India Infoline is bullish on Aztec and has recommended buy rating on the stock.
India Infoline report on Aztec Software
“Aztec Software announced strong numbers for the quarter due to all operational reasons. With sequential revenue growth of 14.2% and earnings growth of 24.2%, the company surpassed street expectations by a fair margin. It was a quarter of robust volume growth, material pricing improvements and significant margin expansion. On top, the company is expecting the strong volume growth momentum and improved profitability levels to continue in the coming quarters barring Q4 FY07, which would be impacted by Dendrite ODC transfer.”
" Volume growth was 11% qoq with the balance 3% sequential growth coming from pricing improvements. Company conducted annual pricing revision for some of its clients (including 3 of Top 5) during the quarter and the billing rates were increased by 8-10% for them. Further, the company has been getting better prices (US$2-2.5$/hr more) from new accounts added."
"Aztec (product engineering) revenues grew strong 17% qoq (second consecutive quarter of outperformance vis-ŕ-vis company growth) whereas revenue growth in Disha (independent software testing) revived and stood at 8.8% qoq. The business mix in the quarter was 68:32 between Aztec and Disha. Company witnessed strong volumes from the new clients added during the quarter (13) and in Q1 FY07 (16). On the other side, Top 5 and Top 10 clients grew sequentially at slower than the company rate at 10% and 9% respectively. As a result, their contribution declined qoq to 53% and 63% respectively."
"More or less, company expects to recoup the revenue and earnings loss resulting from this transfer from recent and new accounts growth quickly. More importantly, the replacement growth would come at higher billing rates. Management is confident of clocking sequential revenue and earnings growth of 10-12% in coming quarters barring the Q4 FY07, where they expect a flattish growth caused by the ODC transfer."
Outlook
“Post disappointing performance in Q4 FY06 and Q1 FY07, the strong Q2 results come as a refreshing change. Based on the broad guidance the company has given, we arrive at an EPS number of Rs10.5 and Rs14.2 for FY07 and FY08 respectively. Purely based on earnings growth without assuming multiple re-rating (which has a fair chance), we assign a 13x P/E multiple (similar to current levels) to our FY08 expected EPS to arrive at our 1-year target price of Rs184 representing 34% upside form current levels. We rate the stock as BUY given the potential appreciation and improved business confidence of the management.”
