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Infotech Enterprises -------------------------------------------------------- Maintain OUTPERFORM
Strong growth delivered; look forward to improving margins
● Infotech Enterprises reported mixed results for the Dec-10
quarter. While revenue growth exceeded our expectations by 2%,
EBIT was 3% below. Higher other income helped PAT to come in
line with our estimates.
● Management restated its earlier guidance of 8-10% QoQ growth and
5-6% QoQ growth for the Engineering and Network & Content
Engineering (NCE) verticals, respectively, over the next few quarters.
● It also reported success in pricing negotiations with key customers
and guided for a 120 bp improvement in overall pricing from the
current quarter.
● Management indicated that improving margins would be its top
priority going forward, driven by: (1) improving utilisation, (2)
improve productivity of employees and (3) improving offshore mix.
● Given strong revenue growth and improving margins, EPS could
grow 25% in FY12. At 10x FY3/12 earnings, the stock appears
cheap. We thus maintain our OUTPERFORM rating with a target
price of Rs200.
Mixed results
Infotech Enterprises reported 10.1% QoQ revenue growth in
US$ terms – 2% ahead of our estimates. Despite the strong growth,
there was slight disappointment in margins – EBIT margin dropped 10
bp QoQ versus our estimate of 50 bp QoQ increase. Thus, EBIT was
3% below estimates. Higher other income helped PAT to come in line
with our estimates.
Continued strong business momentum
The engineering vertical grew 7.0% QoQ in US$ terms, driven by
5.2% QoQ volume growth. The UTG vertical, which has now been
rebranded as Network & Content Engineering (NCE), grew 17.4%
QoQ in US$ terms (10.4% QoQ excluding Wellsco), driven by 14.1%
QoQ volume growth.
Management indicated that it was comfortable with its earlier guidance
of 8-10% QoQ growth in the engineering vertical and 5-6% QoQ
growth in the NCE vertical for the next few quarters.
Price increases have come through
Management reported that it had achieved 3-5% pricing hikes, effective
1 January 2011, with respect to its top three customers. Based on
concluded negotiations with other customers, management guided for
120 bp improvement in pricing for the overall company. We note that
this indicates a very robust demand environment for its services.
Focus on margin improvement
Management indicated that improving margins was its top priority
going forward.
Management targeted to improve employee utilisation. It mentioned
that while current utilisation in the NCE and Engineering verticals was
81% and 75%, respectively, these verticals could operate at 85% and
80% utilisation levels, respectively.
Also, the company could benefit by boosting productivity of employees
on fixed price projects by increasing the proportion of variable
incentive-linked pay.
Further, there was significant scope to increase the proportion of
offshored work, especially in Daxcon and Wellsco. Management
indicated that Wellsco could start offshoring from the Jun-11 quarter
onwards.
Retain OUTPERFORM
We adjust our model slightly to incorporate the results of this quarter.
Price increases corroborate our thesis of strong revenue growth for
the company and margins could also improve. At 10x FY3/12 earnings,
the stock appears inexpensive. Hence, we retain our OUTPERFORM
rating and a target price of Rs200.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Infotech Enterprises -------------------------------------------------------- Maintain OUTPERFORM
Strong growth delivered; look forward to improving margins
● Infotech Enterprises reported mixed results for the Dec-10
quarter. While revenue growth exceeded our expectations by 2%,
EBIT was 3% below. Higher other income helped PAT to come in
line with our estimates.
● Management restated its earlier guidance of 8-10% QoQ growth and
5-6% QoQ growth for the Engineering and Network & Content
Engineering (NCE) verticals, respectively, over the next few quarters.
● It also reported success in pricing negotiations with key customers
and guided for a 120 bp improvement in overall pricing from the
current quarter.
● Management indicated that improving margins would be its top
priority going forward, driven by: (1) improving utilisation, (2)
improve productivity of employees and (3) improving offshore mix.
● Given strong revenue growth and improving margins, EPS could
grow 25% in FY12. At 10x FY3/12 earnings, the stock appears
cheap. We thus maintain our OUTPERFORM rating with a target
price of Rs200.
Mixed results
Infotech Enterprises reported 10.1% QoQ revenue growth in
US$ terms – 2% ahead of our estimates. Despite the strong growth,
there was slight disappointment in margins – EBIT margin dropped 10
bp QoQ versus our estimate of 50 bp QoQ increase. Thus, EBIT was
3% below estimates. Higher other income helped PAT to come in line
with our estimates.
Continued strong business momentum
The engineering vertical grew 7.0% QoQ in US$ terms, driven by
5.2% QoQ volume growth. The UTG vertical, which has now been
rebranded as Network & Content Engineering (NCE), grew 17.4%
QoQ in US$ terms (10.4% QoQ excluding Wellsco), driven by 14.1%
QoQ volume growth.
Management indicated that it was comfortable with its earlier guidance
of 8-10% QoQ growth in the engineering vertical and 5-6% QoQ
growth in the NCE vertical for the next few quarters.
Price increases have come through
Management reported that it had achieved 3-5% pricing hikes, effective
1 January 2011, with respect to its top three customers. Based on
concluded negotiations with other customers, management guided for
120 bp improvement in pricing for the overall company. We note that
this indicates a very robust demand environment for its services.
Focus on margin improvement
Management indicated that improving margins was its top priority
going forward.
Management targeted to improve employee utilisation. It mentioned
that while current utilisation in the NCE and Engineering verticals was
81% and 75%, respectively, these verticals could operate at 85% and
80% utilisation levels, respectively.
on fixed price projects by increasing the proportion of variable
incentive-linked pay.
Further, there was significant scope to increase the proportion of
offshored work, especially in Daxcon and Wellsco. Management
indicated that Wellsco could start offshoring from the Jun-11 quarter
onwards.
Retain OUTPERFORM
We adjust our model slightly to incorporate the results of this quarter.
Price increases corroborate our thesis of strong revenue growth for
the company and margins could also improve. At 10x FY3/12 earnings,
the stock appears inexpensive. Hence, we retain our OUTPERFORM
rating and a target price of Rs200.
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