers cloud services, security and identity management, big data and software defined infrastructure and CEP (complex event processing) and SOA (service oriented architecture. Since the company has good domain knowledge in the above mentioned horizontals, Rolta is all set to provide an all-inclusive set of services for a company’s IT needs, from initial assessments to development of IT roadmap, including (1) evaluation of cloud, (2) virtual data center strategies, through sizing and implementation of complete solutions for optimal infrastructure configurations and (3) enterprise level business applications, with ongoing technical support.
Huge opportunity for geospatially linking digital data
Rolta’s business strategy is to look beyond the immediate, and the strategy was to build businesses with long term relevance by providing innovative solutions, which results in being a market leader in the areas and domain, where it operates. Over the past 3 years, the company has invested about USD200mn in buying and building IPs, as it recognized that almost 2/3rd of the world is still to be digitally mapped and more than 3/4th of all digital data can be geospatially linked.
1. Hence, infrastructure investments in emerging markets like the Middle East and India, are driving the need for base mapping, 3D intelligent models, and earth sciences, while the developed markets like US and EU demand enterprise integration and business intelligence. Rolta is reasonably well placed to capture the growth opportunities in both these markets, through its IP led solutions, huge services infrastructure and established track record.
2. In the engineering domain, Rolta has opened up a much larger market, beyond its traditional Design and Engineering space of capex requirements. The company has positioned its state of the art solution across a spectrum of owner-operators to address Opex requirements in the Oil & Gas, Power Generation, process plants like chemicals and petrochemicals, and Telecom. This has opened up significant opportunities across thousands of plants across a multitude of industries worldwide.
3. In the IT services segment, Rolta offers cutting edge solutions for enterprises like real-time business analytics, EBS (enterprise business solutions), EPM (enterprise process management), BI (business intelligence), cloud computing, Big Data and Analytics and SDI (software defined infrastructure). The transformation that the company has undergone over the past couple of years through series of acquisition, has given Rolta, a track record of 25 years, thousands of customers and more importantly IPs, in the above mentioned areas. By combining the offshoring the price advantage, Rolta has been able to effectively compete, as it is now able to provide much higher value proposition.
4. The Indian defence market has emerged amongst the top spenders worldwide, at the same time Indian Defence Minsitry is encouraging the Indian private sector by inviting only qualified local bidders to participate in large procurements, under the make India classification. Rolta by virtue of servicing the Indian defence forces for many decades in the geospatial space, has been recognized and invited to participate in such programs. In addition, Rolta is also well placed to seize the significant opportunities arising from the huge modernizing programs of Indian para-military and police forces, in the fast growing Homeland and Maritime markets.
Militaries across the globe have realized that the side, which can harness technology enabling force multipliers, are likely to emerge victorious in the modern warfare. We have seen US armed forces using the latest gizmos, there by giving them the edge over the guerilla warfare tactical soldiers. The modern day warfare is “network centric” with precision censors, battlefield management systems and communications and smart effectors. Indian Defence Ministry is keen to improve the country’s armed forces and military capabilities. Rolta could be a serious contender to participate in the future defence orders for the following reasons:
1. With a capital expenditure of USD50bn likely to be incurred by FY2015, the Indian Defence is one of the largest spenders globally in buying – aircrafts, warships, submarines, aircraft carriers advanced systems in battlefield management systems, communications and optronics. In addition, the vast coast line of nearly 5000 miles, also need to be protected, and the maritime security is jointly provided by Coast Guard, Coastal Police and Navy. The Ministry of Defense is of the opinion that about 70% of the new acquisitions in the not so distant future, would have to be sourced from within and not from overseas. This has led Indian vendors to gear up, to serve the huge emerging opportunity.
2. The series of recent terror attacks on many of the Indian cities, cross border infiltration and internal disturbances caused by the anti-national elements have exemplified the deteriorating security scenario, and brought home the truth that there is a need to safeguard its economical and human assets and lay greater focus on homeland security. In addition the above, increasing crime rates, rapid urbanization, large migrant and floating population, environmental catastrophes are all adding to the urgent need for safeguarding the critical economic and human assets. Therefore homeland security is getting increasing priority, and is being perceived as critical to the overall security of the country.
The Centre and State governments are appraised of the scenario and have been focusing on the modernization and up-gradation of the homeland security infrastructure, to meet the above mentioned challenges. In FY13, the government has increased the security budget by 35% to Rs50bn for police modernization towards coordinated intelligence gathering, providing security for vital infrastructure, in addition to CCTNS (crime and criminal tracking network systems), NATGRID and UID numbers. To strengthen the police apparatus and to have adequately train manpower for facing the emerging challenges, various modernization programs are being pursued. To check cross border infiltration, a program to deploy specialized surveillance technologies, all along the border has been initiated.
In order to participate in the upcoming programs, the company has systems to serve C2ISR and C3ISR, Optronics (Night Vision) Communications, Digital Soldier System, Battlefield Management Systems, Vehicle and Fire Control Systems.
· Geospatial Fusion enables the users a complete view of their network, assets, project management and other crucial data leading to better decision making. Nearly every company, business, Government and consumer in today’s world is dependent on the transportation and logistics industry. The product enables the transportation-cum-logistic company to maximize the availability of its assets and infrastructure, while providing increased agility in customer service. In the transportation industry, Rolta’s products have been extensively used to assess, manage and maintain the transportation fleet and systems. Whether it is for tracking or for monitoring the location or the condition of the roadway or railway (more particularly during the monsoon) or combining asset data with critical statistical information like traffic, maintenance costs, etc. By using GIS, coupled with BI, the transportation and logistics companies are able to do better planning, enabling decision making a lot easier.
· Rolta offers a range of technology solutions which plays a significant role in effectively planning and executing large number of infrastructure projects. Rolta offers several technologies such as RSGIS (Remote Sensing Geographical Information Systems) and photogrammetry. This plays a significant role in the planning and execution of infrastructure projects for monitoring changes, illegal construction activities and environmental factors. Satellite based remote sensing has proven to be valuable for usage in a vast range of infrastructure projects in cities and suburbs. In addition, the company’s products and services have widespread usage in Utilities, Oil & Gas, and Petrochemicals, manufacturing, banking & financial services and retail.
Traction in overseas business gaining impetus
1. Over the past 15 months ROLTA has doubled its overseas revenues in USD terms from USD35mn/quarter to USD68mn/quarter, through a combination of mining its existing clients and new client wins through acquisitions. This has been achieved despite the quarterly run rate of domestic revenues slipping from 2.7bn/quarter in 1QFY13 to 2bn/quarter in 1QFY14, as the order flows and issuance of work orders from the Government has been muted. The impact of the slowing economy has negatively impacted the domestic revenue growth. As overseas revenues are growing fast at fast clip, the revenue mix has decisively changed in favor of overseas revenues.
2. As the strategy and focus of the company is to grow the overseas revenues faster in the current environment, the flow of EITS orders has been relatively faster as compared to EGES over the past few quarters. Though the EGES revenue growth on a sequential growth remained sluggish, EBITDA margins were good. Whereas the EITS revenue growth was robust, EBITDA margins continued to witness compression. EITS accounts for close to 70% of revenues while EGES accounts for about 30% of revenues. Our view is that ROLTA would witness a compression in its EBIDTA margins on a consolidated basis as it migrates towards more non-GOI orders from GOI orders and over the next 3 to 4 years the company should have a sustainable 35% - 36% EBIDTA margins from the current annual margins of ~40%.
Our hypothesis is that the company despite having a debt of Rs35bn has been posting positive operating free cash since several years except for FY’13 which witnessed the massive clean- up exercise. We now expect the company to start paying higher taxes from the next fiscal onwards as depreciation benefits expire and the company has now adopted the financial year ending March as per the Companies Act 2013. Promoters have hiked their holding in the company from ~40% to 50% during the last 3 years through the creeping acquisition route in line with SEBI guidelines. We believe that with a 4% dividend yield, ROLTA is an interesting bet in the defense space and investors with a horizon of one-year can accumulate the stock on declines for a price objective of Rs110.
TECHNICAL VIEW
ROLTA is in the process of a strong base formation. The stock is finding good support near the curve-trendlines( as shown in the chart). With increase in trading volumes in the last few months, there is a very good probability that the stock could break out of a long term consolidation and break the curve-trendlines.
Technically, once level of 80 is breached with strong volumes, then there could be a breakout which could propel the stock to levels of 110 over a one-year time frame.
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