Buy ORG Informatics: target Rs 184: Sharekhan

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Sharekhan Research is bullish on ORG Informatics and has maintained buy rating the stock with a price target of Rs 184. The reason being the steep jump in the other income and the write-back of tax provisions enabled the company to post a relatively higher growth of 24.7% in its consolidated earnings to Rs 5.3 crore.

 

Share Khan report on ORG Informatics: 

 

Clubbing of low or negative margin hardware supplies in Q4:

 

On an overall basis, the company has been able to achieve around 6% OPM on the hardware supply part of the contract. However, in Q4 the profitability was severely dented by the clubbing of the hardware supplies (which have low or negative margins) for the MTNL order. The margins were also affected by the write-off of Rs 1.3 crore related to inventory (Rs1 crore) and provisioning for bad debts   (Rs 0.3 crore). The company expects the situation to normalize in Q1 and the OPM to improve on a full-year basis. That's because the hardware supply part of the order has largely been completed and the company would benefit from the contribution of the high-margin maintenance revenues in FY2008.

 

 Reasonably strong growth visibility:

 

The company expects to maintain its growth momentum on the back of a robust order book position and incremental revenues from the recent acquisitions. Among the major deal wins, the company has bagged a Rs62-crore order from Houston Technologies (end user Bharat Sanchar Nigam) and expects to bag some substantially large orders in the domestic market.

 

Utilization of GDR proceeds:

 

ORG raised USD 10 million (or Rs 44.7 crore) through a global depository receipt (GDR) in December 2006; the issue was priced at around Rs 155 per share and resulted in the dilution of the equity base by 28.6 lakh shares. The company has utilised  Rs 29 crore as on March 2007, including Rs 15.7 crore on the acquisition of a majority stake in two companies and a minority stake in Six Dee (a Bangalore-based company having intellectual property right [IPRs] in the telecom space). The acquisitions are aimed at strengthening the services business and gain IPRs in the telecom space.

 

Valuation:

 

We have revised downwards the earnings estimate for FY2008 by 2.6% to factor in a higher tax rate. At the current market price the stock trades at 10.2x FY2007 earnings and 7.4x FY2008 estimated earnings. We maintain our Buy call on the stock with a price target of Rs 184.