[Reader-list] Stock Prices And smart Cards

[Taha Mehmood]

Dear All

Market seems to be good for companies involved in the manufacture of
smart card devices. As the blog-post below indicates- '*The global
RFID market is expected to be around $ 5 bn. by 2010. RFID and
biometric solutions are growing at a CAGR of 50% and are expected to
grow in tandem with retail and manufacturing growth in India. The
applicability of Smart Card is expanding with various government
agencies announcing usage of smart card for biometric PAN card,
Railway Season Tickets, National Identity Cards, Passports, Driving
Licenses, Toll Collection, Financial Inclusion Cards (for BPL
families) etc., the demand for Smart Card is estimated to be more than
150 bn. units per year and to grow at 48% y-o-y'

Regards

Taha
*


Bartronics India Ltd Buy Rs.98*

*Industry ITES BSE/ NSE Code 532694 / BARTRONICS Company P/E 5 x FY09E
52 Week H/L Rs. 253 / Rs. 55 Market Cap. (Rs) 2,715 mn 52 Week Avg
volumes 143,000 / 215,000
Face Value (Rs) 10 Dividend (FY’08) 0% *

*Investment Argument:*

�� FCCB fears overdone: Bartronics India Ltd. (BIL) has underperformed
the broad market on FCCB concerns. As on December 2008, BIL had
outstanding FCCBs worth $ 56 mn., of which $ 6 mn. at a conversion
price of Rs. 140 (maturing in FY12) and $ 50 mn. at a conversion price
of Rs. 290 (maturing in FY13). Looking at the steady order book and
large orders from the government segment, we believe that, company
will be able to generate sufficient funds for re-payment
of these FCCBs, in the event of the same not getting converted.

�� Integrated Operations: With the chip manufacturing unit going on
stream BIL has become a fully integrated Smart Card manufacturing
unit, which is expected to contribute 45% of the revenues for FY09E.
The integrated operation is expected to bring higher operating margins
of about 18-19% compared to average margin of about 15-16%. BIL is
already an end-to-end service provider – from planning to
implementation - for Automatic Identification and Data Collection
(AIDC) technology, which consists of Bar Coding and its manifold
applications such as Biometrics and Radio Frequency Identification and
Data Collection (RFID) etc.

�� Government Contracts to Drive Growth: BIL has already won contracts
for supply for Smart Cards to Employee State Insurance Corporation
(ESIC) amounting to Rs.4bn., from the Rajasthan State Governments for
Bhamashah Financial Empowerment Scheme, covering about 5 million
families through Biometrically identifiable Smart Cards amounting to
Rs 1.5bn., and from the Bihar State Government for supply of Smart
Cards to the RSBY scheme for about 4 million families.
BIL is bidding for many such projects at State and Central Government
levels. These orders have helped BIL de-risk its business, which was
dependent on telecom sector so far. Next big opportunity which BIL
targeting is banking industry, for chip based ATM, Credit and Debit
cards.

�� Global Operations: During FY08 BIL has set up two subsidiaries to
expand its footprints to global operations. In January 2008, US
subsidiary acquired two US based firms Proximities Inc. and Delaware
Corporation for a total consideration of $ 50 mn. For FY09E, BIL
expects US subsidiary to contribute a top line of ~ $ 40 mn. and the
Singapore subsidiary to contribute about $ 15 mn.

Financial Highlights:

�� For 9MFY09 BIL’s top line was up by 155% y-o-y, at Rs. 4171.91 mn.
against Rs. 1634.35 mn. a year ago.. PAT grew by 132% at Rs. 655.51
mn. from Rs. 282.37 mn. for the same period previous year. Teething
trouble for newly started Smart Card unit and establishing overseas
operations took its toll on the net profit margin, which was down at
15.71% for 9MFY09 compared to 17.28% for 9MFY08. However, we are
confident of BIL maintaining net margins at 19-20%
going forward.

�� For FY09E, we expect company to post a top line of Rs. 5.2bn. and
PAT of 0.94bn. Overseas subsidiaries are expected to contribute
revenues of around $ 50-55, where as Smart Card unit should contribute
in excess of Rs.2bn. and balance from domestic solution business.

Outlook & Valuation:

�� The global RFID market is expected to be around $ 5 bn. by 2010.
RFID and biometric solutions are growing at a CAGR of 50% and are
expected to grow in tandem with retail and manufacturing growth in
India. The applicability of Smart Card is expanding with various
government agencies announcing usage of smart card for biometric PAN
card, Railway Season Tickets, National Identity Cards, Passports,
Driving Licenses, Toll Collection, Financial Inclusion Cards (for BPL
families) etc., the demand for Smart Card is estimated to be more than
150 bn. units per year and to grow at 48% y-o-y. BIL having the
highest market share and the first mover advantage is expected to
capture the maximum market share in the booming domestic market.
Currently, the stock is trading at 4.3x its FY09E earnings. We
recommend BUY on the stock for a short term price target of Rs. 130.