Rolta India - Pricing ahead of volumes; retain BUY (Source: BNP)

Pricing ahead of volumes; retain BUY

Retains guidance; remains our pick for the downturn
Despite challenging macroeconomic conditions, Rolta retained both its
FY09 guidance of 38.0-39.9% revenue growth and 23.9-25.8% net profit
growth (pro forma for MTM provisions for FCCBs). This corroborates our
thesis that the company’s niche market leadership, defensive end market
exposure, strong order book and hence revenue visibility, position it
better than its generic IT services peers, which are finding new projects
increasingly hard to come by with clients cutting back heavily on
discretionary spending. At 4.0x FY10E P/E, on an FY08-11 EPS CAGR
of 21.9%, we see value in Rolta, so retain our BUY.

EPS beat on pricing-led margin gains and lower taxes
Rolta’s 2QFY09 revenue came in slightly below our expectations (4.6%
q-q vs BNPP’s 6.6%), while pricing-led margin gains and lower taxes
allowed the company to beat our EPS estimate (-1.6% q-q vs BNPP at -
9.6%). Its EPS q-q decline was primarily due to lower other income and
interest expenses on a foreign currency loan taken to fund the recent
Piocon acquisition. Order book growth was subdued at 1.3%, which is
understandable given the weak macro environment, but at about 2x our
2HFY09E revenue, still provides enough cushion to meet our FY09
revenue projections.

Strategy shift to improve pricing ahead of volumes
Rolta remains among few Indian services companies to still see pricing
gains given the demand-supply imbalance for its services, and its thrust
on higher value offerings. Net hiring was almost negligible in the quarter,
while USD-based pricing went up 0.5-3.3% q-q across divisions, and
almost entirely drove revenue growth. This appears to be the strategy
going forward as the company has no plans for any more fresher hiring
in FY09, and will instead focus on a solutions-based sales approach.
Strong earnings visibility, solid buying opportunity; BUY
We retain our DCF-based TP of INR220, which implies a 9.9x FY10E
P/E. Rolta appears to have been an unfair victim of the overall weak
market and market rumours. The key risks to our call are weakening
order book growth and higher than expected capex plans.