Buy Avaya Global Connect; target of Rs 358: Emkay

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Buy Avaya Global Connect; target of Rs 358: Emkay

Emkay Research is bullish on Avaya Global Connect and has recommended a buying rating on the stock with a target price of Rs 358.

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Emkay Research is bullish on Avaya Global Connect  and has recommended a buying rating on the stock with a target price of Rs 358.

Emkay Research report on Avaya Global Connect:

Buy Avaya Global; target of Rs 358: Emkay

Avaya Global Connect has reported consistent performance for the third consecutive quarter after the inconsistencies shown in the quarterly performance on account of change in accounting policy and supply constraints. For FY07, the company reported 29% rise in the net sales to Rs 6,093 million, a flat EBITDA of Rs 439 million and a 21% fall in the PAT to Rs 244 million. The EBITDA margins for the year stood at 7.2% a decline of 220 bps yoy. The EPS for the year stood at Rs 17.2 as against Rs 21.7 in FY06. We believe that the change in the accounting policy and the problems of supply constraints which affected the performance of the company are more or less over, and the company is back to a stable state to take advantage of the growth in both Indian and Australian enterprise solutions market. We expect Avaya to report EPS of Rs 27.4 and Rs 35.8 for FY08E and FY09E respectively. We upgrade our recommendation from Accumulate to BUY with a 12-month price target of Rs358 based on 10x EPS FY09E.

Market Leader in Enterprise communications:

Avaya Global Connect continued to maintain its leadership position in the contact center solutions and enterprise communications (voice solutions) business, including IP telephony and video conferencing solutions. According to the Voice and Data estimates, the Voice solutions market for FY2006 grew by 33% to Rs 11 billion. Avaya's market share during FY2006 stood at 34% far ahead of the nearest competitor Siemens at 18% market share. Avaya has continuously differentiated itself from the competition through initiatives such as customer studio, which are aimed at providing better customer service as compare with the competition. Based on the discussions with the management and based on the industry reports, we believe that the enterprise solutions market is poised to grow at 20-25% for the next couple of years. We believe that Avaya Global Connect being the market leader would be among the prime beneficiaries of the growth in the industry.

Margins bottomed out:

We believe that the ramp-up in the Australian operations, which is currently dragging the consolidated margins, would lead to an increase in the EBITDA margins. Also with the discontinuation of certain old technology products, the services revenues (high margins) have declined from 22% to 18% of the revenues. The products business, which brings in services revenues after 12-18 months of the sales, would contribute to an increase in the services business and lead to an increase in the margins of the company going forward. We believe that the margins have limited downside and expect them to increase by 250 bps over FY07-09E.

Valuation & Recommendation:

While Avaya has changed its accounting year to September end (in line with Avaya Inc), our estimates are on a financial year basis. We expect the consolidated net sales, EBITDA and PAT to grow at a CAGR 20%, 39% and 45% respectively. We expect the EBITDA margins to improve from 7.2% in FY07 to 9.8% in FY09E. At CMP of Rs281, the stock is available at 7.8x FY09E EPS of Rs 35.8 and 2.8x EV/EBITDA FY09E. We recommend BUY with price target of Rs 358 based on 10x EPS for FY09E.