Each week we screen thousands of corporate bond listings to find what we believe are currently the best corporate bonds for investors needing or seeking higher yields with the least amount of risk possible relative to its projected return. This week, we focused on 4 1/4 year Yankee bonds (in US dollars) from Rolta LLC, a leading Internet Technology and Intellectual Property firm in India. Although the nearly 11% yields currently indicated with this bond that carries only a -BB rating from Standard & Poor’s and Fitch, the following review shows why we see these 52 month high yield notes as a savvy means to both increase cash flow and preserve wealth. We also believe this debt instrument offers unique diversification into the emerging Indian economy, and that it makes a sound addition to two of our client’s high yielding managed income portfolios, Fixed-Income1.com and Fixed-Income2.com.
Assessing the Yield Curve
Although we have communicated it many times previously, it bears repeating that wealth preservation by achieving returns that can outpace moderately rising inflation is one of the biggest concerns among our clients and other fixed income investors. One of the few things our politicians in Washington seem to be the most capable of is taking mismanagement to new highs, as staunch party politics and/or highly manipulative political agendas continue resorting to what appears to us to be little more than bubble gum and band aids to patch up and heal our wounded economy. The Fed’s 5 years of money pumping may be giving the appearance of a growing economy, but the national debt has risen sharply. While government spending that lacks accountability and transparency abounds, sound fiduciary based rationale appears to have been tossed aside and swept under the rug.
|Percent change at seasonally adjusted annual rates||M1||M2|
|Thirteen weeks ending January 6, 2014||11.7%||6.7%|
Nevertheless, we endeavor to simply this concern for wealth preservation by finding the highest yields possible in shorter maturity, high yielding fixed income investments that are able to meet or exceed our strict criteria for evaluating debt issuers, as outlined below.
A look at the issuer
Rolta India Limited (RIL) together with its subsidiaries is primarily engaged in the engineering design/geospatial information system (GIS) Solutions, E-Business and other information technology (IT) related services. The Company operates in three business segments: Enterprise Geospatial and Defense Solutions (EGDS), Enterprise Design and Operation Solutions (EDOS) and Enterprise Information Technology Solutions (EITS). Rolta is a leading provider of innovative Intellectual Technologies solutions for many vertical segments, including Federal and State Governments, Defense and Homeland Security, Utilities, Process, Power, Financial Services, Manufacturing, Retail, and Healthcare. By uniquely combining its expertise in the IT, Engineering and Geospatial domains, Rolta develops exceptional solutions for these segments.
Founded in Mumbai in 1989 by Shri K.K. Singh, Rolta is a multinational organization headquartered in India. Initially, the Company was engaged in the design and distribution of CAD/CAM systems, the manufacture of engineering workstations and network servers, and the export of software packages. After negotiating a strategic partnership with Dell Computer Corporation (DELL) in 1999 for distribution and support of its products, Rolta set up engineering and software centers in Mumbai to support global projects. In 2000 Rolta India Ltd. entered in a strategic alliance with IBM (IBM) to pursue the e-business market, and soon after added Oracle (ORCL) and SAP AG (SAP) as it’s clients. By 2009 ROLTA was ranked at the #1 position in Human Relations (HR), and at the 3rd position in the 2009 DATAQUEST survey of Best Employers in the Intellectual Technology sector. Currently, Rolta has executed projects in over 40 countries, and Forbes Global ranked Rolta amongst the “Best 200 under a Billion” four times in six years. The Company is listed on the Bombay Stock Exchange and National Stock Exchange, and forms part of various indices on BSE/NSE in India. The Company’s GDRs are listed on the Main Board of London Stock Exchange.
In its 25 years of existence, Rolta has evolved from a one product company into a full service solution company. Starting in 2008 it decided to reinvent itself one more time, greatly expanding it’s capex expenditures to turn itself in a high margin intellectual property company that provides Intellectual Technology services. In July 2011, the Company acquired the public safety and emergency response company ACLS Systems. In November 2012, the Company, through its subsidiary Rolta International, Inc., acquired AT Solutions Group, LLC. While the average annual CAPEX for last 3 years for Rolta has been about USD170 or 180 Million, the estimate for 2014 is down to 100 Million with about half of that slated for maintenance and half for certain investments or acquisitions done in the past which have payments due this year. Going forward at the end of this year CAPEX is projected to be just 50 million.
Worldwide IT spending is projected to total $3.8 trillion in 2014, a 3.1 percent increase from 2013 spending of $3.7 trillion, according to the latest forecast by Gartner, Inc. In 2013, the market experienced flat growth, growing only 0.4 percent year over year. With that said, Roltla’s Q1-FY2014 Consolidated Revenue Grow was 33.5% and they ended the quarter with a record high book to bill of 1.19. This means that for every dollar they shipped out and billed for, they took in $1.19 in new bookings, indicating a 19% growth in future sales.
Revenue Growth and Rising Profits
Roltla’s most recently reported quarter (Oct. 24, 2013) put consolidated revenue for Q1 FY-14 at Rs. 6.278 Billion (US$99.2 Million), compared to Rs.4.70 Billion (US$74.4 Million) in Q1 FY-13, registering a year over year growth of 33.5% and quarter over quarter growth of 2.5%. Earnings before interest, taxes, depreciation and amortization (EBITDA) for the Q1 FY-14 was Rs.2.39 Billion (US$37.8 Million) compared to Rs.2.13 Billion (US$33.7 Million) in Q1 FY-13, giving it a year over year growth of 12.6% and quarter over quarter growth of 5.3%.
Debt to Cash Ratios
Rolta’s total financial debt at the end of Q1 2014 was about $580 million, the major part of which is in US dollars, while cash and short term deposits were equivalent to $82.9 million. Even though a 7:1 debt to cash ratio is higher than we normally prefer, considering both the revenue and earnings growth along with the forecast for considerably lower capex/cost, we expect to see this ratio improve as the company strives to deleverage its balance sheet over the next few years.
Interest Coverage Ratios & Balance Sheet
Finance costs for the most recent quarter were Rs.783 Million (US$12.37 Million), giving it about an adequate 3 to 1 earnings (EBITDA) coverage. While Rolta’s balance sheet remains weak because of the debt needed to complete its numerous acquisitions and significant growth, the Company’s stated goal is to lower it debt to equity ratio below one times over the next three years, and over next 6-7 years move into a more negligible net debt position. Rolta currently pays a common stock dividend of Rs.3, or about 4.3% its recent stock price of Rs.65.80.
We like higher yields
This five year, $200 Million (US dollar denominated) debt of Rolta was issued in May of 2013 at the coupon rate of 10.75%, payable semi-annually. Acquiring this bond near or slightly below par would result in indicated yield to maturity (in 2018) of nearly 11%, and provide additional strength to the high cash flow instruments in our FX1 and FX2 foreign and world fixed income holdings.
The default risk is Rolta’s ability to perform. Considering its strong growth and recent forecast increased revenue, lower costs, and rising free cash flow to service their interest bearing debt, as outlined above, it is our opinion that the default risk for this short to medium term bond is less than its more favorable return potential.
The hardest risk for us to identify is the geopolitical risk. Since we find it hard to understand many of the political changes even in our own country, perhaps the uncertainties of changes on a foreign soil become less formidable. With that said, it is our opinion that diversification into a wide variety of global debt vehicles often serves to reduce risk. Our strategy here, as with other Yankee bonds, is to focus on unique or required services core service as a adding key economic value to the society it’s associated with. Rolta’s growth into intellectual properties as a building block for many markets is a basic need for modern high tech economies around the world, and it is highly regarded as one of the best operators in its country.
Rolta is relatively small compared to such intellectual properties companies such as IBM (IBM), located in Armonk, New York, U.S, Oracle (ORCL), based in Redwood City, California, and SAP AG (SAP) headquartered in Walldorf, Germany. However, Oracle has proclaimed Rolta as an Oracle ‘Titan’ and ‘Partner Excellence’: winning eight awards over recent years for innovative use of Oracle technologies. IBM named Rolta as ‘The Great Mind Challenge for Business’; and topping this is SAP’s agreement that will integrate Rolta’s numerous industry solutions with platform technology from SAP. In this CNBC video link, http://www.rolta.com/americas/videos/, the president of SAP promotes Rolta products for the SAP platform. We see this as a big green light for SAP’s top and mid-tier sales forces to push this new Rolta product, stirring up greater confidence that this new agreement will further boost future Rolta sales. This new SAP relationship may help explain why Rolta’s stock is up over 20% in the last three months.
We believe that these Rolta bonds have similar risks and maturities to other Yankees bonds inn the region such as Bio PAPPEL (DURQ), Vedanta Resources (VDNRF), or Georgian Railway, which we have reviewed previously on our Bond-Yields.com blog.
Summary and Conclusion
It is our opinion that Rolta, based in one of world’s best low cost Intellectual Technology regions, has positioned itself very well for the future as a leading Intellectual Technologies provider. It has a fair cash position, excellent growth and improving earnings as capex and costs come down. Consequently, we see the 10.75% yields that these Rolta notes appear to be offering as a superior opportunity relative to the financial risks that we can identify. Therefore, we have marked these high coupon Yankee bonds for addition to our Fixed-Income1.com and Fixed-Income2.com portfolios.
Issuer: Rolta LLC
Yield to Maturity: ~10.75 %
Disclosure: Durig Capital and certain clients may have positions in Rolta 2018 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.
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