Buy Northgate Technologies: IL&FS

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IL&FS has recommended buy rating on Northgate Technologies . Research firm expects the company to post revenue growth at a CAGR of 47.6% through FY07-FY09E and strong earnings growth at a CAGR of 50% over the same period.

IL&FS report on Northgate Technologies:

Northgate Technologies Limited (NTL) is an IT company with a focus on online advertisement business. The company's two business segments- Axill.com, an online media agency, and Globe7, a VOIP soft phone - have achieved early success and are on track of reaching critical mass. The online advertising industry is growing at a robust pace globally. World over, companies have started allocating a significant part of their marketing budgets for online advertising. NTL is in a unique position to benefit from this structural change in the advertising industry. Key investment arguments: Presence in a high-growth internet advertisement industry Achieved critical number of impressions on Axill.com Secured sizable number of downloads of Globe7 within a short span of its launch We expect the company to post revenue growth at a CAGR of 47.6% through FY07-FY09E and strong earnings growth at a CAGR of 50% over the same period. At the current market price, the stock is trading at a P/E of 26.8x FY08E and 19.4x FY09E. We initiate coverage on the stock with a BUY recommendation.

Industry Overview

The medium of Internet, from the advertiser's point of view, has some distinct advantages. It allows the advertiser to reach a global audience, simultaneously tracking sales leads and consumer behavior real-time. This allows advertisers to achieve a better ROI than traditional advertising media. The Internet has emerged as the fastest growing advertisement media, overtaking traditional media components (in terms of growth rate) such as newspapers, television and radio. Increased online media consumption and high-end technology are likely to create growth in online advertising and marketing budgets. The USD 28.2 billion market for online advertising (2006) is likely to grow at a 16% CAGR to become a USD 50.3 billion market in 2010.

Valuations

NTL's revenues grew 178% in FY07 (over FY06) primarily due to an increase in revenues of Axill.com. Globe7 contributed 10% of NTL's total revenues. We expect Axill.com's growth momentum to continue as most of its clients have testified positively and are likely to generate incremental business. Moreover, the full impact of revenues generated by Globe7 is likely to be felt in the coming years. The pace of downloads for Globe7 remains intact; hence, we expect its user base to expand continuously over time. The revenues of Globe7, NTL's web advertisement publishing business, will have higher EBITDA margins around 38%. NTL reported healthy EBITDA margins of 20.3% in FY07. Going forward, we expect the company's EBITDA to improve by 240 bps in FY08 and further 170 bps in FY09 to 24.3%. The increase in EBITDA margin will be due to the higher contribution of Globe7 revenues to NTL's total revenues. We believe that once Globe7 attains critical mass, it should have significant value and may get listed or be acquired by some bigger companies; this would enable it to monetise mass reach. In the recent past, similar businesses like Doubleclick (USD 3.1billion) and Skype (USD 2.6 billion) have been acquired by Google and eBay respectively. NTL has reported an EPS of Rs 34 in FY07; we expect it to report an EPS of Rs 56 in FY08 and Rs 77 in FY09. At the current market price of Rs 1497, the stock is trading at 26.8x FY08 and 19.4x FY09. We recommend a BUY on the stock.