We initiate a Buy call on ICSA (India) Ltd with a 58% upside potential on the stock from the current levels. Investment advice is based on strong growth in top line, diversified businesses and strong outlook for the power sector over next 10 years. We expect top line to grow by 30-35% over next two years and our conservative projections suggest that bottom line will grow at compounded annual rate of 15%. Stock is currently trading at 4.6 x its FY09 Earnings and 4.6x and 3.7x its FY10E and FY11E earnings.

Investment arguments:

Strong order Book Position: The order book at the end of the quarter stood at Rs 1915 crore executable over 12-18 months. Embedded Technology segment has order book of Rs 650 crore executable over next 6-9 months and balance is for Infrastructure EPC segment. The order pipeline is about Rs 700 crore.

Allocation Of funds by govt: The RAPDRP(Restructured Accelerated Power Development and Reforms Programme) is the restructured version of APDRP, which has a budget of Rs 50000 crore to be spent over 3 years of which Rs 10000 crore is towards Technology acquisition (the segment which the Company caters to). Increased allocation of Government projects under Rajiv Gandhi Grameen Viduytikaran Yojana (RGGVY) to 7000 crores up by 27% will have see significant orders coming in for ICSA.

Inorganic Growth: As a part of its inorganic growth, last year ICSA acquired the energy Meter plant of ECE industries in Hyderabad, thereby enabling itself to manufacture energy meters on its own capacity. Moreover in order to enhance the revenue and enjoy the tax benefit, it has diversified into non conventional energy and is setting up a 20 MW capacity wind power project in Andhra Pradesh out of which nearly 10MW has already being commissioned.

Discounted Valuations: Share is trading at 72% discount to its adjusted all time closing high of 587. India power and Infra sector have strong growth ahead, and ICSA will continue to be a part of it.

- Revenue for the quarter is Rs 2861mn which is down by 6% as compared to the previous quarter in the same year whereas on year to year comparison the increase is roughly 35%.

- A shift in the business mix, though indicated by the management in the last quarter, we expected it to be gradual, given the order book position in the embedded segment. The sharp fall in that segment indicates not only slowdown in additional orders but more importantly delay in implementation of the existing orders due to which there is a significant fall in the revenues of the
embedded segment as well as reduced EBIDTA margins on account of change in revenue mix.

Result Analysis :

For the quarter ended March 2009, on y-o-y basis, ICSA reported 35% rise in operating revenues at Rs 286.10 crore. Operating margins dipped 360 bps at 21.9%. Other Income was up 313% depreciation/amortization charge was up 78% at Rs 3.51 crore. Tax provision for the quarter was up 66% at Rs 15.56 crore and the resultant PAT was down 9% at Rs 34.06 crore.

For the quarter, Embedded Technology segment clocked revenues of Rs 135.24 crore down 25% on q-o-q basis and 5% on y-o-y basis. There has been slowdown in the segment on the back of delay in projects from Restructured Accelerated Power Development and Reforms Programme (RAPDRP) due to polls. The bids are on hold due to polls. The management expects the delay to continue for next 2 quarters. PBIT margins were at 30.7% up 150 bps on q-o-q basis and down 60 bps on y-o-y basis.

- The consolidated top-line of the company for the full year ended March 2009 more than doubled to Rs 1111.34 Crore.

- The absolute operating profit increased by 43.31% to Rs 844.05 Crore during the year.

- The interest cost and the depreciation allowance during the period increased by 22% and 218.73% to Rs 33.11 Crore and Rs 11.06 Crore respectively. Hence the profit before tax was flat at Rs 224.6 Crore during the year ended March 2009.

Company Description:

HISTORY

Inareddy computer software associates (ICSA) was originally incorporated as Auriferous Finance and Investment Private Limited on 1st February, 1994. In the year 2000 ICSA, launched a new software package for the healthcare industry - `Docspro' - primarily targeted at medical practitioners and In the year 2001 The Company entered into a partnership agreement with the first integrated trading platform BazaarE.com.

NATURE OF WORK

ICSA has always been in the forefront of adopting advanced technologies to ensure customer satisfaction with a suite of embedded solutions and comprehensive quality infrastructure, customized for specific requirements of the enterprises across a spectrum of industries & utilities especially the Energy Sector, which includes Power, Oil, Natural Gas & Water ICSA is headquartered in Hyderabad, India with its operating locations spread across the World The company’s focus has been to provide technology solutions to power sector to identify and minimize transmission and distribution losses and monitor power consumption using GSM and alike networks.

ICSA helps it’s clientele in construction, installation, commissioning and testing of substation and
transmission overhead lines.

IN IT’S TECHNOLOGY SOLUTIONS ICSA STRENGTHENED IT’S STANDING BY DEVELOPING 3

NEW PRODUCTS DURING THE YEAR:-

1. AGRICULTURE LOAD MANAGEMENT SYSTEM-Agricultural Load Management System is meant for supplying power to farmers during specified time with assured time duration. It reduces the stress on LT lines, distribution transformers, sub-station and system in view of diversified usage.

2. REMOTE STREET LIGHT CONTROL SYSYTEM-Any Street light JB can be controlled from the central location, The switch ON/OFF time can be configured from the central location, The ON / OFF timings can be programmed as per the seasonal changes. Individual phases can be switched ON & OFF at different times, as per the traffic movement, automatically, for saving energy.

3. The third product is developed in the oil and gas segment to prevent the pipelines from corrosion
Losses

IN INFRASTRUCTURE SOLUTIONS ICSA IS CAPABLE TO DESIGN, SUPPLY,TRANSPORT,
ERECT, TEST AND COMISSION THE FOLLOWING ON :-

A. EPC(Engineering, procurement and construction) BASIS:
1.400KV Transmission Lines & Sub Stations.
2. 22OKV/132KV Transmission lines and substations
3. Out door and GIS substations
B. TURNKEY BASIS:-
1. HVDS Distribution works.
2. Rural electrification works.
3. Industrial electrification works.
4. Construction of 33KV/11KV Indoor, outdoor substations.

Company’s future projects:

The Company has installed wind farms with aggregate capacity of 9.6MW in Tamil Nadu and
Karnataka. The capex incurred in FY09 was 60-62 crore.

ICSA India has secured work orders on 18 march 2009 for a total contract value of Rs 464.17 crore from Bihar State Electricity Board, Mahavitaran (Maharashtra State Electricity Distribution) and M P Poorv Kshetra Vidyut Vitaran for the work as detailed below:-

INDUSTRY POTENTIAL

Indian power sector value chain constitutes of Generation, Transmission, Distribution and Rural Electrification. Though, the sector is plagued by numerous problems at all levels, the overall performance has been commendable and is showing strong growth trends over the Years 2007-2012.

Power as a sector is planned for 5 years, therefore the plan ending 2007 March was 10th plan and the 11th plan period is between 2007 April to March 2012.Government has given big incentives and big budget of appx 4 lac crore for power/transmission projects in the 11 5 yr plan which provides big opportunity to the company.

Valuations:

OUTLOOK AND VALUATIONS

The change in business revenue mix which will contract margin figures of ICSA (India) Ltd on one hand, and the strong order book position on the other hand are the positive factors. Demand would revive back though at a slower pace. ICSA is expected to post revenue CAGR of 30% over the financial years 2009-2011. The company is exploring all the possible way to diversify its revenue stream in order to bring down the T&D losses to magnify its earnings and to capitalize on its strong client base.

ICSA is in a long term bullish trend and has a good support at its 200 DMA of 144-146 levels, So one could buy on every dips for a Target of 210-240 for a holding period of 3-4 months.

Key Risks to our projections:

Competitive Pressures: The competitive landscape is building up. In the last one year the Company has seen pricing pressure due to competition.

Growth Dependent on RAPDRP Scheme: The company’s growth is dependent upon the implementation of RAPDRP scheme any change in the scheme by the govt. will have an impact on the firm’s growth.

Although we have considered Revenue on the lowerside, delay in Government projects could hit top line of the company, impacting overall profitability of the firm

FCCB Convertibility: The outstanding FCCBs at the end of the year were US$ 21 million due in 2012. The conversion price has been reset to Rs 189 per share against Rs 250 per share earlier. The diluted equity on conversion of FCCBs will be 5.2 crore shares. In case of bad year for overall Equity

ICSA’s working capital cycle could be adversely impacted if it selects to work with government power sector utilities, most of who are in the red.

The share price of ICSA (India) ltd. has been underperforming the benchmark nifty index since November 2008, with the spread between the two rising continuously.

The share price has been down by 70%. However we are Bullish on this stock because it is a major domestic player in the existing sector. While the charts do not show any extraordinary price movements we believe the prices will rise due to strong fundamentals showing increase in net sales and net profits by 65% and 54% respectively. Hence over a longer period share will give decent returns.

The margins will decrease in the following years, due to the change in business revenue mix, leading to an increase in share of infrastructure EPC segment. Going forward, in the next 2-3 years, the management is targeting revenue mix of 50:50 between the 2 segments and margins of 22% overall. Operating margins dipped 90bps at 21.9% for the quarter ended march 2009

Going forward, the return on capital employed is expected to stay healthy because there would not be any capex other than required for the Wind Power business. The gross block at the end of the year was Rs 220 crore.

DSO(Day Sales Outstanding) days for FY09 were down at 160 days from 175 days for FY08. The payable days are at 61 days which implies that it takes ICSA 160 days now to collect its revenues after sales has been made.