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Buy Black Box Ltd For Target Rs.301

Unwrapping its true potential

Black Box Ltd (erstwhile AGC Network Ltd) has built a reputation for acquiring inefficient businesses (with global potential) at frugal valuations, integrating them with their existing operations, scaling them up rapidly while ruthlessly cutting costs to achieve the stated goals on profitability. Today, Black Box has emerged as a serious global systems integration player and vendor of choice for global corporations.

We believe that Black Box is at the threshold of accelerated growth given its expanding footprint, improving market share and new cloud oriented product offerings. We expect revenue to grow at a CAGR of 12.3% over FY22-25 to INR 7,600.0 cr in FY25 driven by:

* 4.3% CAGR in system integration revenues to INR 5,026.9 cr in FY25.

* 155.5% CAGR in consulting revenues to INR 1,733.8 cr in FY25.

* We have not built in any growth for the product business of Black Box as the company mostly does white labelling there. This remains an upside risk to our estimates.

EBITDA and PAT are expected to grow at a faster CAGR of 32.6% & 66.6%, respectively, to INR 607.6 cr & INR 336.5 cr over the forecast period, on the back of operating leverage coupled with cost centricity. As a result, EBITDA and PAT margins are set to improve by 315bps & 307bps to 8.0% & 4.4%, respectively. Consequently, return ratios RoE/RoCE are set to expand by 698/1,071bps to 34.9/36.3% in FY25.

Further, the conscious decision to stay away from high working capital intensive government contracts would mean that the working capital cycle should stay negative over the forecast period.

We initiate coverage on Black Box with a BUY for a PT of INR 301 representing an upside of 130% over next 24 months. Geographical concentration given large exposure to USA, remains a key risk in our view which the management is trying to mitigate by concentrating on Europe and APAC

Our Bull and Bear Case Scenarios

We have prepared a Bull and Bear case scenario with 3 variable sensitivity based on FY24 revenues, EBITDA margins & valuation multiple:

* Bull Case: We have assumed FY25 revenues of INR 8,500.0 cr in FY25 (CAGR of 16.5%) and EBITDA margins of 10.0%, which will result in a Bull Case price target of INR 617 per share. We expect the exit PE of 20x

* Bear Case: We have assumed FY25 revenues of INR 6,500.0 cr in FY25 (CAGR of 6.6%) and EBITDA margins of 5.0%, which will result in a Bear Case price target of INR 90.0 per share. We expect the exit PE of 12x.

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