Rolta India: Hold

Investors can retain their holdings in Rolta India with a 12-18 month horizon, considering its fair growth prospects. At the current market price (Rs 677), the stock appears richly valued at 25 times and 20 times its estimated current year and 2008-09 earnings respectively.

This is close to the valuations enjoyed by KLG Systel and Infotech Enterprises (not strictly comparable), but at a significant premium to most Tier-II players in the IT space.

Investors can retain holdings and consider fresh exposures only on a substantial dip in stock prices. Amidst an uncertain environment for Tier-II IT companies, in general, the company has managed strong growth on the back of a domestic focus and niche areas of business. This has helped the stock deliver strong gains in recent months.

Rolta provides geo-spatial information systems (GIS) services such as digital mapping and photo-grammetry. Engineering design services is another area of operation.

Rolta also offers traditional IT services in partnership with Computer Associates and Enterprise Application Services with Oracle.
Business Drivers

Government orders and domestic theme: Rolta provides GIS services to a wide range of customers. This involves interpretation of satellite images, remote sensing and geo-spatial data modelling, which are delivered to agencies such as the Ministry of Defence, National Remote Sensing Agency, Survey of India, Airports Authority of India, as well as to a few non-government clients.

By the very nature of their operations, these organisations require constant upgrade and maintenance of imaging data. Rolta appears well-placed to tap potential repeat business, given its significant presence in this space and execution track record.

The telecom angle: Rolta also works with telecom companies in Europe and North America for enabling provision of geographic information/digital mapping services on mobile phones.

This is a feature that may help provide information about hotspots, traffic information, hotels and the like, which have high levels of usage in those countries. This constitutes another revenue stream.

This apart, as and when 3G services are commenced in India, Rolta, which works with BSNL as well, may be well-positioned to extend this service to Indian operators as well.

Engineering design and automation: This is another area where Rolta has been able to piggyback on India’s domestic infrastructure spend.

Its engineering design services cater to engineering, power, refinery and the shipping industries. Rolta’s services here cater to a good part of the engineering services value chain.

These are high growth sectors and Rolta has clients in such areas in India, West Asia and the US as well. Engineering services also commands higher billing rates than GIS services and has been growing at over 35 per cent for the company and may improve realisations.

The geographical spread and capabilities also means that it may be well-placed to latch on to the next wave of outsourcing, which is believed to have engineering services outsourcing as a chunk. The company has a joint-venture with Thales, a player in critical information systems working with aerospace, Defence and security market. This JV may help Rolta corner any outsourcing to the JV done by Thales’ clients.

Another JV has been forged with Stone & Webster in the engineering services space, enabling the company to work in areas such as nuclear power engineering.

The JV is revenue-accretive to Rolta, and is executing projects in Singapore. The two companies are also seeking to capitalise on any opportunity arising out of the Indo-US nuclear deal, when it is completed.

Rolta has a strong order-book of over Rs 950 crore for the current year. The strong domestic focus means that the company is well-placed to weather rupee appreciation risks. The company operates at a 40 per cent earnings before interest, tax, depreciation and amortisation (EBITDA) margin, placing it well above levels enjoyed by Tier-II players.

The company also has recurring revenues of about Rs 150 crore for this year, up 25 per cent over last year.
Risks

The company derives nearly 38 per cent of its revenues from government orders. This means that receivables cycles could be much longer than is the case with other software companies. There are certain projects where complete payment is received only after the warranty period.

These may place higher demands on working capital requirements.

This apart, in the traditional IT services business, the company has to contend with heavy competition from the top and Tier-II players.