Buy Avaya Global; target Rs 358: Emkay Research

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Buy Avaya Global; target Rs 358: Emkay Research

Emkay Research has maintained buy rating on Avaya Global Connect with target price of Rs 358. The research firm maintains its EPS estimates of Rs 27.4 and Rs 35.8 for FY08E and FY09E respectively.

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Emkay Research has maintained buy rating on Avaya GlobalConnect with target price of Rs 358. The research firm maintains its EPS estimates of Rs 27.4 and Rs 35.8 for FY08E and FY09E respectively.

Emkay Research report on Avaya Global Connect:

Avaya Global Connect reported good set of results for the quarter ended June 2007. The net sales for the quarter increased by 25% yoy to Rs 1522 million. The EBIDTA for the quarter stood at Rs 168 million as against an operating loss of Rs 3 million in the same quarter last year. The EBIDTA margins for the quarter stood at a healthy 11%, the highest in the last 7 quarters. The increase in the EBIDTA margins is on account of higher proportion of services revenues (21%) in the overall revenue mix of the company. The PAT for the quarter stood at Rs 91 million as against a net loss of Rs 22 million in the same quarter last year. As estimated, the Australian operations have broken even at the EBIDTA level. We maintain our EPS estimates of Rs 27.4 and Rs 35.8 for FY08E and FY09E respectively. We maintain BUY recommendation with a price target of Rs 358 based.

Margins expand

The consolidated net sales for the quarter increased by 25% yoy to Rs 1522 million. The Australian operations reported revenues of Rs 130 million during the quarter. The consolidated EBIDTA margins stood at a healthy 11% as compared to our estimates of 9% for FY08E. The PAT for the quarter stood at Rs 91 million while the net margins were 6% for the quarter. During the quarter the services contributed to 21% of the revenues as against 18-19% in the last few quarters. This coupled with the cost control measures led to the margin expansion during the quarter. The EPS for the quarter stood at Rs 6.4.

Rupee appreciation to increase margins further

While rupee appreciation has hit the IT industry, it is beneficial to Avaya as the company is a net importer of the raw materials. As the rupee has appreciated significantly over the last quarter, it is yet to reflect in the performance of the company because the company recognizes revenues on a project completion basis and much of the projects undertaken during the last quarter would get completed in the coming quarters. With the benefit of rupee appreciation, the margins are expected to increase further.

Short-term pressure seen by user industry

During the quarter Avaya has witnessed an order booking of Rs 1349 million as against Rs 1331 in the same quarter last year and Rs 1661 million in the preceding quarter. The order book at the end of the quarter stood at Rs 1667 million as against Rs 1630 million in the same quarter last year and Rs 1876 million during the preceding quarter. The order bookings during the quarter were lower as the user industry (IT & BPO) is facing pressures due to the appreciating rupee. However, the management believes that, inspite of the rupee appreciation, the Indian IT and BPO industry still provides enough cost advantage to the customers globally.

Valuation & Outlook

During the quarter, Avaya has shown a healthy improvement in the margins and with the increase in the services revenues and the benefits of rupee appreciation, a further improvement is likely over the next few quarters. The take over of the parent Avaya Inc by private equity players is likely to trigger an open offer on closure of the transaction, which is likely to be completed by October 2007. We maintain our estimates and BUY recommendation on the stock with a price target of Rs 358.