Buy Rolta India Growth Story

Citi has initiated coverage on Rolta India with a BUY rating. Rolta is a unique mid-cap IT services play [for the past 10 years, it has remained a Midcap], a market leader in some of its key business segments, predominantly domestic and geared to India’s investment build-out.

Rolta’s business focus is unique – ~75% of its revenues are from Geospatial Information Solutions and Engineering Design Services – linked to India’s investment growth; 50%+ revenues are domestic – negligible net currency exposure; Strong client base, healthy order book with lesser competition than what peers see. It, however, is not too leveraged to traditional IT service drivers – outsourcing, discretionary spend, weak INR.

Rolta offers good evenue/earnings CAGR of ~17/22% in FY10-12E and reasonable returns, but has high capital intensity. Citi has set a target price of Rs245 based on 13x FY11E P/E, which equates to (a) our target multiples for mid-tier Indian IT stocks, (b) Rolta’s 3-year average trading multiple, and (c) a ~40% discount to the India mid-cap EPC companies.

Near-term catalysts are likely improvement in the book-to-bill ratio and better than expected quarterly results. Its earnings and returns volatility will likely be higher than that of peers, given the project nature of its business.