An unfairly battered Indian stock

published 31 October 2011

Rolta India Ltd (LSE: RTI), rated as OUTPERFORM by Macquarie

Despite their buoyant economies, Brazilian, Russian, Indian and Chinese stocks have all sunk like BRICs this year. India in particular looks to be the baby that's been thrown out with the bathwater. GDP is expected to expand 7.8% this year and 7.5% next, with a large chunk of the growth coming from the resilient domestic market. More people are using credit cards, buying mobile phones, eating out and spending on healthcare, travel and luxuries.

What's more the nation's demographics, corporate governance, democracy and vast pool of cheap, university-educated and English-speaking professionals all point to sustainable wealth-creation. That's good news for IT outsourcing, where growth rates are typically in the low teens.

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The front-line players (for example, Tata Consultancy, Wipro and Infosys) are not cheap, trading on earnings multiples of 15-20 times. That's why I prefer to cherry-pick further down the food chain. Take Rolta India, whose shares are listed on the Bombay and National Stock Exchanges of India. Two per cent of its capital is also quoted in dollars on the London Stock Exchange's (LSE) International Order Book in the form of Global Depositary Receipts (GDRs).

The firm employs 3,500 staff, of which about 90% are professionals with engineering degrees, masters or PhDs. Rolta's core business is the provision of software and IT services for digital mapping, computer-aided design and the prevention of cyber-crime. In the latter it is a leading defence and homeland security supplier to the Indian government.

Elsewhere, it also develops a whole host of business intelligence and cloud computing applications for blue-chip corporations worldwide. Its $404m revenues, which have soared on average 26% a year over the past five years, are split 63% India, 25% North America and 12% Europe, so it is ideally positioned to benefit from India's surging infrastructure spending, and the West's urgent need to cut back on costs.

Another strength is that Rolta can offer its international clients a round-the-clock service. For example, IT projects are worked on by specialist teams, which are located across all three major timezones. This capability to follow the sun substantially shortens development time and vastly improves customer satisfaction.

The board expects revenues to expand by 13%-15% for the year ending June 2012, underpinned by a chunky order book of $410m. Eighty per cent of that is work scheduled for the next 12 months. On this basis, I value Rolta on a ten times earnings before interest, tax and amortisation (EBITA) multiple. Adjusting for net debt of $281m, that delivers an intrinsic worth of about $2.45 a share (or 120 rupees).

Investing in emerging markets is not for the faint-hearted. Volatility tends to be high, exchange rates can fluctuate, employee salaries are rising at 10%-15% a year, and there is a danger that big-spending corporates could cut back. Nonetheless, Rolta is a well-respected player, whose stock should be tucked away for the long-term. Investors can buy directly in India, but this is restricted to individuals with Indian ancestry (known as Non Resident Indians or NRIs). Alternatively you can buy the GDRs (ticker RTI) on the LSE's International Order Book. Here liquidity can be poor, so you may need to be patient. Quarterly results are due soon.

Rating: BUY at $2.20

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634 for more.

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.