Rolta India Limited
Event Update January 24, 2008
CMP: INR 541
BSE Sensex S&P Nifty BSE IT BSE Code NSE Code Bloomberg Code Reuters 52 Week High (Rs) 52 Week Low (Rs) Equity (Rs Mn) Market Cap. (Rs Mn) Shareholding Pattern (%): Foreign Institutions Corporate Promoters Public & Others Total: Returns (%): 1 Month 3 Months 1 Year 17,594 5,203 3,631 500366 ROLTA RLTA@IN ROLT.BO 780.0 276.3 801.4 43,352
Target: INR 660 (cum bonus)
BUY
Rolta announced the acquisition of Broech Corporation, doing business as “TUSC”, IT Consulting Company specializing in ERP applications as well as Database and Business Intelligence solutions, based on Oracle technologies.
TUSC Business Overview
TUSC is headquartered in Chicago, having over 160 consultants across the US. Established in 1988, TUSC has served over 2000 customers in diverse sectors like Utilities, Energy, Engineering, Manufacturing, Finance, Insurance, Retail, Government, Healthcare, Services, Transportation, and Technology. TUSC holds an expertise in high-end consulting for large-scale ERP applications, Fusion Middleware, Business Intelligence and core Database Technology. TUSC is one of only a handful of companies worldwide that have the highest level of Partner certification for both ERP and Oracle Technology. TUSC currently has five “Oracle Master” level consultants on its staff, giving the company an unmatched reputation globally for outstanding expertise in Oracle technologies.
Result Update
38.91 2.73 2.37 40.67 15.32 100.00
TUSC Financial Details
TUSC is a profitable company and its 2007 revenues were in excess of USD 48 million, with a CAGR of more than 30% over the past 4 years. TUSC operates at ~11% EBIDTA margin and ~7% net margin. Over 50% of revenues are generated from repeat business.
Deal Structure
21.55 0.13 61.33
Relative Price Chart:
Rolta
250
BSE IT
Sensex
The consideration for this transaction is about USD 45 million, including escrows and earn-outs. The upfront cash payment will be USD 36 million and the USD 6 million earned-out will be payable in next 2 years. The consolidation is expected to be over within one month and so company is expected to consolidate TUSC for about two month in March 2008 quarter. As a wholly owned subsidiary of Rolta, TUSC will continue to lead its operations from headquarters in Chicago, USA.
Deal Valuation
200
150
Rolta has paid ~1 time revenue and ~9 times EBIDTA of FY2007. The management expects this transaction to be immediately accretive to shareholder value in the current fiscal year ending in June 2008.
Rationale for the acquisition
100
50 Aug-07 Apr-07 Sep-07 Jun-07 May-07 Mar-07 Nov-07 Dec-07 Feb-07 Oct-07 Jan-07 Jul-07
Source: Comline Products
Analyst: Dipesh Mehta Email: dipesh@kslindia.com Khandwala Securities Limited
This acquisition will bring to Rolta a strong portfolio of products and customers; improved access to complementary markets and industry service lines; and strengthen its global delivery model; while continuing to leverage its existing core competencies in the GeoSpatial and Engineering domains. The three founders of TUSC, Rich Niemiec, Joe Trezzo and Brad Brown, will continue to lead the company. With each having over 20 years of experience, this management team brings a wealth of experience to Rolta.
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Khandwala Securities Limited
TUSC’s offerings are focused towards mission-critical applications, providing significant opportunities in the Rolta customer base, especially in the Engineering and Utilities sectors because of a workflow that requires the integration of Design, Engineering, Mapping and ERP. The continued development of Fusion Applications by Oracle presents another significant opportunity for this business. While today TUSC operates completely on a US based delivery model, by leveraging Rolta’s offshore infrastructure and domain expertise, the Company expects TUSC’s businesses to achieve better margins, higher scalability, and provide greater value to customers worldwide.
Valuation:
We believe acquisition would be beneficial to Rolta in medium term as combined offering enable Rolta to provide enterprise level solution to their clients. Acquisition also provides cross-selling opportunities, of their respective service offerings by both companies, to existing clients. TUSC has also developed and owns a broad range of IPRs, which Rolta can monetize and offer as different products (like Periscope – advanced data mining and virtualization tool). This strategy could give some non-linearity in revenues helping it to manage margins against rising wage cost and rupee appreciation. We expect Rolta’s revenue and net profit to grow by 44% and 35% CAGR respectively over FY 2007-2009. The stock is currently traded at ~15x FY09E earnings. We remain positive about the growth potential in the business, considering recent correction in market price, we revised our recommendation to BUY from ACCUMULATE on the stock with a 12-months target price of Rs. 660 at 18x FY2009E earnings.
Khandwala Research
Rolta India Limited January 24, 2008
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The Research team of Khandwala Securities Limited on behalf of itself has prepared the information given and opinions expressed in this report. The information contained has been obtained from sources believed to be reliable and in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, KSL or its group companies make no guarantee, representation or warranty, whether express or implied and accepts no responsibility or liability as to its accuracy or completeness of the data being provided. All investment information and opinion are subject to change without notice. Also, not all customers may receive the material at the same time. This document is for private circulation and information purposes only. It does not and should not be construed as an offer to buy or sell securities mentioned herein. KSL shall not be liable for any direct or indirect losses arising from the use thereof and the investors are expected to use the information contained herein at their own risk. KSL and its affiliates and / or their officers, directors and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. KSL and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein (or investments related thereto) and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors, as they believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. The value of or income from any investment may be adversely affected by changes in the rates of currency exchange. The recipient means this document strictly for use only. None of the material provided herein may be reproduced, published, resold or distributed in any manner whatsoever without the prior explicit written permission of KSL.
Khandwala Research
Rolta India Limited January 24, 2008
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