>ROLTA INDIA (EDELWEISS)

■ Performance in line with expectations; uptick seen across segments: Rolta’s Q1 results clearly indicate the improving traction across its three business segments. The engineering segment has seen stability with marginal revenue growth after two successive quarters of decline, while the GIS segment continued to deliver profitable growth. The GIS division posted top line growth of 7.2% Q-o- Q and EBITDA margin expansion of 280bps to 46.8%. Company level operating profit margin improved 200bps to 35.6% Q-o-Q driven by cost rationalisation and better utilisation. Rolta’s order accretion remained healthy with INR 4 bn worth of new orders, taking the company’s total order book to INR 16.6 bn (up 3% Q-o-Q). However, despite better profitability during the quarter (vis-à-vis our expectation) higher depreciation and tax rate dragged down the net profit in line with our expectation.

■ GIS business segment drives performance: The company, with its unique solutions, has created a strong niche in the GIS market. With leadership in the Indian defence geospatial market and high exposure to the government its GIS business has more than offset the impact of slowdown in the engineering segment. Further, as its Fusion solution has gone live, profitability of the segment has increased to 47% at the EBITDA level during the quarter. We expect this business segment to grow ahead of the company’s growth rate.

Revenue momentum picks up with better profitability

■ Equity raising could be in the offing: Rolta has passed an enabling resolution to raise funds up to USD 250 mn through instruments like ADRs/GDRs/FCCBs/QIPs/Warrants or private placements of any other form of securities convertible into equity shares. Though the company has indicated that it has no plans currently to raise equity, we understand it could be particularly targeted to deleverage the balance sheet (current net debt of ~INR 8 bn, i.e., USD 172 mn). Though an option, the company is not pursuing any acquisitions actively currently. In case of full USD 250 mn being raised, equity will be diluted by 28%.

■ Outlook and valuations: Growth momentum returning; maintain ‘BUY’: Past two quarters have seen sharp increase in Rolta’s order intake, the impact of which in terms of better growth rates will be seen in the P/L during forthcoming quarters. We maintain our estimate of revenue growth of 12% and EPS estimate of INR 16 for FY10. At CMP of INR 187, the stock is trading at P/E of 11.7x FY10E and 9.7x FY11E earnings. We maintain ‘BUY’ recommendation. On relative return basis, the stock is rated ‘Sector Outperformer’

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