Spanco Telesystems

Spanco Telesystems reported Q2FY08 results below our expectations. Owing to a lower growth of 11% yoy in the telecom business, Spanco’s Q2 net sales grew by a mere 12% yoy to Rs1360mn. The lower sales growth was due to the delay in completion of few large contracts, which are expected to be completed in Q3FY08. While the EBIDTA increased by 16% yoy to Rs193mn, the EBIDTA margins for the quarter expanded by 50bps yoy to 14.2%. The increase in the EBIDTA margins was due to lower proportion of hardware component in the telecom business. On a segmental basis, the PBIT from Telecom business increased by 180bps where as the PBIT for the international BPO operations declined by 920bps yoy primarily owing to the appreciation in currency. The PAT for the quarter increased by 20% yoy to Rs109mn. The EPS for the quarter stood at Rs4.6. Post lower than expected Q2 results, we are lowering our revenue and PAT estimates for FY08 by 10% and 16% respectively. We also introduce our FY09 estimates with net sales of Rs9481 and earnings of Rs842. We maintain our BUY recommendation on the stock with a price target of Rs395 using SOTP approach (10x FY09E EPS of Rs35.8 and Rs25 per share for IRCTC contract).

Result update

The net sales for the quarter grew by mere 11% yoy to Rs1360mn due to lower than expected growth in the Telecom business, which was on account of delay in completion of few large orders, which would be completed in Q3FY08. The improvement in EBIDTA margins by 50bps led to a 16% yoy growth in the operating profits. The PAT for the quarter grew by 20% yoy to Rs109mn. On segmental basis, the PBIT margins for telecom business expanded by 180bps to 15%, while the PBIT margins in the international BPO declined by 920bps yoy to 10.3% mainly due to rupee appreciation.

Revising FY08 estimates and introducing FY09 estimates

Post lower than expected Q2 results; we are lowering our FY08 revenue estimate by 10% to Rs6979mn and PAT estimate by 16% to Rs562mn respectively. Our revision is higher in profitability due to lower margins in the international BPO business on account of rupee appreciation. We also introduce FY09 estimates with net sales of Rs9481mn and PAT of Rs842mn accruing into a fully diluted EPS of Rs35.8. Our FY09 estimates factor the aggressive expansion of BPO operations from the current 650 seats to 2000 seats by mid FY09.

Outlook and Valuations

We continue to remain bullish on Spanco due to the robust expansion activity in the industry, which provides immense growth opportunity for the company. We have lowered our earnings estimate for FY08 by 16% to Rs23.9 and have introduced estimates for FY09 with earnings of Rs35.8 per share. Over FY07-09E, we expect net sales to increase by 49% CAGR to Rs9481mn and PAT to increase by 61% CAGR to Rs842mn. We revise our price target upwards from Rs311 per share to Rs383 per share based on SOTP approach (10x EPS for FY09 and Rs25 per share for the IRCTC project). We maintain our BUY recommendation on the stock.

We have downgraded our revenue, EBIDTA and PAT estimates for FY08 by 10%, 11% and 16% respectively. The revision in profitability is higher because of the currency pressure affecting the margins in the BPO business.

----- With due apologies and full credits to Emkay Research