The stock price of TAKE Solutions (TAKE) was down by about 8% today (September 20, 2007) to close at about INR 1003.
We see several fundamental differentiators operating in this company that should serve to give stock returns of ~35% over a 12 month horizon with a moderate risk only thus marking it out as our top pick (we do not have official coverage yet). We highlight our key thoughts as follows:
(a) Business momentum in robust in both segments (SCM and life sciences). The company is closing out on deals and also in the final stages of fairly impactful potential deals at a frenetic pace. For a company such as TAKE Solutions, such a strong revenue momentum can have a dramatic impact on profits given its modest revenue base (expected revenues of about USD 70-75 mn expected in FY08E).
(b) The INR-USD equation poses little threat to TAKE for three reasons:
§ At a growth rate of 50%+ per year in revenues, the company is unlikely to feel the pinch of the appreciating INR as the robust growth can absorb this impact.
§ The company has discretionary pricing power for its products (license fees and maintenance fees) and we believe that margins can comfortably absorb the initial dilutive impact of acquisitions. No other company in the Indian IT-Sector in our universe of coverage enjoys comparable discretionary pricing power.
§ Over 60% of the company's USD exposure (billing) is neutralized by natural costs incurred in USD, hence, the natural vulnerability to the USD is low. For services players,
§ Non-linear business model provides a powerful margin lever as several existing accounts expand with little incremental operating expenses.
(c) TAKE could grow ~50% in FY08 over FY07 in EPS ( i.e. posts EPS of INR 48); in doing so it would be the best performer in the whole IT pack. The company could thus see its valuation sustain at 20-22x FY09E based on the potential it can further extrapolate to FY09E over FY08 performance. This we believe will help it establish its clear differentiation in quality growth at a time like this in the current environment. Further, we expect FY09E to be at least INR 60 with an upside risk (note that FY09E reflects the full impact of the acquisitions made in FY08).
(d) Management incorporates the contribution from future acquisitions, certainly of one more company which they are likely to announce in Q3-Q4 of this fiscal (FY08). We cannot and hence have not anticipated this in our future projections.
TAKE Solutions can continue to trade in the same valuation zone as Infosys, if not at a slight premium for two reasons.
1. TAKE's 3-year CAGR EPS growth trajectory over FY07-10E is likely to be at least 15% higher than that of Infosys (35%+)
2. Incremental ROCEs are on an upward trend.
We believe both these factors should sustain P/Es and size will be a relatively minor criterion in setting P/E.
Should we see Subex's downgrade of its outlook as indicative of risk in TAKE? Not really, because unlike Subex, TAKE's customer concentration is low and the largest customer contributes less than 5% of revenues. In addition, Subex has largely a single vertical exposure (telecom) which we believe is significantly riskier in case the vertical itself turns sour. TAKE's SCM line of business is well distributed across several verticals such as hi-tech, FMCG, pharma and food. Also, a powerful driver for TAKE's life sciences vertical is regulation mandated by the FDA - there is no discretionary element about this spend which pharma firms are bound to incur.
To round out, we met the expanded management team recently (including the team from their acquired company ClearOrbit) and we believe that they have added depth and quality of their management team with relevant domain and product experience. The team in place has the wherewithal to significantly grow the company from current levels.
All of the above should explain why TAKE Solutions should currently be our top pick in the IT sector
We see several fundamental differentiators operating in this company that should serve to give stock returns of ~35% over a 12 month horizon with a moderate risk only thus marking it out as our top pick (we do not have official coverage yet). We highlight our key thoughts as follows:
(a) Business momentum in robust in both segments (SCM and life sciences). The company is closing out on deals and also in the final stages of fairly impactful potential deals at a frenetic pace. For a company such as TAKE Solutions, such a strong revenue momentum can have a dramatic impact on profits given its modest revenue base (expected revenues of about USD 70-75 mn expected in FY08E).
(b) The INR-USD equation poses little threat to TAKE for three reasons:
§ At a growth rate of 50%+ per year in revenues, the company is unlikely to feel the pinch of the appreciating INR as the robust growth can absorb this impact.
§ The company has discretionary pricing power for its products (license fees and maintenance fees) and we believe that margins can comfortably absorb the initial dilutive impact of acquisitions. No other company in the Indian IT-Sector in our universe of coverage enjoys comparable discretionary pricing power.
§ Over 60% of the company's USD exposure (billing) is neutralized by natural costs incurred in USD, hence, the natural vulnerability to the USD is low. For services players,
§ Non-linear business model provides a powerful margin lever as several existing accounts expand with little incremental operating expenses.
(c) TAKE could grow ~50% in FY08 over FY07 in EPS ( i.e. posts EPS of INR 48); in doing so it would be the best performer in the whole IT pack. The company could thus see its valuation sustain at 20-22x FY09E based on the potential it can further extrapolate to FY09E over FY08 performance. This we believe will help it establish its clear differentiation in quality growth at a time like this in the current environment. Further, we expect FY09E to be at least INR 60 with an upside risk (note that FY09E reflects the full impact of the acquisitions made in FY08).
(d) Management incorporates the contribution from future acquisitions, certainly of one more company which they are likely to announce in Q3-Q4 of this fiscal (FY08). We cannot and hence have not anticipated this in our future projections.
TAKE Solutions can continue to trade in the same valuation zone as Infosys, if not at a slight premium for two reasons.
1. TAKE's 3-year CAGR EPS growth trajectory over FY07-10E is likely to be at least 15% higher than that of Infosys (35%+)
2. Incremental ROCEs are on an upward trend.
We believe both these factors should sustain P/Es and size will be a relatively minor criterion in setting P/E.
Should we see Subex's downgrade of its outlook as indicative of risk in TAKE? Not really, because unlike Subex, TAKE's customer concentration is low and the largest customer contributes less than 5% of revenues. In addition, Subex has largely a single vertical exposure (telecom) which we believe is significantly riskier in case the vertical itself turns sour. TAKE's SCM line of business is well distributed across several verticals such as hi-tech, FMCG, pharma and food. Also, a powerful driver for TAKE's life sciences vertical is regulation mandated by the FDA - there is no discretionary element about this spend which pharma firms are bound to incur.
To round out, we met the expanded management team recently (including the team from their acquired company ClearOrbit) and we believe that they have added depth and quality of their management team with relevant domain and product experience. The team in place has the wherewithal to significantly grow the company from current levels.
All of the above should explain why TAKE Solutions should currently be our top pick in the IT sector
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