Niche
player with established presence: Nucleus Software Exports Ltd
(NSEL) is a niche player offering software products and services
to companies in the banking and financial service space. It has
established itself globally with product installation base of over
250 application modules in more than 30 countries.
Product
business drives growth: The product business grew
exponentially in FY2006, on the back of some impressive order wins
like the $12-million multi-year deal with GMAC. Apart from this,
it added 21 new clients and bagged orders for 38 new installations
in FY2006. In the first half of FY2007 also, the company added 14
new clients and continued to grow its pending order book that
stood at Rs135 crore as on September 2006. Consequently, we expect
the product revenues to grow at a CAGR of 67% over
FY2006-08.
Margins are
sustainable: In spite of the cost pressures and the aggressive
employee addition targets for this year, the company is likely to
sustain its overall profitability. The growing contribution from
the high-margin product business is expected to mitigate the
adverse impact of the rising wage bill and the expansion-related
pressures in the intermediate term.
Alliance
could throw positive surprises: The initiatives to forge joint
marketing alliances with global technology giants and develop a
network of channel partners could result in higher-than-expected
order bookings. The partnership model has already started yielding
results.
Valuation: Revenues and earnings are estimated to
grow at CAGR of 38% and 40% respectively over FY2006-08E. At the
current price the stock trades at 11x its FY2008 earnings, which
is relatively cheaper compared with the peer companies. We
recommend a Buy on NSEL with a one-year price target of
Rs680.