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SUBEX AZURE LIMITED (SUBEX)
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.88
FY12E P/E: 6.7X
Subex's operating performance for 3QFY11 was a mixed bag. Product
revenues were flat on a QoQ basis and came in below expectations. EBIDTA
margins for products division at 32.7% were above expectations. Interest
cost was higher on a sequential basis, which was surprising. The order intake
for the quarter was 39% higher QoQ at Rs.27mn, we believe and
reflected the management optimism on achieving higher revenue growth.
While Subex indicated higher confidence in the macro scene larger peers in
the industry have indicated still sluggish outlook for the telecom vertical.
We need to watch the future pipeline and order book conversions before we
become more optimistic on the future prospects of Subex. The financial
performance of Subex has also been very erratic in the past. Subex's
employee costs continue to fall, surprisingly. We expect revenues to grow
QoQ, leading to higher margins as costs remain under tight control. We
have also assumed full conversion of the restructured FCCBs and preferential
allotment to promoters of 4mn shares. However, we are surprised at the
decision to dilute equity further at these valuations to repay debt and have
not considered the same in our workings. Our FY11 earnings estimates
stand at Rs.8.8 per share and FY12E at Rs.9.3 per share. We maintain
ACCUMULATE with a PT of Rs.88 (Rs.91) based on FY12E earnings. We have
assumed FCCBs to be converted into shares (conversion price about Rs.80,
which may increase liquidity in the stock). Uncertainty over the same may
keep the stock range bound. Better visibility and comfort on the future
performance can make us more bullish on the stock.