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INFOTECH ENTERPRISES LTD (IEL)
PRICE: RS.170
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.197
FY12E P/E: 10.5X
Infotech's results were a mixed bag. While revenues were higher than what
we had expected, EBIDTA margins once again disappointed. Consequently,
operating profits for 3QFY11 were lower v/s our estimates. EMI volumes
were up by 5.2% and N&CE reported a 6.5% organic growth, which is
encouraging. Ramp up of existing projects and new project initiations
helped, we opine. What is encouraging is the fact that, the Top 3 client have
given a 3-5% billing rate increase WEF 4Q, which should help margins.
Overall, we tweak our earnings estimates for FY11 and FY12. FY11E
earnings now stand at Rs.12.8 per share (Rs.13.2) and FY12E earnings at
Rs.16.3 per share (Rs.16.8). Consequently, our PT stands revised to Rs.197 v/
s Rs.199 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 and pressure 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
N&CE), in addition to currency fluctuations.
Revenues were up 6% - Volume growth encouraging
n Revenues for the quarter grew by 6% QoQ including the financials of Wellsco,
which were consolidated for the full quarter (WEF 9th Aug 2010 in 2Q).
n While EMI reported a 5.2% rise in volumes, N&CE (Network and Content Engineering) also achieved a 6.5% organic growth QoQ.
n Infotech bagged 14 new accounts during the quarter split evenly between the
two businesses.
n EMI has been witnessing consistent growth over the past few quarters on the
back of significant new additions and scale up of existing accounts. Quarterly
revenues have crossed Rs.2bn mark already.
n According to the management, the spending in manufacturing industry has
picked up and this has been led by hitech, heavy engineering and aerospace verticals.
n The client budgets are expected to be higher for companies in these three verticals. Hi-tech and heavy engineering space is expected to see a significant increase in spend due to the cuts experienced in the previous two years.
n We understand growth came due to the scale up is existing accounts and scale
up in new accounts from Hamilton Sunstrand and Westinghouse. However, the
scale up in Westinghouse will be more gradual.
n Infotech has penetrated the UTC group well with cumulative revenues of more
than $250mn. It now operates at ACE Gold level across all divisions of UTC.
n The company has also been short-listed as one of the off-shore partners for a
new initiative of Caterpillar.
n The 6.5% volume growth in N&CE was encouraging. This vertical has been facing continuing client issues. The projects-based nature of N&CE revenues also
adds to the uncertainty.
n The management had indicated in 1Q that, new projects from Swisscom were
expected to start only in 2QFY11. We understand that these projects have indeed
started scaling up.
n The business added 7 new customers during the quarter.
n During the quarter, Infotech renewed the contract with Tom Tom for three years
at a higher price.
n It has also expanded our service portfolio by winning multi-year contract to provide Dial-Before-You-Dig services to an Australian utility.
n The management has developed initiatives for broadening its concentrated revenue base (Top 5 make 36.7% of 3Q revenues); we have seen early results as
this concentration is down from 43.4% in Q4FY10.
n We opine results of this 'diversification and growth' strategy will be important for
IEL's broad based growth.
Billing rate increases from Top 3 clients
n Infotech has managed to get 3% - 5% rate increases for off-shore services from
its Top 3 clients EF January 2011.
n We view this as a significant positive for Infotech. We also see this as a reflection
of the improving macro scene in both service lines.
n This should have a near 1% - 1.2% impact on overall realisations and also allow
the company to improve margins.
EBIDTA margins were a negative surprise; we had expected improvement QoQ.
n EBITDA margins for the quarter were almost flat QoQ. This was disappointing,
especially after a steep fall in 1Q and no improvement in 2Q.
n We had, in fact, assumed an improvement QoQ.
n The margins were impacted by the rupee appreciation and investments in sales /
marketing. However, the management has indicated that some of the expenses
were one-time in nature and may not recur in 4Q.
n We had indicated that, salary increments, higher levels of attrition and need to
invest in business generating initiatives will put pressure on margins.
"Other income' and tax rates helped PAT growth
n Infotech reported a other income component of Rs.98mn, which was higher than
our expectations.
n The company has stated that its forward contracts FY11E onwards qualify for
cash flow hedge accounting, and as such will sit in the exchange fluctuation reserve in the balance sheet and will be expensed through the P&L as and when
they come up for expiry. We believe this is likely to make the other income line
less volatile in a dynamic currency environment.
n The company provided tax at the rate of 17% of PBT which is lower QoQ due to
some one time benefits. Management expects the same to move up to about 20
- 21% in FY11.
Tweak estimates
n We have tweaked our earnings expectations to accommodate higher revenue
growth but slightly lower margins.
n We forecast a 25% rise in FY11 revenues on the back of higher volumes and
Wellsco consolidation.
n However, we believe that, margins will be under pressure and expect the same
to fall to 15.9% v/s 21.9% in FY10.
n PAT is expected to fall by about 17% in FY11E.
n For FY12, we have assumed a revenue growth of about 25%, led by EMI.
n EBIDTA margins are expected to be flat over FY10 and salary increments and
rupee (assumed to average Rs.45 per USD in FY12) set off the impact of higher
efficiencies, better billing rates, pyramid benefits and utilisation levels.
n We have assumed tax rate to rise to 24% of PBT in FY12 v/s about 20% in FY11.
n Consequently, PAT is expected to rise by about 27% to Rs.1.81bn, resulting into
an EPS of Rs.16.3.
n We expect the company to have net cash of about Rs.5.7bn by FY12 end, which
works out to Rs.51 per share.
Deep relationships with existing customers and differentiated
service offering augur well over the longer term
n Infotech has managed to deepen client engagement for clients like UTC, Tom
Tom, P&W, Bombardier, Tele-Atlas & Swisscom over the recent quarters and
enjoys relationships with marquee clients in its verticals.
n Management continues to see opportunities in the higher thrust which aerospace
companies (Bombardier, etc are major clients) are giving to efficient and light
engine design skill sets- areas where IEL has domain expertise and existing impressive client roster.
n We have in our DCF model built in higher growth rates for Infotech over the
medium term, given the improving demand environment.
Concerns
n A sharp acceleration in the rupee from our assumed levels will impact earnings
estimates negatively for the company.
n Belying of hopes of a pick up in the economic outlook of major user economies
could impact revenue growth of Infotech.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
INFOTECH ENTERPRISES LTD (IEL)
PRICE: RS.170
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.197
FY12E P/E: 10.5X
Infotech's results were a mixed bag. While revenues were higher than what
we had expected, EBIDTA margins once again disappointed. Consequently,
operating profits for 3QFY11 were lower v/s our estimates. EMI volumes
were up by 5.2% and N&CE reported a 6.5% organic growth, which is
encouraging. Ramp up of existing projects and new project initiations
helped, we opine. What is encouraging is the fact that, the Top 3 client have
given a 3-5% billing rate increase WEF 4Q, which should help margins.
Overall, we tweak our earnings estimates for FY11 and FY12. FY11E
earnings now stand at Rs.12.8 per share (Rs.13.2) and FY12E earnings at
Rs.16.3 per share (Rs.16.8). Consequently, our PT stands revised to Rs.197 v/
s Rs.199 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 and pressure 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
N&CE), in addition to currency fluctuations.
Revenues were up 6% - Volume growth encouraging
n Revenues for the quarter grew by 6% QoQ including the financials of Wellsco,
which were consolidated for the full quarter (WEF 9th Aug 2010 in 2Q).
n While EMI reported a 5.2% rise in volumes, N&CE (Network and Content Engineering) also achieved a 6.5% organic growth QoQ.
n Infotech bagged 14 new accounts during the quarter split evenly between the
two businesses.
n EMI has been witnessing consistent growth over the past few quarters on the
back of significant new additions and scale up of existing accounts. Quarterly
revenues have crossed Rs.2bn mark already.
n According to the management, the spending in manufacturing industry has
picked up and this has been led by hitech, heavy engineering and aerospace verticals.
n The client budgets are expected to be higher for companies in these three verticals. Hi-tech and heavy engineering space is expected to see a significant increase in spend due to the cuts experienced in the previous two years.
n We understand growth came due to the scale up is existing accounts and scale
up in new accounts from Hamilton Sunstrand and Westinghouse. However, the
scale up in Westinghouse will be more gradual.
n Infotech has penetrated the UTC group well with cumulative revenues of more
than $250mn. It now operates at ACE Gold level across all divisions of UTC.
n The company has also been short-listed as one of the off-shore partners for a
new initiative of Caterpillar.
n The 6.5% volume growth in N&CE was encouraging. This vertical has been facing continuing client issues. The projects-based nature of N&CE revenues also
adds to the uncertainty.
n The management had indicated in 1Q that, new projects from Swisscom were
expected to start only in 2QFY11. We understand that these projects have indeed
started scaling up.
n The business added 7 new customers during the quarter.
n During the quarter, Infotech renewed the contract with Tom Tom for three years
at a higher price.
n It has also expanded our service portfolio by winning multi-year contract to provide Dial-Before-You-Dig services to an Australian utility.
n The management has developed initiatives for broadening its concentrated revenue base (Top 5 make 36.7% of 3Q revenues); we have seen early results as
this concentration is down from 43.4% in Q4FY10.
n We opine results of this 'diversification and growth' strategy will be important for
IEL's broad based growth.
Billing rate increases from Top 3 clients
n Infotech has managed to get 3% - 5% rate increases for off-shore services from
its Top 3 clients EF January 2011.
n We view this as a significant positive for Infotech. We also see this as a reflection
of the improving macro scene in both service lines.
n This should have a near 1% - 1.2% impact on overall realisations and also allow
the company to improve margins.
EBIDTA margins were a negative surprise; we had expected improvement QoQ.
n EBITDA margins for the quarter were almost flat QoQ. This was disappointing,
especially after a steep fall in 1Q and no improvement in 2Q.
n We had, in fact, assumed an improvement QoQ.
n The margins were impacted by the rupee appreciation and investments in sales /
marketing. However, the management has indicated that some of the expenses
were one-time in nature and may not recur in 4Q.
n We had indicated that, salary increments, higher levels of attrition and need to
invest in business generating initiatives will put pressure on margins.
"Other income' and tax rates helped PAT growth
n Infotech reported a other income component of Rs.98mn, which was higher than
our expectations.
n The company has stated that its forward contracts FY11E onwards qualify for
cash flow hedge accounting, and as such will sit in the exchange fluctuation reserve in the balance sheet and will be expensed through the P&L as and when
they come up for expiry. We believe this is likely to make the other income line
less volatile in a dynamic currency environment.
n The company provided tax at the rate of 17% of PBT which is lower QoQ due to
some one time benefits. Management expects the same to move up to about 20
- 21% in FY11.
Tweak estimates
n We have tweaked our earnings expectations to accommodate higher revenue
growth but slightly lower margins.
n We forecast a 25% rise in FY11 revenues on the back of higher volumes and
Wellsco consolidation.
n However, we believe that, margins will be under pressure and expect the same
to fall to 15.9% v/s 21.9% in FY10.
n PAT is expected to fall by about 17% in FY11E.
n For FY12, we have assumed a revenue growth of about 25%, led by EMI.
n EBIDTA margins are expected to be flat over FY10 and salary increments and
rupee (assumed to average Rs.45 per USD in FY12) set off the impact of higher
efficiencies, better billing rates, pyramid benefits and utilisation levels.
n We have assumed tax rate to rise to 24% of PBT in FY12 v/s about 20% in FY11.
n Consequently, PAT is expected to rise by about 27% to Rs.1.81bn, resulting into
an EPS of Rs.16.3.
n We expect the company to have net cash of about Rs.5.7bn by FY12 end, which
works out to Rs.51 per share.
service offering augur well over the longer term
n Infotech has managed to deepen client engagement for clients like UTC, Tom
Tom, P&W, Bombardier, Tele-Atlas & Swisscom over the recent quarters and
enjoys relationships with marquee clients in its verticals.
n Management continues to see opportunities in the higher thrust which aerospace
companies (Bombardier, etc are major clients) are giving to efficient and light
engine design skill sets- areas where IEL has domain expertise and existing impressive client roster.
n We have in our DCF model built in higher growth rates for Infotech over the
medium term, given the improving demand environment.
Concerns
n A sharp acceleration in the rupee from our assumed levels will impact earnings
estimates negatively for the company.
n Belying of hopes of a pick up in the economic outlook of major user economies
could impact revenue growth of Infotech.
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