Rolta announced that it has raised USD 150 million (Rs 6.1 billion) through FCCB offering. The company would issue 1,500 FCCBs of USD 100,000 each, which are expected to be listed in Singapore. These are zero coupon bonds with yield-to-maturity of 6.75% p.a. and tenor of 5 year and 1 day. The conversion price is fixed at Rs 737.4. The eventual dilution on account of this issue, on conversion at the stated conversion price, will be 9.4% on the expanded capital base.

The company intends to utilise these funds for acquisition and setting-up new facilities. We believe that given buoyant demand environment, strong growth opportunities exist within various business segments for Rolta. An aggressive approach towards acquisition will enable the company to expand its presence and gain domain skill sets apart from scale. The company has also announced its plan to set up a 5,000 seat facility in Kolkata, which will require an investment of Rs 2.5 billion. We are positive on the management’s capability to utilise these funds effectively, which will prove beneficial to the investors.

Business triggers

Rolta has a number of beneficial factors operating in conjunction, which include:

Acquisitions: As highlighted in our earlier quarterly report, acquisitions will be the immediate short term triggers. We believe that the company is currently pursuing acquisition opportunity at 2-3 targets, of which, one is expected be closed in 2-3 months.

Strong order book: Rolta has a robust order book of Rs 7.5 billion (USD 179 million) as at end of March quarter, executable over the next 18-24 months. This is its highest ever, representing a sequential quarterly growth of 9%. In addition, it has bid for projects worth Rs 15 billion (USD 357 million).

Two JVs with high-revenue potential over the medium-to-long term: Business solutions provided by the JVs cater to both domestic and export markets. Rolta stands to significantly gain by way of technology transfers.

A strong operating environment present in the GIS and engineering IT space: Rolta, with its unique turnkey solutions capabilities and track record of executing large-sized projects, seems to be emphatically exploiting the current operating environment.

High profitability of operations: Rolta enjoys industry-leading EBITDA margins of over 40%, which the company believes will be sustained, going forward.

Investment Theme

Outsourcing of engineering services is expected to reach USD 38-50 billion by 2020 compared with USD 2 billion now, as per the Nasscom, Booz Allen Hamilton study. As one of the leading offshore engineering services firm for manufacturing industry, Rolta is poised to grab the increasing opportunities. The company has entered into two high potential JVs, which are likely to raise its traction in high growth verticals such as power, energy, and defence. Its 50:50 JV with Stone & Webster is pursuing engineering design opportunities in high growth refinery, petrochemicals, and energy sectors in India. Its 51:49 JV with Thales, the French defence and aerospace major, aims at targeting Indian and international defence spend in the area of high-tech warfare.

Key Risks

Key risks to our investment theme include: (a) adequate availability of skilled manpower, (b) substantial proportion of revenues from non-annuity sources, and (c) large proportion of revenues from domestic market.

Valuation

We expect the company to achieve strong organic growth over FY07-09E. In addition, its two JVs - Thales (51% share) and Stone & Webster (50% share) - are also expected to contribute significantly through FY09E, which will shift the company’s growth trajectory to 38-40%. At INR 461, the stock trades at a P/E of 15.0x and 11.0x on our FY08E and FY09E earnings, respectively. Assuming that the FCCB gets fully converted at Rs 737.4, amounting to 9.4% dilution, the fully diluted EPS for FY08E and FY09E would stand at Rs 27.8 and Rs 38.0, resulting in P/E of 16.6x and 12.1x, respectively. Our financial tables do not take into account this impact. We remain positive on the development and maintain our ‘Buy’ recommendation.