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Friday, September 12, 2008

Rolta India - Stocks Idea

Rolta India Limited
CMP: Rs.343
Target Price: - - - -.

Rolta India was incorporated in 1989 as a public limited company. Rolta is the only CAD/CAM/GIS Company that provides end-to-end IT Solutions and services that address a customer's total requirements for engineering and its e-enablement.

Stone and Webster Ltd. is a merged entity of Stone & Webster and Rolta which serves customers completely integrated project services including Engineering, Design, Procurement Services and Construction Management services. Rolta has an agreement with Thales to establish a joint venture Rolta Thales Ltd. to improve upon its core strengths. Rolta owns 51% and Thales owns 49% in this joint venture.

Enjoying its dominant role in the GIS/EDA businesses
Rolta 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.

Waiting for untapped nuclear power projects
The nuclear power market of 40,000 megawatts, which accounts for $80 bn in the next decade, is a fair opportunity for the EDA segment business of Rolta. Rolta would benefit in the joint venture with the Shaw Group, which is a leading U.S. player. This group maintains over 60 to 70% of the existing nuclear plants in the U.S. We understand and believe that the Indian nuclear deal would not benefit Rolta in the short run.

Improving presence in the E-Solutions segment
The company is showing a higher growth rate (120%) in the e-solutions segment from the last three years. 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.

Still struggling with the margins; needs to gather stimulus
Except at the end of FY08, the growth in the overall revenues of the company is not so healthy. The margins are decreasing on YOY basis with EBITDA declining from 42.30% to 41.36% and the PAT margins from 22% to 11% in the last three years.

Valuations
At the CMP of Rs. 343, the stock discounts FY2009E & FY2010E earnings at 52.31 x & 30.38 x respectively. We believe that the company could benefit from the joint venture and improve its margins.

Outlook
Rolta India Limited is a mid-tier geospatial and engineering-focused company with revenues of Rs.10.6bn. The company has 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 a three-year CAGR (CY08-CY11E) of 37% in the revenues. The growth will most likely be driven by capturing the market in the GIS/EDA space for infrastructure space. We are initiating coverage with Neutral.

Financials
Our price target methodology is based on the DCF valuation using the FCF methodology. Given its consistent performance during the last three years and the growth rate of 37% achieved in the last year, the stock is trading at high multiples as compared to peers in the industry. With a PE multiple of 51.09, Rolta is now operating with 80% of its revenues in the Engineering Design/GIS Solution Services segment and 18% in the E-Business Solutions and services segments.

Risks
Perceived risks for the company are:
1. Lowering expenditure in infrastructure spending
2. Revenues project-based rather than annuity-based
3. Attrition and wage inflation

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