Broker says buy Scandent Solutions, target price of Rs 300

Broking house, Khandwala Securities is bullish on Scandent Solutions Corporation . It has initiated coverage on the company with a buy rating with a target price of Rs 300 over an 18-month horizons.

About the company's itself, the report says,

"Scandent Solutions is a leading innovator in providing technology enabled solutions and services to a wide array of clients around the world in sectors such as banking, financial services, insurance, manufacturing, logistics, and government. It is a global business solutions powerhouse offering unique services in the context of Strategic Consulting, Applications Implementation, Software Engineering, Maintenance Services and Business Process Outsourcing."

The report mentioned several investment positives, these are below: -

Leverage Scale, Global network and Brand Equity

"The merged entity will get place in top 10 IT companies premier league with improved revenue mix. Cambridge has a strong brand presence in US, UK and Australian market. It will help the merged entity to leverage its existing client base for additional business by offerings wide range of services and also in getting new clients by full bouquet of services. The merged entity, with improved customer acquisition capabilities, gets enough size and scale to qualify itself for large contracts. CSL will have operations in four continents covering nine countries including the USA, UK, Germany, France, Singapore, Japan, Malaysia and Australia, besides India."

Growth momentum to continue

"The merged entity will be uniquely positioned to offer customers a synergistic combination of BPO and IT services and also has opportunities to cross sell newer services to existing customers while offering a combined comprehensive portfolio of services to new customers."

Increasing deal size

"The company management is looking at its client list to focus on accounts where it finds huge potential. The company shows robust increase in deal size in the past and merger with Cambridge gives it enormous opportunity. The company has opportunities to cross sell newer services to its clients resulting in increasing revenue per client and also increase in number of clients with service range expansion."

Strong and diversified client base comprising of blue chip companies

"Cambridge has more than 30 clients including American Express, Bank of America, Cintas, Manpower, MasterCard, Southwest Airlines, Toyota Motors, and Wal-Mart etc. with revenues in excess of USD 1 million. Scandent has main focus on BFST, Government segment, Manufacturing and Logistic segment. SBI, Citibank, JP Morgan, NASDAQ, Pacific Stock Exchange, Liberty Mutual, some US federal state departments are few examples from the Scandent's diversified and bluechip client list."

Strong management team

"The key management team of the company includes rich experienced members and domain experts. The merger will further strengthen the management depth by combining best brains of Scandent and Cambridge on its board and infuse world-class leadership for the combined business that helps CSL to significantly expand the scale of operations."

Fund raising plans for expansion and debt restructuring

"Board of directors of the company approved a proposal to raise funds through ADR/GDR issue of USD 75 million. The fresh infusion of funds will be utilized for organic and inorganic growth. The company is setting up a new centre in Bangalore that will have a capacity for 3,000 professionals and will be ready by April 2006. The fund is also utilized in restructure and repay the current debt of Scandent Solutions that helps the company to reduce its interest cost."

Margin Improvement expectation (Global presence with India advantage)

"The company has potential to improve its EBIDTA margin further on account of Significant SG&A leverage

• Decrease in sales and marketing costs as a percentage of sales, as we believe current Scandent's sales force is sufficient to handle ramp up in revenue,
• decrease in administrative costs as a percentage of revenues, as Cambridge's current infrastructure and SG&A spend can handle up to USD350 million of revenues without significant additional outlays and benefits accrue from economies of scales"

"Increasing share of business being done from India"

About the company's valuations, the report says, "The merger between Scandent Solutions and Cambridge will result in the creation of a company with revenues of USD 275 million, making it one of the largest listed BPO/IT companies in India. Cambridge has a strong brand presence in US, UK and Australian market. It will help the merged entity to leverage existing client base for additional business by offerings wide range of services and also in getting new clients by full bouquet of service offerings. The merged entity, with improved customer acquisition capabilities, gets enough size and scale to qualify itself for large contracts."

"The stock is currently traded at a multiple of 11x FY2008E earnings. We recommended Buy rating with a target price of Rs 300 over 18-months horizons."