>ICSA: Stress due to revenue mix to continue (MACQUARIE RESEARCH)

Event: ICSA reported FY10 results that were in line with expectations. We are reducing our estimates on margins, as the projects business continues to dominate order book. In addition, we reduced our target price to Rs197 from Rs205.

Impact
■ Results in line with expectations: ICSA reported FY10 revenue growth of 11%, which was in line with our expectation. However, margin at 20.4% was slightly lower than our estimate, due to continued domination of infra projects in revenues. FY10 PAT stood at Rs1.3bn (vs our estimate of Rs1.34bn). We are maintaining our revenue estimates, which call for growth of 23% in FY11 and 20% in FY12.

■ Change in mix continues to affect margins, as expected: The shift towards the lower-margin infra projects segment continues. The high-margin software product business accounted for only 32% in 4Q FY10 and 34% for the full year.

■ We build in margins risk, due to higher mix of projects in overall revenues: We have reduced our FY11 and FY12 estimates to build in a margin decline to 20.3%, as we expect the current revenue mix to continue in FY11 (36% coming from software division and 64% coming from the projects business).Our previous margin estimate was 21.4%.

■ Order book is healthy at Rs18.4bn: Although the order book stands flat YoY, the composition has changed significantly. The projects business constitutes at 81% of order book in FY10 vs 66% in FY09.

Earnings and target price revision
■ We have reduced our EPS estimates for FY11 and FY12 by 9% each, building in lower margin due to the projects business. In addition, we have reduced our target price to Rs197 from Rs205.

Price catalyst
■ 12-month price target: Rs197.00 based on a DCF methodology.
■ Catalyst: Higher revenues and margins from next quarter.

Action and recommendation
■ Stock attractive at 4.9x FY11 earnings: On our current FY11 EPS estimate of Rs31.5, the stock is trading at 4.9x. Our target price of Rs197 builds in margin risk due to low-margin infrastructure projects. We expect the revenue mix and margins in FY11 to be the same as in FY10.

To read the full report: ICSA