Hold MRO-TEK: Sharekhan

Sharekhan report on MRO-TEK:

"After the lacklustre performance in Q4 of FY2006, we had expected improvement in MRO-TEK's performance in the following quarters. That's because the demand drivers are in place. The telecommunication service providers (the key user industry, providing 70-75% of the company's revenues) continue to witness robust net subscriber additions and an explosive growth in traffic on their networks, leading to an increased capital expenditure by them. According to industry estimates, the total capital expenditure by telecommunication service providers stood at USD 4.8 billion, which is likely to increase to USD 6-6.5 billion in the current fiscal. Bharti Airtel (MRO-TEK's key client) is targeting capital expenditure of USD 1.8 to USD 2 billion during FY2007, up from USD 1.4 billion in FY2006."

"Some of the other user industries like banks, financial service companies and retailers are also investing heavily in building technology infrastructure. Thus, the demand for Internet access, telecom network and enterprise network products continues to remain robust."

But weakness to continue:

"Despite the favourable business environment, MRO-TEK's performance is likely to be weak in Q1FY2007 also. We expect the revenue and earnings to decline both sequentially and on an annual comparison basis."

"Though the dismal performance in Q1 could be due to the possible delay in the execution of some large orders, we are concerned that the problem could be more serious. A lacklustre performance in two consecutive quarters indicates that the company could be losing market share or facing severe competition-led pricing pressure. Moreover, the company is clearly unable to effectively exploit the robust demand from the user industry. Consequently, we are revising downwards the earning estimates by 6.9% (to Rs10) for FY2007 and by 11.4% (to Rs12) for FY2008."

Valuation:

"At the current price the stock trades at 6.8x FY2007 and 5.5x FY2008 revised earnings estimates. We are downgrading our recommendation on MRO-TEK to hold and would wait for more clarity and signs of improvement in the company's performance."