Infotech Enterprises – Healthy volumes, margin blues; maintain Sell by Anand rathi

Visit http://indiaer.blogspot.com/ for complete details 􀂄 􀂄

Infotech Enterprises – Healthy volumes, margin blues; maintain Sell

n       Margin recovery still a problem. Infotech Enterprises’ EBITDA margin fell 50bp qoq on account of wage hikes (following a 557-bp qoq fall in 1Q) even with healthy 15.8% volumes for the UTG (6.4% organic) and 13.2% for the EMI verticals. Management indicated that recruiting a high-cost sales team would hold margins in check. We maintain our target price and rating on the stock.

n       Key points in 2Q. US dollar revenue grew 14.6% qoq (11.3% organically). The company added seven clients in the UTG and five in the EMI vertical. Geographically, North America grew 23.2%, while Europe grew 14.3%. Infotech holds Rs3.6bn (Rs33/share) in cash and cash equivalents.

n       Change in estimates. We lower our FY11e and FY12e EPS 3.8% and 3.5% to Rs12.5 and Rs15.4 respectively, taking into account the lower margin.

n       Introducing FY13 financials. We expect about 16% volume growth, flat pricing, a 40-bp margin expansion over FY12, a tax rate of 23% (constant compared with FY12).

n       Valuation. Our target of Rs175 comprises Rs155 (target 12-month forward, Sep ’11 PE of 12x) and Rs20 (valuing the cash above the average peer cash holding). Our target multiple is at a 40% discount to the average of large-cap IT stocks (FY11e PE 19.5x). Risks to our call: 1) Higher-than expected demand and ramp-up in services. 2) Acquisition, leading to higher profitability.