>AGC NETWORKS

Recommendation: Buy (SHAREKHAN)
Price target: Rs400
Current market price: Rs265

Spreading its network

Key points 

• Spreading wings to reap large industry opportunity: AGC Networks (AGC; formerly known as Avaya Global Connect) has transformed its business from a single-partner (Avaya) relationship into a diversified business with multi-level global partners (Cisco, Juniper, HP, IBM, Dell, Polycom etc) to significantly multiply the addressable market and growth opportunities in its focus area of IT network infrastructure and related services. Currently, it gets around 80% of its business from India, where the addressable product & services target market was close to Rs30,000 crore in FY2011 and is growing at 20% per annum. However, with its renewed strategy (named as 10^3) the company is spreading its wings through a multi-solution, multi-alliance and multi-geography strategy, which augurs well as it will provide much more diversified revenue traction in the coming years. 
• Parent Aegis adds muscle to AGC's growth prospects: AGC's parent Aegis is ranked among the top Indian BPO companies with presence in 13 countries, 55 locations and over 300 clients across verticals, such as BFSI, telecom, healthcare, travel and hospitality, consumer goods, retail and technology. AGC would be leveraging the strong presence of Aegis and get access to the parent's elite client base across geographies. After being acquired by Aegis in May 2010, AGC has significantly grown its product portfolio, geographical markets and partners. Over the last two years after coming to the fold of Aegis, AGC has transformed from a single-product (unified communications[UC]) and single-partner (Avaya) entity into a diversified integrated player with multiple partners and businesses spread across geographies. 
• Solid financials, healthy prospects ahead: In the last two years AGC has reported a strong growth in the top line and the bottom line. Going forward, with diversified product offerings and a wider client base, the company is well poised to raise its growth trajectory. We estimate an over 40% CAGR in its earnings over FY2012-14 with a 33% revenue CAGR over the same period. We expect the OPM to remain stable at 10% over the next two years with a judicious mix of products (70%) and services (30%) in the revenues. Further, with an increase in the addressable market opportunities and the successful implementation of the 10^3 strategy, the management aspires to reach $1 billion in revenues (Rs5,500 crore) by 2015 through both organic and inorganic initiatives. 
• Undemanding valuation, rich dividend play: AGC is a distinguished player in the enterprise communications space in India and its pertinent focus on delivering industry-specific solutions with customised services proves to be a key differentiator from the others. With increasing clients and an expanding geographical network through the Aegis legacy and own sales and marketing initiatives, the company is well poised to witness significant traction in profitability in the coming years. At Rs265 the stock is currently available at undemanding valuations of 3.9x and 3x FY2013E and FY2014E earnings respectively. Further, the company is a strong dividend play in FY2012 150% dividend, 33.5% pay-out). Going forward, with the company all set to receive a windfall of Rs97 crore through the sale of the Aegis stake (5.7 million shares at Rs170 per share) by December 2012, its per-share value works out to Rs68. Thus, there is a higher prospect of a special dividend pay-out in FY2013 over and above the usual dividend. We initiate coverage on AGC with a Buy rating and a 12-month price target of Rs400. At our price target the stock would be valued at modest 4.5x FY2014E earnings. 

RISH TRADER