Infotech Enterprises Ltd 2QFY11 analysis by Religare Research

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Infotech Enterprises Ltd
2QFY11: Strong revenue performance, but margins disappoint
Infotech reported 2QFY11 revenues of Rs2,955mn, up 17% QoQ and 10%
above our estimates, however net profit before minorities came in at Rs314mn,
up 8% QoQ and 4% below expectations. EBITDA margins declined 70bps to
15.3%(including the Wellsco acquisition) but on like for like basis was flat at
16%. The revenue growth was primarily driven by strong volume growth (11%
QoQ) in both EMI and UTG verticals. However margins were impacted due to
another round of wage hikes and higher investments in sales and marketing.

Large deals won earlier this year have begun to ramp up and the management
has guided to a sustained 8-10% sequential volume growth in EMI segment and
a 5-6% growth in UTG segment. We are adjusting our FY11/12 EPS by
-15%/-8% to factor lower than expected margin improvement and adjust our
price target to Rs250.
Strong volume growth this quarter: Infotech reported a solid 17% QoQ rise in
revenues led primarily by strong volume growth (13.2% in EMI and a 15.8% in
UTG segment - 9.4% Wellsco + 6.4% organic). This includes 7 weeks of
revenues from the Wellsco acquisition amounting to Rs85mn. As per the
management ramp ups at all three Hamilton, Seawell and Westinghouse projects
have started and should provide adequate growth visibility.
Margins impacted by wages and higher investment in sales: EBITDA margins
excluding Wellsco remained flat at 16%, against expectations of improvements
starting this quarter. The margins were mainly impacted due to wage hikes given
to a particular set of employees amounting to Rs48mn. Besides sales related
expenses were higher as the company hired a new sales team from IBM. The
company added 454 employees and attrition was at 4.6% during the quarter.
Management guidance and change to estimates: The management has guided to
a sustained 8-10% sequential volume growth in EMI segment and a 5-6% growth
in UTG segment. Further company expects margins to improve to 18% by year
end driven by higher volumes and improving utilization. We raise our FY11/12
revenues by 7%/10% but lower our EPS estimates by 15%/8% on account of
lower than expected margins.
Valuation: We adjust our price target and roll over our time frame to Dec-11.
Our new target price is Rs250 (previously Rs238), based on a 12x one year
forward EPS. We remain positive on Infotech and continue to believe that it is
one of the few good quality differentiated midcaps in offshore engineering
services space to own with a 2-3 year view and maintain our Buy rating. Key
risks to our thesis include deterioration in global IT spending, continued wage
pressures and sharp rupee appreciation.