Rolta India

Investors with a two-year horizon can buy the shares of Rolta India, a software solutions provider, considering its strong order book position, favourable geographic mix and a strong focus on areas such as Defence where spends are increasing.

At Rs 183, the stock trades at 10 times its likely FY11 per share earnings. Given its differentiated focus, there are no strict peers, but valuations are at a discount to most mid-tier IT companies of similar size.

In the nine months of FY10, the company has seen revenues grow by 7.7 per cent to Rs 1,120.6 crore, while operating profits improved 14.9 per cent to Rs 440.8 crore.

Rolta provides geospatial information to the armed forces, the DRDO, the Survey of India, the Airports Authority of India and a host of other governmental nodal agencies. This segment contributes to half its revenues, while engineering services (25 per cent) and enterprise IT solutions (about 25 per cent) are its other divisions.

The company derives 55 per cent of its revenues from Indian clients, with a strong concentration towards government customers, where spends are being enhanced. With a 45 per cent overseas currency exposure, across the dollar, euro and the pound, the impact of rupee appreciation on revenues has largely been muted (2.5-3 per cent).

Its client base is resilient in India. With Defence spends increased by four per cent in the 2010-11 Union Budget to Rs 1,47,344 crore, companies such as Rolta with existing relationships can look to a increased share of the pie.

The nuclear reactor segment, another key area where the company recently won a deal, is also set to improve contribution as India signs deals with various members of the nuclear suppliers group.

The company has an order book of Rs 1,770 crore (more than its expected current year revenues) executable over the next four-five quarters. The order book comprises healthy contribution from all three of its segments of operations, with geospatial services and engineering services accounting for nearly 79 per cent. This gives a fair degree of revenue visibility for the company across divisions.

Also, the billing rates have stabilised across all three segments and in cases, even marginally increased. IP services, which ensure strong margin-led growth, account for 8-9 per cent of Rolta's revenues currently. The company expects this proportion to go up to 20-25 per cent over the next three years.

via BL