Nucleus Software Exports

Investors with a medium-term perspective can consider buying Nucleus Software Exports. The stock’s structural downtrend that commenced from Rs 600 was arrested in the support band between Rs 39 and 42. Since this low the stock has been on an intermediate-term uptrend. In May, the stock breached its 200-day moving average and is currently trading above its 50-DMA too.

We are optimistic on the stock and believe that it has the potential to rally up to Rs 175, in the medium-term term.

Investors can buy the stock with stop-loss at Rs 87. Short-term traders can buy with a target of Rs 122 and stiff stop at Rs 105.

via BL

Nucleus Software

Nucleus Software

Wockhardt, Bharti Airtel, KSB Pumps,Gateway Distripaks, Nucleus Software Exports, Andhra Bank

Wockhardt, Bharti Airtel, KSB Pumps,Gateway Distripaks, Nucleus Software Exports, Andhra Bank

Nucleus Software Exports

Nucleus Software Exports

Ceat, Nucleus Software, IT Preview

Q1FY2008 IT earnings preview

Against all possible odds
It couldn't have been worse for the information technology (IT) service companies. During the first quarter, the margins of the front-line IT companies are generally dented by the cumulative impact of the incremental cost of visa charges (the visa window opens only during Q1 every year), the inflow of fresh engineers (they are put under training and are non-billable) and the annual salary hikes. (The annual salary hikes are fully reflected in Q1 in case of Infosys Technologies [Infosys] and Tata Consultancy Services [TCS]; the other front-line IT companies provide for the same in either Q2 or spread it out over a number of quarters.) In addition to all this, the steep appreciation in the rupee against all major currencies in Q1 added to the pressure on the margins.

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SECTOR UPDATE

Automobiles

June numbers—a mixed bag
Auto sales numbers continue to be a mixed bag. Two-wheeler sales continued to decline in June owing to higher interest rates and stringent checks by financiers. On the other hand, cars sales outperformed the sector in the same month despite it being the slack season on account of the monsoon. The growth in cars was largely led by a flurry of new launches in the recent times, such as SX4, Swift Diesel, Logan and Spark. The commercial vehicle (CV) sales continued to reel under the monsoon, hardening interest rates and tightened liquidity. Maruti Udyog Ltd (MUL) and Mahindra and Mahindra (M&M) were clear winners of June, as their growth was fuelled by their recent launches.

Ceat
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs190
Current market price: Rs171

Still on a fast track

Key points

• The slowdown in the sales of commercial vehicles in the country has been greater than the company's expectations which is feared to take its toll on the company's original equipment manufacturer (OEM) sales. Consequently, Ceat's management expects the sales revenues from the OEM segment to be lower at Rs500 crore in FY2008 vs Rs600 crore in FY2007. However, to counter the situation the company is trying to realign its strategies and boost its replacement sales and exports.
• The company expects the slowdown to continue for the next few months and the demand to revive with the onset of the festive season, ie by September or October. For FY2008, the company expects a volume growth of about 10%, with the growth in the second half likely to be better than that in the first half.
• Some positive developments regarding the industry are also expected in the coming days. For instance, the government might tighten the anti-dumping laws. It might also raise the reference price for import of cross-ply tyres to $130 from $100 at present. Also, China is reducing the incentives on export of tyres and lowering the freight subsidy to India for cross-ply tyres by 5%. All this would be positive for the entire tyre industry and help it combat the cheaper Chinese tyre imports. However, the same would affect only the cross-ply imports. Hence, the radial tyre imports from China are expected to continue at the same speed in the medium term.
• The rubber prices have softened significantly in the past couple of weeks. The prices have come down to about Rs73 per kilogram levels from the average level of Rs95 per kilogram. The rubber prices are expected to remain soft in the coming months. At the same time, we believe there will be pressure from the OEM customers for price reductions. Even if the prices are lowered for the OEM customers, the replacement market may not see any price cuts. Since the replacement market constitutes about 65% of a tyre company's total sales, this is a huge positive for both Ceat and the industry.
• The company expects to improve its margins in the current year, mainly due to lower raw material prices and improved efficiencies.
• The land sale at their Bhandup plant site has got delayed due to a delay in obtaining certain legal approvals. The company expects to finalise the deal by the third quarter of the current fiscal.
• Spotting great potential in the off-the-road market, the company is raising its capacity in the segment from 25 tonne a day to 45 tonne a day by November 2007. The location for the greenfield plant is still under consideration and is expected to be finalised soon.
• The de-merger of its investment business into a separate investment and finance company in order to optimise the operational efficiencies and improve the performance of its core business is expected to take place in FY2008.
• The financial restructuring entails the conversion of one share of Ceat out of every four held into a share of the investment and finance company. Thus, the equity capital of Ceat (ie the core tyre business) will reduce by 25% which will improve the earnings per share.
• We maintain our positive outlook on the company in view of its smart turn-around and brilliant performance. At the current levels, the stock trades at 10.8x its FY2008E and an enterprise value/earnings before interest, depreciation, tax and amortisation of 5.0. We maintain our Buy recommendation on the stock with a price target of Rs190.
  

Nucleus Software Exports
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs1,020
Current market price: Rs993

Annual report review

Key points

• Nucleus Software Exports has further built on the growth momentum of FY2006 and reported another year of robust performance. The quality of its revenues has also improved with the high-margin product business contributing 54% of the total turnover.
• It was an exceptionally good year in terms of order inflows as the company added 21 new clients for 74 modules of the FinnOne product suite. The order backlog of Rs330 crore provides strong growth visibility in the coming quarters.
• The balance sheet continues to be strong with Rs81.9 crore of cash and cash equivalents and healthy return ratios. However, the jump in the account receivables to 91 days is a worrying factor.
• The current valuations of the stock factor in most of the positives and any re-rating would depend on a higher than expected ramp-up in the business. We maintain Hold on the stock.

Emkay - Nucleus Software, Anagram - Agri Commodities

Emkay - Nucleus Software, Anagram - Agri Commodities

Sharekhan Investor's Eye dated May 04, 2007

Esab India
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs575
Current market price: Rs378

Beating expectations

Result highlights

• Esab India's Q1CY2007 results are ahead of our expectations. Its top line grew by 29% to Rs81.2 crore and bottom line grew by a strong 38% to Rs12.3 crore during the quarter.
• The higher top line growth was aided by the company's new facility as Chennai, which on a fully operational basis can contribute additional Rs60 crore to the top line. The revenues for the quarter recorded an impressive 29% growth as the equipment division's revenue increased by 31.7% and the consumable division's revenue grew by 28.1%.
• The operating profit for the quarter grew by 44% to Rs19.6 crore as operating profit margin (OPM) improved by 250 basis points to 24.1%. The improvement in the OPM was on account of better profitability of both the divisions. The earnings before interest and tax (EBIT) margin of the equipment division improved by 396 basis points to 16.5% and that of the consumable division improved by 282 basis points to 27.7%.
• The depreciation for the quarter increased by 24% as the company has commissioned its new plant at Chennai.
• The interest cost was negligible as the company has repaid its entire debt and become a debt-free company.

Nucleus Software Exports
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs1,020
Current market price: Rs1,010

Put on Hold

Result highlights

• Nucleus Software Exports (Nucleus) has announced a growth of 7.1% quarter on quarter (qoq) and 42.9% year on year to Rs60.2 crore. The product revenues have grown at a robust rate of 12.3% sequentially whereas the project and service business remained flat sequentially during the fourth quarter.
• The operating profit margin (OPM) improved by 60 basis points sequentially to 28.5%, in spite of the 230-basis-point increase in the selling, general and administration expenses as a percentage of the sales (up from 15.7% to 18% in Q4). The OPM was boosted by a 290-basis-point improvement in the gross margin due to a favourable revenue mix (even after accounting for Rs1.8 crore of a one-time expense due to the penalty related to the delay in project execution).
• However, the earnings were largely flat at Rs13.9 crore (sequentially) due to a lower other income, higher depreciation cost and tax rate during the quarter. The same are lower than our expectations of around Rs15.5 crore.
• The order backlog of Rs330 crore continues to be healthy (up from Rs131 crore as on March 2006). Moreover, the expected execution of the ACOM order (around $35 million) is likely to boost the overall revenue growth in the coming quarters.
• Along with the results, the company has rewarded the shareholders with a bonus issue of 1:1 and dividend payout of 35% (Rs3.5 per share).
• In addition to the subdued performance in the past two quarters (a flat growth for two consecutive quarters), the scrip has appreciated by over 100% since our Buy recommendation on December 12, 2007 (@Rs497) and appears fairly valued at around 14.8x FY2009 earnings estimate (introduced in the note). Consequently, we are downgrading the stock to Hold recommendation and would review our estimates if the ramp up in the business is much faster than our expectations.

Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs263

Q4FY2007 results�first-cut analysis

Result highlights

• Orchid Chemicals & Pharmaceuticals (Orchid) reported a 3.4% increase year on year (yoy) in its net sales to Rs248.0 crore in Q4FY2007. The sales growth was above our expectations. The growth in the sales was marginal due to the absence of any significant new launches in the US market during the quarter.
• The company maintained its performance in its major market, the USA. Its key products�Ceftriaoxne and Cefproxil�continued to maintain a healthy market share in excess of 20-25%. Further, being the sole generic supplier of Cefoxitin and Cefazolin in the USA, Orchid continues to maintain its high market share for these products.
• Orchid's operating profit margin (OPM) improved by 190 basis points to 30.7% in the quarter. The improvement in the margin was driven by a 14.5% decline in the company's material cost on account of an improved product and geographical mix. The resultant improvement in the margin has caused the company's operating profit to grow by 10.2% to Rs76.1 crore in Q3FY2007.
• For FY2007, Orchid's stand-alone revenues grew by 5.1% to Rs934.2 crore. The revenue growth was below our estimates. Despite higher interest cost and tax outgo, the net profit grew by an appreciable 16.6% to Rs96.6 crore. The net profit reported by the company was higher than our estimate of Rs92.3 crore.
• On a consolidated basis, Orchid's revenues rose by 3.5% to Rs985.1 crore in FY2007. The company's consolidated profits grew by an impressive 37.2% to Rs78.6 crore. The consolidated profits were higher than our estimate of Rs75.3 crore.
• At the current market price of Rs263, Orchid is quoting at 9.3x its estimated FY2008E earnings. The valuation is very attractive given the strong growth potential for FY2008 and FY2009 in view of some forthcoming big launches in the USA and an entry into Canada and Europe. Hence, we maintain our Buy call on the company with a price target of Rs390.

Apollo Tyres
Cluster: Apple Green
Recommendation: Buy
Price target: Rs425
Current market price: Rs318

Strong performance

Result highlights

• Apollo Tyres' Q4 results are ahead of our expectations, on both the top line and the margin front.
• The net sales for the quarter saw a strong growth of 22% year on year (yoy) to Rs910.2 crore. The growth was achieved on the back of a 7% growth in the volumes and about a 14.6% growth in the realisation yoy.
• On the back of numerous price hikes undertaken by the industry, softening rubber prices and improved operating efficiencies the margins also improved. The operating profit margin (OPM) expanded by 340 basis points yoy to 11% as the operating profit increased by 78% to Rs100.4 crore.
• Stable interest and depreciation charges helped the company to post a brilliant net profit growth of 141.4% to Rs42.7 crore. The reported profit is up by 62% due to an extraordinary item last year.
• At the current market price of Rs318, the stock discounts its FY2008E earnings by 10.1x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.5x. We maintain our Buy recommendation on the stock with a price target of Rs425.

Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs44
Current market price: Rs39.5

Q4FY2007 results�first-cut analysis

Result highlights

• Ashok Leyland has delivered strong results for Q4FY2007 and the same are ahead of our expectations on the margin front. The top line has grown by 32.1% for the quarter driven by a volume growth of 28.4% and a realisation growth of 2.9%.
• We were positively surprised with the operating profit margin, which stood at 11.6% for the current quarter against our expectations of 10.7%. In comparison to last year, the operating profit margin has declined by 100 basis points, mainly due to a higher raw material cost. Consequently, the operating profit for the quarter has grown by 21.1% to Rs264.9 crore.
• Lower interest cost and tax outgo helped the company grow its net profit by 28.8% to Rs174.6 crore.
• For FY2007, the net sales for the company grew by 36.5% led by a volume growth of 35%. The operating profit margin came down slightly by 30 basis points to 9.9% while the profit for the year grew by 46% to Rs436.3 crore.
• We are adopting a cautious outlook on the industry considering the rising interest rates and tightening liquidity in the country which would affect its sales volumes. Consequently, after a dream run in FY2007, we expect the company's growth rates to moderate. We expect a volume growth of 11.9% for FY2008.
• At the current market price of Rs39.5, the stock discounts its revised FY2008E earnings by 11x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 6.4x. We maintain our Buy recommendation on the stock with a price target of Rs44.
  

Sharekhan Investor's Eye dated May 04, 2007

Sharekhan Investor's Eye dated January 22, 2007

ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,240
Current market price: Rs977

Price target revised to Rs1,240

Result highlights

• ICICI Bank's Q3FY2007 net profit at Rs910 crore was much above our and market expectations. The net profit saw a growth of 42.2% year on year (yoy) against our expectation of a 26.1% year-on-year (y-o-y) growth. The robust performance was driven mainly by a very high growth in the fee income and the other income compared with our expectations. Despite a rise of 125.6% in the provisions, the profit growth was very strong on the back of a 65.4% growth in the operating profit.
• The net interest income (NII) grew by 31.9% yoy to Rs1,708.8 crore. What's impressive is that in Q3FY2006 the NII included a securitisation income excluding which the y-o-y NII growth stands at 53%.
• The other income grew by 68% yoy to Rs1,980.6 crore, of which the core fee income grew by a strong 52.7% yoy to Rs1,345 crore.
• The operating profit was up by a strong 65.4% on the back of a good NII growth and a sharp rise in the fee income. The operating expenses increased in line with the business growth.
• The provisions increased by 125.6% mainly due to higher provisions for the non-performing assets (NPAs). The asset quality deteriorated as non-collateralised retail loan products like credit cards reported defaults. The gross non-performing asset (GNPA) increased by Rs650 crore on a sequential basis and the net non-performing asset (NNPA) also increased in absolute and percentage terms.
• The capital adequacy ratio (CAR) stood at 13.4%, with the Tier-I CAR at 8.63%. Incorporating the Basel II guidelines the Tier-I CAR would be 9.5% and we feel the bank can maintain its current growth rates without any dilution in the medium term.
• We have revised our FY2007 and FY2008 estimates based on the bank's improved performance on the non-interest income front. We have also factored in the higher provisions that may be made in future in view of the signs of deterioration in the retail loan book. We have revised the FY2007 and FY2008 profit after tax (PAT) estimates by 2.9% and 2.4% to Rs3,375.7 crore and Rs4,041.9 crore respectively. We have also introduced our FY2009 numbers as we believe that slowly the market would start factoring in the FY2009 financials.
• At the current market price of Rs977, the stock is quoting at 17.5x its FY2009E earnings per share (EPS), 7.2x its pre-provisioning profits (PPP) and 2.8x book value (BV). The valuation looks attractive if one considers the value of the bank's subsidiaries which works out to Rs400 per share of the bank. We maintain our Buy recommendation on the stock with a one year price target of Rs1,240.

Maruti Udyog
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs939

Loss of new plant impacts reported profits

Result highlights

• The Q3FY2007 results of Maruti Udyog Ltd (MUL) re in line with our expectations.
• The company's net sales for the quarter grew by 18.5% to Rs3,679.5 crore from Rs3,112.0 crore in Q3FY2006. The growth was led by a volume growth of 18.7% during the quarter and was in line with our expectations.
• The expenditure for the quarter was higher due to higher employee costs, an increase in royalty and a loss with respect to Maruti Suzuki Automobiles India Ltd (MSAIL). Considering all these the operating profit margin (OPM) declined by 52 basis points to 14.36%. The margins were affected due to higher royalty expenses. Consequently, the operating profit grew by 14% to Rs528.48 crore.
• The interest and depreciation costs for the quarter were higher due to the commencement of the Manesar plant. The adjusted net profit grew by 14% to Rs384.81 crore. The reported profit after tax (PAT) rose by 12% to Rs376.4 crore.
• MUL is expected launch the diesel Swift in January 2007. This is expected to be a big boost for MUL as it would be its first serious attempt to cater to the fast-growing diesel segment. The diesel segment constitutes about 25% of the total car market in India.
• We maintain our positive outlook on MUL, considering its leadership position in the Indian car market, planned product launches including the foray into the diesel segment and a strong outsourcing potential. Despite its rising raw material cost, MUL has been able to maintain its margins at commendable levels due to increasing efficiencies and a better product mix.
• At the current market price of Rs939, the stock quotes at 14.4x its FY2008E earnings and 9.9x its enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs1,050.

Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs217

Strong growth potential despite poor performance

Result highlights

• The net sales of Orchid Chemicals & Pharmaceuticals (Orchid) rose by 0.5% year on year (yoy) to Rs238.7 crore in the third quarter of FY007. The sales growth was slightly below our expectations, partly due to an absence of any significant new product launches in the USA and partly due to the high base of Q3FY2006.
• The company maintained its performance in its major market, the USA. Its key products�Ceftriaoxne and Cefproxil�continued to maintain a healthy market share in excess of 20-25%.
• The company's operating profit margin (OPM) expanded by 350 basis points to 32.6% as against our expectation of 31.5%. The improvement in the margin was primarily on account of a 27% drop in the raw material cost, as the company continued to derive an increasing proportion of its revenues from the sale of formulations in the high-margin regulated markets. Formulations constituted roughly 45% of its sales, almost 90% of which came from the USA.
• Consequently, the operating profit grew by 12.4% to Rs77.8 crore in the quarter.
• Despite a substantial improvement in the margins, the high interest cost (up by 19.4% yoy) and the higher tax provisioning as compared to Q3FY2006 dragged down the net profit, which declined by 2.2% to Rs28.3 crore in the quarter. The profit growth was in line with our estimate.
• Orchid has just received approval from the UK MHRA for its betalactum API facility at Aurangabad. This development indicates that Orchid is on track to make its big entry into Europe in FY2008, which will add to its growth from FY2008 onwards.
• At the current market price of Rs217, the stock is quoting at 8.5x our estimated FY2008 earnings. The valuation is very attractive given the strong growth potential for FY2008 and FY2009 in view of some forthcoming big launches in the USA and a big entry into Europe. Hence, we maintain our Buy call on the company with a price target of Rs390.

Nucleus Software Exports
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs898
Current market price: Rs811

Price target revised to Rs898

Result highlights

• Nucleus Software Exports has announced lower-than-expected sequential growth in its revenues at 2% quarter on quarter (qoq) and 50.3% year on year (yoy) to Rs56.2 crore (against the expectations of Rs58.6 crore). The product revenues have grown at a robust rate of 12.8% sequential. However the revenues from the project and services business declined 9.3% sequentially and resulted in a lower-than-expected overall growth in the revenues during the third quarter.
• The operating profit margin (OPM) declined by 110 basis points sequentially to 27.9% during the quarter, largely due to the steep increase in the selling, general and administration expenses (SG&A) as a percentage of sales (up from 12.6% of the sales in Q2 to 15.7% in Q3). The huge jump in the SG&A expenses was driven by the additional cost incurred (on travel and other related expenses) in pursuing some of the large deals in the pipeline (including the recently bagged order from ACOM).
• Consequently, the earnings were largely flat at Rs13.9 crore on a sequential basis. However, the earnings grew at a robust rate of 58.1% on an annual basis.
• Notwithstanding the muted performance (sequentially) during the quarter, the company has shown an exponential growth in its order backlog that is likely to boost the overall revenue growth in the coming quarters. The pending order book jumped to Rs335 crore, up from Rs135 crore at the end of the previous quarter. The order backlog includes the multi-million multi-year order from ACOM, a leading consumer finance company in Japan.
• To factor in the impact of the huge fresh order intake, we are revising upwards the revenues and earnings estimates by 7% and 9% respectively, for FY2008. At the current market price the stock trades at 22.8x FY2007 and 16.5x FY2008 earning estimates. We maintain our Buy call on the stock with a one-year revised target price of Rs898 (15x its rolling four-quarter earnings).

India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs315
Current market price: Rs242

Net profit up 1,000%

Result highlights

• India Cements achieved a net profit of Rs79.77 crore for Q3FY2007, clocking a year-on-year (y-o-y) growth of 1000% , though it was below our expectations on account of higher-than-expected increase in the costs.
• The top line grew by a robust 36% year on year (yoy) to Rs472 crore on the back of a 4% y-o-y growth in the volumes to 1.75 million metric tonne (MMT) and a 32% growth in the realisations to Rs2,700 per tonne.
• The company's operating expenditure increased by 13% yoy to Rs339 crore on the back of a 20% increase in the raw material costs and an 18% rise in the distribution costs. Sequentially, the freight cost and the power & fuel cost increased by Rs30 per tonne and Rs15 per tonne respectively.
• The company's high leverage to the cement prices resulted in an operating profit growth of 185% yoy to Rs133 crore whereas the operating margin expanded by a mammoth 1,40 basis points to 28%.
• The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne tripled to Rs761 though it was down 12% quarter on quarter (qoq) on account of lower volumes due to the monsoons in the southern region namely Tamil Nadu and Andhra Pradesh.
• The interest expenditure and the depreciation cost remained flat qoq at Rs34.7 crore and Rs19.82 crore respectively. These factors coupled with a negligible tax provision helped the company's net profit to register a 1,000% year-on-year jump to Rs79.77 crore.
• The company's plan to augment its capacity by 2MMT at its existing facilities (namely Sankaridurg and Vishnupuram) is well on schedule. One million tonne of the capacity is expected to come in June 2007 whereas the balance one million will kick in by December 2007.
• We expect the company's volumes to bounce back in the fourth quarter and also expect the prices to firm up further by Rs5-10 per bag.
• At the current price of Rs242, the stock trades at 12.2x its FY2007E and 8.5x its FY2008E earnings. On an enterprise value (EV)/tonne basis, the company is trading at USD115 per tonne, which is a steep discount to its peer Madras Cement, which is trading at USD155 per tonne. We continue to maintain our positive outlook on the company with a price target of Rs315.

Indo Tech Transformers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs335
Current market price: Rs288

Price target revised to Rs335

Result highlights

• The Q3FY2007 results of Indo Tech Transformers Ltd (ITTL) are above our expectations.
• The company has reported strong quarterly results. The revenues for the quarter grew by 130% to Rs45.04 crore as against our expectations of Rs40 crore while the net profit grew by 166% to Rs7.3 crore against our expectations of Rs5.3 crore. The volume growth was 89% as the company sold 672 mega Volt Ampere (MVA) during the quarter as against 355MVA in Q3FY2006.
• The above performance was due to the fact that the company executed some high-margin orders during the quarter under review and hence the operating profit for the quarter grew by 153% to Rs11.86 crore. The operating profit margin (OPM) for the quarter improved by 240 basis points to 26.3% as against 23.9% in Q3FY2006. Going forward the company expects to maintain its OPM in the range of  19-20%.
• The interest expense for the quarter stood at Rs0.23 crore while the depreciation cost for the quarter was Rs0.28 crore.
• The order backlog at the end of Q3FY2007 stood at Rs153 crore as against Rs79 crore at the end of the previous quarter, showing a growth of 94%.

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Nucleus Software Exports: Sharekhan Stock Idea dated December 12, 2006

Nucleus Software Exports
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs680
Current market price: Rs497

Product play

Key points

• Niche player with established presence: Nucleus Software Exports Ltd (NSEL) is a niche player offering software products and services to companies in the banking and financial service space. It has established itself globally with product installation base of over 250 application modules in more than 30 countries.
• Product business drives growth: The product business grew exponentially in FY2006, on the back of some impressive order wins like the $12-million multi-year deal with GMAC. Apart from this, it added 21 new clients and bagged orders for 38 new installations in FY2006. In the first half of FY2007 also, the company added 14 new clients and continued to grow its pending order book that stood at Rs135 crore as on September 2006. Consequently, we expect the product revenues to grow at a CAGR of 67% over FY2006-08.
• Margins are sustainable: In spite of the cost pressures and the aggressive employee addition targets for this year, the company is likely to sustain its overall profitability. The growing contribution from the high-margin product business is expected to mitigate the adverse impact of the rising wage bill and the expansion-related pressures in the intermediate term.
• Alliance could throw positive surprises: The initiatives to forge joint marketing alliances with global technology giants and develop a network of channel partners could result in higher-than-expected order bookings. The partnership model has already started yielding results.
• Valuation: Revenues and earnings are estimated to grow at CAGR of 38% and 40% respectively over FY2006-08E. At the current price the stock trades at 11x its FY2008 earnings, which is relatively cheaper compared with the peer companies. We recommend a Buy on NSEL with a one-year price target of Rs680.

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