Reliance Money - Stock of the Week

Subex Azure
Recommendation: Buy
BSE Code: 532348
CMP: Rs. 580
52 Wk H/L: 887/355
Price target: Rs. 900

Introduction

Subex Azure was formerly known as Subex Systems. The Group's principal activity is to provide revenue maximization solutions to communications service providers worldwide. These solutions improve the revenues and profits of the communications service providers through identification and elimination of leakages in their revenue chain. It markets in Canada, United Kingdom, China and the United States of America. On 25-Apr-2006, the Group acquired Azure Solutions.

So what’s new?
Subex with the acquisition of Azure Solutions will be a market leader in terms of revenues and installations for Fraud Management Systems (FMS) and Revenue Assurance (RAS). The merged entity will have a 25% share of its target market that is growing at a CAGR of 15%. With this acquisition, Subex will leverage on one of the most powerful brands in this space and will establish its leadership position.
Till recently Subex had a steady growth in its market and have consolidated. Post the merger; Subex has entered an exponential growth phase. The market dominance of the products and its sheer size will lead to a surge in revenues and profitability. We believe that Subex, has the potential to increase the under penetrated market for Revenue Assurance.
There were many skeptics as far as this deal is concerned, as it was highly dependant on the successful integration of Azure with Subex. However, taking the recent developments and the management views into consideration, we at SAANS believe that the integration is well under way and the concerns regarding the same can be laid to rest. It is extremely encouraging to know that the integration of Subex Systems and Azure, almost 70% complete, is well ahead of schedule, with financial consolidation completed. In Q2 FY07, 60 employees of Azure have been made redundant. This itself is an indicator of the degree of integration completed. Though financial consolidation has been effective from Q2 FY07, the company had already re-aligned its accounting policies in Q1 FY07.
Now, with this acquisition in place, Subex has access to 23 of the 40 Tier I Telco customers. Post the integration the growth opportunity lies in leveraging these clients. As the quality of the clients improves, we expect the average revenue per contract to improve significantly from US$0.95m to US$1.2m.

Financial performance
Subex recorded a staggering 137 per cent QoQ growth in 2QFY07 to Rs. 103 crores as compared to Rs. 43.4 crores in the quarter ending June 2006. This growth was mainly fuelled by the successful integration of Azure with Subex. The bottom line of the company almost jumped three times to Rs. 17.1 crores in 2QFY07 as compared to Rs. 3.75 crores in 1QFY07. We expect this strong growth to continue in the medium to long-term future too.

Valuation
At the current market price of Rs. 558, the scrip is discounting the FY07E EPS by 27x. We expect this exponential growth to continue at least for a period of another two years. Apart from this, we also expect the management’s concentration over small acquisitions to bring in some good client base will continue to drive the stock performance. We at SAANS expect the stock to trade at Rs. 900, which will mean a discounting of 20x its FY08E EPS in another 6 – 12 months.