Rolta India

Investors with a two-year horizon can buy the shares of Rolta India, a niche software provider offering geo-spatial information and engineering design services.

At Rs 120, the stock trades at a historic low of six times its likely 2008-09 earnings. This is the valuation that most mid-tier IT companies enjoy currently.

But given Rolta’s superior net profit margin (greater than 21 per cent) vis-À-vis most mid-tier IT companies and its business prospects over the next few years in areas such as power, oil and gas, and geographic mapping for the defence forces, the stock appears attractive.

The current difficult business environment means that only select mid-tier IT companies with differentiated offerings and those with strong domestic focus would be reasonably placed to stem the tide.

Rolta, with a strong domestic revenue base and catering to clients which are mostly government institutions and large core engineering industries, might fit this criterion.
Key domestic presence

Rolta derives 55 per cent of its revenues from services rendered in India. The US contributes 31 per cent of its revenues, while BFSI as a whole less than 4 per cent. The domestic exposure is the highest among IT companies in India.

The company provides geospatial information to clients such as the armed forces, DRDO, Survey of India, Airports Authority of India and a host of other governmental nodal agencies.

This segment contributed 50 per cent of its revenues in FY-08. With spends on internal security and defence capabilities enhancement, this segment provides Rolta with a fair degree of revenue visibility over the long term.

The nature of services that the company delivers are also such that there would be constant upgrades and maintenance required, thus providing a steady stream of revenues.

The company has managed to create software products by using its own and third-party software such as Intergraph to cater to segments such as government, Defence, infrastructure and utilities.

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 bag any outsourcing deals to the JV done by Thales’ clients.
Engineering services strength

Rolta derives over 30 per cent of its revenues from delivering high-margin engineering services to clients. Its design services cater to engineering, power, refinery and the shipping industries and cover a good part of the value chain.

Domestically, with refining capacities and power generation set to improve manifold over the next few years, the company may be well-placed to tap such opportunities for delivering its services.

Here too, 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 opportunities arising out of the Indo-US nuclear deal.
Other services and order-book position

The company delivers traditional IT services in partnership with players such as Oracle and Computer Associates.

This is a low-margin service, but has been growing in triple digits over the last couple of years.

Its presence here results in an end-to-end offering to engineering clients. But this business segment has to withstand competition from a host of Tier-1 and mid-Tier IT players.

The company has a current order-book position of over Rs 1,500 crore to be executed over the next 12-18 months across all segments of operation. This is about 1.5 times its FY-08 revenues, and lends visibility.
Risks

For Rolta, high dependence on governmental clientele 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, the company derives 34 per cent of its revenues from new clients, which means lower annuity-based revenues.

However, the company’s focus on products-driven business may improve this situation.