Subex Azure : Kotak Securities maintains REDUCE on Subex Azure

Subex Azure’s Q2FY09 results came in below expectations. While EBIDTA was marginally higher, lower other income component impacted net profit.

Mark-to-market (MTM) loss on foreign borrowings stood at Rs706 million for the quarter. Order booking higher q-o-q but we remain concerned about the macro headwinds.

Management maintains FY09 products revenue guidance of Rs 5 billion and $125 million (exchange rate assumption is surprising). Maintenance of rupee guidance despite the significant rupee depreciation indicates reduction in expected US dollar revenues, negative in our view.

The PAT guidance (including services business) at $12 million excludes impact of MTM losses. The unpredictability of Subex’s model prevents us from becoming bullish. The overall macro scenario in telecom and related verticals makes us cautious.

We have tweaked our lower-than-guidance FY09 EPS estimates with an expected EPS of Rs12.1. Our DCF-based price target works out to Rs65 (Rs127 earlier). The stock has corrected significantly post our previous Reduce recommendation. Continue to recommend REDUCE due to uncertainty over the US economy. Forex loss on FCCBs (notional, as of now) and potential equity dilution arising from FCCB conversion are the other variables.

We may review the recommendation in case of sustained improvement in performance in future quarters.