Investment Rationale :
Enjoying its dominant role in the GIS/EDA businessesRolta India Limited (RIL) enjoys a 90% market share in the Indian engineering Design Automation (EDA) market and 95% market share in providing Geospatial based operations and intelligence solutions for the Indian armed forces. Overall, Rolta has a 70% share of the Indian GIS market. Rolta has a unique position in the market for providing end to end services from plant lifecycle designing to manufacturing, maintenance and simulation.
Improving presence in the E-Solutions segment
The company is showing a higher growth rate (120%) in the e‐solutions segment in the FY-2008. This segment is also improving its share in the revenues, which have increased from 9% to 18% in the last three years. But, the share of the GIS/EDA businesses in the revenues is getting lower from 90% to 80% in the last four years.
Rolta’s Acquisition of Piocon Technologies.
Rolta announced about the acquisition of Piocon Technologies Inc. of Chicago, USA which has a unique template‐based solution that addresses the critical operational needs of refineries in the Oil and Gas sector. The solution can address to the process improvement in the refineries to achieve downtime reduction, inventory rationalization, optimization of crude selection, and improved refinery planning through which the midsized refineries could save nearly $20Mn annually. According to a market research the addressable market annually for such a solution is nearly $1bn. This acquisition enables Rolta to not only expand the scope of the services, but for also increases its offerings to address and increase the operational efficiency in the process oriented industries.
Decrease in the margins for this year ending 2008
The company is showing a consistent performance in the last few years with a CAGR of30%. The margins are decreasing on YOY basis with EBITDA declining from 42.6% (FY‐06) to 37.3% (FY‐08) and the PAT margins from 23% (FY 06) to 21% (FY 08) in the last three years.
Valuations
At the CMP of Rs. 90, the stock discounts FY2009E & FY2010E earnings at 10.04x & 7.92x respectively. We believe that the company could benefit from the joint venture and improve its margins.
Growth in EPS will be very crucial
The stock is trading at a PE (TTM) of 7.18x with the price of Rs.90. One year forward PE to the present market price is at 7.34x. As the company is maintaining an average EPS level of Rs.2.6 for last two quarters, even its taken at the same improvements levels the EPS would be at the levels of Rs.10.4 for which the PE levels for the present price would be 8.65x times. We believe the company would perform very fairly in the next few quarters, improve its margins with the new acquisitions in line which can support their operations and maintain the EPS levels of Rs.12.26.
Financial Performance Chart (click image to enlarge)
Risks
Perceived risks for the company are:
1. Lowering expenditure in infrastructure spending
2. Project‐based based Revenues.
Outlook
Rolta India Limited is a mid‐tier geospatial and engineering‐focused company with revenues of Rs.10.6bn with a professional work force of nearly 5000 all over the world. The business model of Rolta India is very unique in nature and provides turnkey solutions for engineering projects. As the business concentrates in the same segment with 3 different verticals, the company could provide end‐to‐end solutions for infrastructure projects.
We expect the growth will most likely be driven by capturing the market in the GIS/EDA space for infrastructure space. We are initiating coverage with BUY Stocks recommendation for the target of Rs. 190.
Mkt Cap 1,419.44
P/E 2.89
Div 30.00
EPS (TTM) 14.80
B/V: 81.03
Mkt Lot 1.00
FV 10.00
Financial Performance (Rs. in Millions)
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