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Merill initiates coverage on Aptech Ltd

April 16, 2008

DSP Merill Lynch has initiated coverage on Aptech Ltd with a BUY rating.The recent sharp 45% fall in stock price on concerns over IT training market is overdone. As the company evolves from a IT training company in India to a diversified training company. The company’s IT training in China contributes 40% to revenue while non-IT services, including animation, aviation and online testing account for 50%.

Aptech’s 30% revenue CAGR to be driven by 25% growth in the retail IT training business in China, where it is the market leader, and 45% growth in its institutional segment from customer interface training and online testing. The company is also benefiting from strong retail demand for vocational training from the booming services sector in India, particularly from emerging industries such as animation and aviation.The higher-margin retail business is expected to increase from 73% to 77% over the next two years, accounting for 70% of incremental EBITDA and 300bp of margin expansion.

Merill expects the stock to re-rate on strong earnings growth of 70%, a 5x jump in cash flow given the asset light model and improving RoE. Visibility is high, given the 55% jump in order booking. The company is expected to report an EPS of Rs 15.5 for Fy09. Buy with a target price of Rs 310.

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