Tera Software - Computing Good Gains

There are certain companies that perform consistently well but still do not manage to catch investors’ fancy on the bourses. Hyderabad-based Tera Software (TSL) is one such company. It is an IT company mainly engaged in e-governance projects having employee strength of nearly 2,100. Our primary reason for recommending this counter is the large order that it has received from the Unique Identification Authority of India (UIDAI) worth Rs 63 crore, taking its total of orders received from the UIDAI to Rs 140 crore. It is also expecting another order worth Rs 60 crore from UIDAI by next month. Further, the management states that including the recent orders of UIDAI and other projects the current total order book stand at Rs 290 crore which is 2.30 times its FY11 revenues.

In addition to this, the company is also expecting an order from the national population register worth Rs 30 crore and by the year end the order book is expected to swell to Rs 400 crore. This clearly indicates the revenue and earning visibility for the next two years. That apart, the scrip is also placed well on the valuation front. At a CMP of Rs 48.50 it discounts its FY11 earnings by 6.52 x (EPS Rs 7.80). Its EV/EBITDA stands at 3.45x only. TSL has been a consistent dividend paying company, but due to growth plans it has not announced a dividend in FY11.

As regards the business of the company, it can be segregated into three major segments viz. integrated solutions, technical division and projects division. The integrated solution segment generates revenues from data entry and BPO services. The projects division generates revenues from various e-governance projects, while the technical division provides software development services. Currently the integrated solution business contributes a higher amount to the revenues but the highest contribution to the bottomline comes from the projects division. But going ahead the projects division is expected to grow steadily. The noticeable factor is that the company’s UIDAI project has just commenced in the month of March. As a result the company has managed to book only Rs 1 crore in its revenue on that front. However, going ahead one can see the benefit of the UIDAI project in terms of growing topline in the year FY11-12.

As regards margins, the management is confident of maintaining the operating margins at around 15 to 16 per cent. TSL also has surplus land of around 15 acres in Hyderabad and it may plan to utilise this by setting up a new enterprise.

On the financial front, for FY11 the company posted topline of Rs 125.23 crore and bottomline of Rs 9.76 crore as compared to Rs 104.82 crore and Rs 9.82 crore respectively. But, with a strong order book, topline growth is expected to be good going forward and sustainable margins are expected to drive the earnings growth. Our recommendation to investors is to buy the scrip with a target price of Rs 62.