Kotak recommends Accumulate Infotech enterprises after quarter results

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INFOTECH ENTERPRISES LTD (IEL)
PRICE: RS.175 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.199 FY12E P/E: 10.4X

Infotech's results were a mixed bag. While revenues were higher than
what we had expected, EBIDTA margins once again disappointed.
Consequently, PAT for 2QFY11 was marginally lower v/s our estimates. EMI
volumes were up by 13% and UTG reported a 6% organic growth, which is
encouraging. Ramp up of existing projects and new project initiations
helped, we opine. The management has indicated billing rate pressures in
new projects and at the time of re-negotiating long term agreements. This
is of concern to us. Margins were flat (organically) QoQ, which was
disappointing in light of the severe fall witnessed in 1Q. The company had
to resort to further increments for scarce resources. This validates our
concerns about mid sized companies facing pressures on salaries due to
strong hiring by larger peers in a buoyant sector. Overall, we reduce our
earnings estimates for FY11 to Rs.13.2 v/s Rs.14.1 earlier. We introduce our
FY12 estimates and expect EPS to be Rs.16.8. Consequently, our PT stands
revised to Rs.199 v/s Rs.189 earlier. At our target price, FY12 estimates will
be discounted by about 12x. We believe this discount to larger peers is
justified due to the limited visibility on FY12, pressure on billing rates and
on margins. We maintain ACCUMULATE. We believe that, Infotech will
have to address the above mentioned concerns before we turn more
positive on the stock. We are also concerned about the relatively high
proportion of project-based revenues (in UTG), client concentration for IEL
(Top 5 makes about 40% of revenues) in addition to currency fluctuations.