Subex

A recovery in the global telecom space could benefit Subex. At current valuations, the stock looks attractive on a long-term basis

BANGALORE-HEAD quartered Subex, provider of fraud management and revenue assurance solutions to global telecom players, was one of the worst hit companies due to a slump in the telecom sector in the last eight quarters globally. The company struggled to remain afloat as its clients from the telecom sector postponed investments in new projects. Now, the worst seems to be over for the sector. Telcos are showing signs of revival, which means that the investments could get back in the sector. This augurs well for Subex.

BUSINESS:

Subex earned Rs 600 crore in the last fiscal from product licences and managed services. Though products contribute over 90% of the revenue, the company is keen on improving the share of the services component as this offers higher margins in the long term. Subex offers solutions to more than half of the top 70 telcos in the world. Apart from its biggest market in the US, it has 54 clients in the African continent and six in India. It has 1,200 employees on its payroll. Its clientlist includes Bell, Comcast, T Mobile, Telefonica, Verizon, BT, Zain, Vodafone, BSNL, Reliance Communications, and Telstra among others.

Inorganic growth has played an important part in Subex’s growth strategy. In the last five years it has acquired four companies in the field of revenue assurance, fraud management, and services fulfillment.

FINANCIALS:

Between FY04 and FY07, the company grew its topline four times aided by acquisitions. Its net profit shot up by a similar magnitude during the said period. However, the next two years proved to be challenging given the slowdown in the global telecom sector. Though topline continued to grow, profits were hard to come by. The company reported losses at the operating level in FY08 and FY09 since costs escalated at a faster pace than the revenues.

The December ’09 quarter reflects signs of revival as the company returned to profitability. It has also restructured foreign currency loans that are convertible into equity shares. This has reduced its debt burden by around 24%.

VALUATIONS:

Subex’s trailing twelve month (TTM) P/E (price-earnings ratio) cannot be considered since the company had posted losses during the first half of FY10. Assuming stable earnings per share for each of the quarters in FY11, its forward P/E comes out to be 6.7 at the current market price of Rs 66 per share. This makes it reasonably valued among the other mid-tier IT players which command P/Es of eight-to-ten.

GROWTH PROSPECTS:

Subex’s ’07 acquisition of services fulfillment player Syndesis went awry as global telcos cut new capex postsubprime crisis. Subex took a big hit because of this since it was betting on selling the next generation deliverables of Syndesis. Given the recovery in the telecom space currently, Subex is hopeful of reviving the Syndesis business. The company is also aggressively expanding its services portfolio, which would generate recurring revenue. With the restructuring of its FCCBs and other debts, its interest costs will fall. This will support its net margin in the future quarters. Investors can consider the stock on a long-term basis.