Visit http://indiaer.blogspot.com/ for complete details Infotech Enterprises; Strong 15% qoq Revenue Growth but Stability in UTG Segment Margins Is Key
US$ revenue growth in the Sep-10 quarter. The strong
revenue outperformance was a pleasant surprise in our
view. However, investments in SG&A and wage hikes
led to flattish margins for the quarter (excluding the
Wellsco acquisition). Management remains hopeful of
achieving ~18% margins in FY11.
We believe margins for Infotech are likely to be ~16-17%
for FY11e and management is likely to miss its EBITDA
margin forecast. However, stronger than expected
revenues for the company should still help it deliver
FY11e net profits closer to our forecasts. We raise our
revenue estimates for Infotech and lower our margin
assumptions. The net result is 3-4% trims to our EPS
estimates for FY11 to FY13. Overall, we forecast
revenue and net income CAGR of 20% and 16%
respectively for FY11e-13e.
Margin outlook: We believe that currently Infotech is
operating at drained margin levels, below which it is
unlikely to fall further. As management deals with the
supply-side challenges, we believe the margins are
likely to recover. However, the pace of improvement
may be significantly slower than management has
suggested, partly due to rupee appreciation of 4-5% in
3Q, in our view
What’s next? We believe management has to focus on
rationalizing SG&A over the coming quarters to drive
profitability. Our interaction with management indicates
that SG&A expenses have peaked and are likely to stay
flattish in absolute terms in coming quarters. We believe
that achieving the stated SG&A outlook could give the
stock further upside from current levels. Maintain OW.
Key risks: Rupee appreciation, slower than expected
turnaround in Wellsco margins
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