A recovery story that can also benefit convertible bonds holders

>Credit opinion and recommendation - We are initiating the coverage of Indra with a positive credit opinion. We are assigning a shadow rating of BB- with a positive outlook to this issuer. From a market standpoint, we are adopting:a Buy recommendation on the 2023 CB 2021 put: this instrument has the twin advantage of offering: i/ a positive yield-to-put of c. 2.3% (on the basis of mid-price); and ii/ an estimated upside potential on the share price of 23% (mainly linked to the operational recovery of the IT services business according to our equity analyst’s investment-case);a Buy & Hold recommendation on the 2018 CB: we calculate that Indra will have the means to repay the remaining outstanding amount of this bond without any new refinancing measure. In this regard, this bond, which still offers a positive yield-to-maturity of c. 1.2% (on the basis of mid-price), is still interesting in terms of carry. It could also benefit from the potential equity upside in the short term.For investors that were exposed to Econocom’s 2019 CB (which will be repaid soon if the soft call is exercised) and who want to stay exposed to the IT services industry, Indra convertible bonds could be interesting in a switch perspective.Strengths/Opportunities - - An interesting dual business model with two verticals (Transport & Defence) showing good profitability;- A recovery plan in the IT division that has started to pay off, which should help the group to significantly increase its free cash flow generation in the short to medium term;- A pro forma adjusted leverage of 4.4x that should be reduced to 3.2x at the end of the year (c. one turn of deleveraging expected);- An interesting equity upside potential based on a recovery story.Weaknesses/Threats - - A decrease in profitability in the past few years due to the cuts in public budgets in Spain, to the internationalization process and to the integration of loss-making companies;- The group is not well diversified geographically speaking (c. 49% of the revenue generated in Spain pro forma the integration of Tecnocom);- c. 40% of the activity in Spain is generated with government-related customers;- Leverage has increased in the past few years;- The acquisition of Tecnocom will lead to a cash-out of EUR 183m (though this is totally manageable at Indra’s scale).