BNP Paribas Securities maintains BUY on Rolta

BNP Paribas Securities maintains BUY on Rolta

We recently spoke to Rolta’s CFO, Hiranya Ashar, to judge how the company is coping with the slowdown.

The key takeaway was that the company remains confident of achieving its 38-40% FY09 (June ’09) revenue growth guidance based on its order book strength. We are currently modelling 41.6% y-y growth.

The company also noted it had seen no project cancellations this quarter, but pointed to some delays in its longer-term sales pipeline converting to orders.

For FY10, management hinted at 20-25% revenue growth as a likely target. We currently project 26.7%, ahead of the rest of our coverage companies.

Rolta stands out among its IT services peers with its niche-market leadership, differentiated growth drivers and exposure to end markets less sensitive to the slowdown. These have led to a strong order book and a more credible earnings profile than its generic IT services peers.

While several other IT services mid-caps are trading at seemingly attractive valuations, our confidence in consensus estimates for those companies remains low given the uncertain demand environment.

The company dominates the geographical information systems (GIS) and the engineering design automation (EDA) markets with 70% and 85% shares (domestic and export), respectively.

64% of revenues come from less slowdown-sensitive sectors such as defence, government, energy and utilities. Also 55% of the revenue is from domestic clients.

An order book of 1.5x FY08 revenue and a pipeline of 2.5x order book provide more than 75% revenue visibility for 2Q-4QFY09E.

We reiterate our BUY rating and our DCF-based TP of Rs220, which implies a 9.9x FY10E P/E (more than one SD below historical mean) on an FY08-11E EPS CAGR of 21.9%.

The key risks to our call are an adverse impact on orders beyond our expectation and investor aversion to mid-cap stocks due to the difficult macro environment.