ROLTA INDIA

ROLTA INDIA

Rolta India’s stock in July ’07, when it was trading at about Rs 494 (or Rs 247 after adjusting for 1:1 bonus issue). The stock has performed well since then. It also showed some resilience during the recent market crash. ETIG decided to take another look at the stock to find out whether one should continue holding it, given the weak market sentiment. We found that the scrip continues to look attractive on a two-year horizon, given the company’s strong future prospects.

Business : Rolta, a mid-sized IT company with revenues of Rs 622 crore in FY07, offers solutions in the niche areas of engineering design and geospatial information systems (GIS). Over 85% of its revenue comes from these two divisions, while e-solutions comprising web-based applications account for the rest. The company has a strong presence in the domestic market, which contributes around Rs 2 out of every Rs 3 to its total revenue. In India, it caters to private and public sector enterprises. Revenues from public sector projects account for one-third of its total revenue. Rolta recently acquired Chicago-based Broech Corporation (it does business using the name ‘TUSC’), which specialises in enterprise resource planning (ERP) applications using Oracle. Rolta will use these skills to provide integrated GIS solutions to clients that use Oracle. The opportunity is sizeable as TUSC closed ’07 with revenue of $48 million and net profit of $3.5 million. Rolta had earlier acquired a small Canadian firm, Orion.

This is expected to equip its current kitty of offerings with web-enabled GIS database solutions. Apart from technical know-how, this will also give Rolta access to Orion’s US clientele. However, benefits of this takeover will come into effect only after a year. Rolta has formed joint ventures (JVs) with Thales of France and US-based Stone & Webster. These JVs help it to cater to the diverse markets of defence, homeland security and power utilities. Rolta is one of the major players in India which provide IT solutions to the defence department.

Financials : The company rides on high operating margin of 40% and above. It has shown stable profitability at operating and net levels. During the year ended June ’07, it reported healthy double-digit growth in topline and bottomline. During the December ’07 quarter, its total income grew 48% to Rs 252 crore. Both profit before depreciation, interest and tax (PBDIT) and net profit rose 47% to Rs 103 crore and Rs 60 crore, respectively.

Valuations : For the year ending June ’08, Rolta’s consolidated results will include the five-month performance of TUSC. This is likely to improve its topline and bottomline. The company is expected to record a 31% jump in bottomline for FY08. This results in a forward P/E of 21 times its FY08 expected EPS of Rs 13.6 on a diluted basis. Moreover, it makes Rolta more valuable than the top-tier companies based on their current P/Es that lie in the range of 14-18.


What makes Rolta more attractive than IT biggies is its lower dependence on the US market and thus, lesser exposure to a possible recession in the US economy. Rolta earns around 24% of its revenues from the US, but it also spends in dollar terms in the US, which acts as a natural hedge against the weak dollar. Further, Rolta has no exposure to the mortgage market since it doesn’t cater to the banking and financial services space. Exposure to the domestic engineering sector helps the company to take advantage of rapid expansion in the economy.

Challenges : The company will have to work hard to maintain its margins as lesser profitability of its acquired companies (for instance, TUSC had PBDIT margin of 11% in ’07) is likely to pull down overall margins. Rolta expects to improve TUSC’s margin to 22-23% in the next three years by increasing the offshoring component of deliverables. The company also has to address the issue of high debtor days.

Rolta’s asset side in the balance sheet is highly skewed towards sundry debtors. The management attributes this to the contractual nature of its business, wherein the credit period may even exceed one year. But the management claims to have reduced this period to 6-8 months.

E.T