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Company Overview
Infinite Computers Solutions (India) Ltd is a global service provider of Infrastructure Management
Services (IMS), Intellectual Property (IP) based Leveraged Solutions, and Application Development
& Maintenance (ADM) services, primarily focused on few large clients across Telecom, Media, Technology,
Manufacturing, Energy & Utilities and Healthcare verticals.
Investment Rationale
Strong Fundamentals and differentiated business model
Infinite revenues has grown at a healthy 3 year CAGR of 24.1% to Rs 6.6 bn in FY10, margins expanded
1,293 bps (FY07-10) to 17.3% and profits grew at a 3 year CAGR of 102.6% to Rs 840 mn
in FY10. The company has been able to maintain long term relationship with its top clients and have
competed successfully against most Tier-I players due to adoption of aggressive pricing and flexible
business engagement terms. In view of existing relationship with top clients, winning of new large
deals involving different engagement models, we expect the top line to grow at a healthy CAGR of
26.5% for FY10-13E. The company has been transforming itself from a onsite player to a typical
offshore one along with the adoption of new non-linear pricing models, which helped the company to
expand its margins along with maintaining its healthy top line growth rate. Going forward, we expect
further rise in off shoring activity, adoption of non-linear pricing mechanism to expand EBITDA margins
and increase profitability. We expect the EBITDA and PAT to grow at a CAGR of 29.8% and
30.3% respectively for FY10-13E.
Long-term and stable relationship with large Marquee clients to drive top-line growth
Infinite strategy to focus on few large clients have paid off well as it has been able to acquire, continue
and expand business with large clients such as Verizon, IBM, Fujitsu, Tellabs, Motorola and
Affiliated Computer Services (ACS). Verizon has been the top revenue contributing client since the
last ten years and has a current run rate of ~US$ 40 mn ( ~20% of revenues) down from ~40% in
FY10. We expect Infinite strong ability to service large clients effectively will boost top line and also
provide strong references for new client acquisitions (e.g. Motorola which is a client of Verizon).
Recent deal wins provide optimistic revenue outlook, further margin expansion possible
Infinite recent deal wins with clients such as Motorola, iyogi, ACS and Govt of Utharakhand provide
optimistic revenue outlook for the future. Moreover these deals are non linear engagements
(Revenue Sharing and Pay as per use) which typically have higher margins than T&M, thus boosting
margins as well. The company have spiced up higher margin RIM business by winning Fujitsu deal
in FY09 and iYogi in Q1FY11. The 4 year Fujitsu deal involves assured off take with 60% guarantee
and 40% variable payout while iYogi is expected to contribute ~US$10 mn in FY12E. Motorola deal
is expected to contribute ~US$ 40 mn in FY12E as revenue share contribution for infinite becomes
70% for 2nd to 5th year of operation with around 45% EBITDA which will boost margins.
Outlook and Valuation
In view of company’s ability to maintain long term relationships with large marquee clients, new deals
wins providing robust revenue visibility along with higher margins, shift to non linear pricing models
and efficient management we expect the company revenue and earnings to grow at 26.1% and
34.7% to Rs 11.1 bn and Rs 1.5 bn respectively in FY12E. The stock currently trades at a P/E of
4.7x and 3.7x FY12E and FY13E earnings which we think is at a steep discount to its peers considering
its high growth rate and healthy return ratios. We initiate the company with a “BUY” rating and
a DCF based target price of Rs 249 an upside of 58.6% from current levels. At this fair value the
stock trades at a P/E of 7.5x and 5.9x FY12E and FY13E estimates.
Investment Rationale
Strong long term relationship with large clients to drive growth further
Infinite strategy has always been to concentrate primarily on few larger clients (primarily fortune
500) and serve them well. Since inception, Infinite has been successful in acquiring and retaining
large clients like Verizon, IBM, Fujitsu, Tellabs, Motorola and ACS. Despite maintaining strong
long term relationship with its top clients it has been able to grow revenues consistently from them
and has been able to maintain a yearly revenue run rate of around US$10-20 mn. Infinite top 5
client contribute around 80% of its total revenues whereas it stands at ~30-40% for its peers.
However this client concentration has not hampered Infinite growth and it has been able to maintain
a health revenue CAGR growth of 24.1% during FY07-10 which includes the peak recession
period. We expect Infinite excellent client mining capability and ability to maintain strong relationship
with clients to help maintain its strong revenue growth rate in the coming years.
Infinite long term relationship can be attributed to its differentiated services offerings as follows.
Infinite has the strategy to focus more on onsite work during the initial years of association with
the clients and gradually move to offshore work as the client becomes old. This can be attributed
to the fact that the onsite revenue contribution has declined from 71.9% in FY09 to 66.2% in
FY10.
The company has an average onsite billing rate of US$ 50-65/hour which is around 20-25% discount
to other peers thus it helps the company to be more competitive.
It offers huge discount in offshore billing rate which as high as 40% as compared to its peers
which makes its services more attractive and more cost efficient for the client. The company
charges around US$ 15-20/ hour for offshore billing.
Differentiated Business model of engaging into higher margin -- Non linear pricing
models or new engagement models (NEMs)
Infinite engages with its clients using innovative risk-reward, revenue-sharing models, which allows
its customers to better align their R&D spend, extend flexible multi-vendor product portfolios
to their end clients and reduce their risks. The strategy also allows Infinite to increase its value
offering to its customers, who, in turn, benefit in the form of a more long term, sustainable and
profitable business model. The recent deal wins such as Motorola, iyogi, APDRP are examples of
such deal and revenues from these engagements will start pouring in from end of FY11E and
FY12E. The Revenue Sharing model accounted for 7% of the company’s revenue, while the traditional
T&M and Fixed price model contributed 51% and 42% to its total revenue in FY10. The contribution
of revenue sharing model accounted to 13.2% of revenues for 9M FY11 due to the contribution
of Motorola contract.
The company expects to derive around 33% from T&M, revenue share and fixed bid each by the
end of FY14 which we believe will help the company expand its margins while maintaining topline
growth. The nonlinear engagement model typically operate at around 40% margins, hence has
become the area of interest of all major IT companies. IT biggies such as Infosys and TCS are
also aggressively planning to increase their revenue from new engagement models, like profit
sharing, revenue sharing and usage based pricing. TCS has recently launched a cloud computing
initiative involving nonlinear pricing model and is targeting $1 bn revenues in the next few years.
Infosys targets around 8% of its revenues from new engagement models (NEM’s) in the next few
years.
Gradual shift towards higher margin services
The company follows a strategy of starting a relationship with a new client by offering lower margins
ADM services, slowly build the relationship with clients then gradually moved toward higher
margins non linear pricing models offering services like IP-based solutions, testing services and
RIM services. This has worked really well for Infinite and it has retained and grown relationship
with its top client since the last many years. Earlier Infinite was heavily focused on ADM services
for its large clients but now has been gradually shifting to other services such as IP leverage services,
Remote infrastructure management (RIM) and Enterprise solution software which usually
have higher margins. The contribution of ADM declined from 76% in FY08 to 58.9% for 9M FY11
while for IP leverage and RIM increased from 15.0% and 11.6% in FY08 to 19.5% and 11.3% in
9M FY11 respectively. We expect the company will continue focusing on non ADM services more
and contribution of non ADM services to increase further going further hence will provide boost to
margins.
Infinite has managed its margins pretty well and has consistently expanded since FY07. The margins
earlier were lower primarily due to focus on lower margins ADM business, higher onsite focus
and lower billing rates as compared to its peers. The company has done well in expanding its
margins, expanded it from 4.3% in FY07 to 17.3% in FY10. The massive expansion in margins
were primarily due to continued efforts to move work offshore and diversify revenues with increased
share of high-margin non ADM services. Contribution from ADM services reduced from
77% in FY08 to 64% in FY10. Also, the onsite revenue share reduced from 81% in FY08 to 66%
in FY10 thus boosting margins. Margin performance in FY11E is expected to be under a bit pressure
and decline 52 bps to 16.8% due to appreciating rupee, increase in onsite employee cost
due to transition of Motorola employees to Infinite and lower employee utilization in the RIM segment.
Sufficient Margins Levers present to expand Margins in FY12E
We expect margins to stabilize in coming years and we expect it to expand by 97 and 92 bps in
FY12E and FY13E to 17.7% and 18.6% respectively. The expansion in FY12E and FY13E will
primarily be driven by higher Utilization rates, shifting work offshore, and higher proportion of
revenues from higher margin revenue sharing IP leverage and fixed price pricing models.
The company onsite revenue proportion in Q3 stood at 66.1% as compared to 72% in FY09,
which we expect to decline further and will provide boost to margins in FY12E. The onsite revenue
proportion increased in H1 FY11 to 71.6% as compared to 66% in FY10 primarily due to
ramp-ups in Motorola deal though we expect it to decline as the company starts shifting work offshore.
Old Client References helped win new deals
Infinite has effectively used its old client’s references to win new clients. In the past four years, it
has acquired clients like ACS, Fujitsu, Tellabs and Motorola through old client’s references like
Verizon. It has effectively demonstrated its ability to leverage on its service delivery capabilities
and client references to achieve its goal of acquiring large clients involving different engagement
pricing models. We expect the company to further leverage its capability of mining existing client’s
contacts to win new deals. For example, Existing clients like ACS, which has been acquired by
Xerox, and Motorola, which has sold its network solutions business to Nokia Siemens Networks,
can provide access to even larger client accounts involving different revenue model.
IP-leverage and Testing based solutions to drive growth
Infinite successfully leveraged its experience in the Telecom vertical and started provided IP leverage
services. As a strategy for strengthening its IP-based solutions capabilities it acquired Comnet
International in August 2007. The acquisition provided Infinite access to product engineering
and lifecycle management related IP-based solutions and helped the company to add client accounts
like Alcatel-Lucent and Tellabs (both in which were in the telecom sector). As a result the
revenue from IP leverage and testing services shoot up from US$ 12.8mn in FY08 to US$ 30.5
mn in FY09 up 139.0% Y-o-Y. We believe the recent win of the Motorola deal in the IP leverage
space will be a revenue booster for the company and revenues will start flowing in completely in
FY12E. Interestingly the 9M FY11 revenues at US$ 42.5 mn has well surpassed the FY10 revenues
of US$ 39.5 mn primarily due to the start of inflow from the Motorola deal in Q3 FY11.We
believe with strong client references in the bag, Infinite plans to achieve the next level of growth
through higher-end services like IP-based solutions and testing services.
Valuation & Recommendation
In view of company’s ability to maintain long term relationships with large marquee clients, new
deals wins providing robust revenue visibility along with higher margins, shift to non linear pricing
models and efficient management we expect the company revenue and earnings to grow at
26.1% Y-o-Y and 34.7% Y-o-Y to Rs 11.1 bn and Rs 1.5 bn in FY12E. For FY13E we estimate
revenues and earnings to grow 20.7% Y-o-Y and 27.8% Y-o-Y to Rs 13.5 bn and Rs 1.9 bn Respectively.
We have estimated EPS to grow at a 3 year CAGR of 25.5% to Rs 42.3 in FY13E. The
stock currently trades at a P/E of 4.7x and 3.7x FY12E and FY13E earnings which we think is at a
steep discount to its peers considering its high growth rate and healthy return ratios. We initiate
the company with a “BUY” rating and a DCF based target price of Rs 249 an upside of 58.6%
from current levels. At this fair value the stock trades at a P/E of 7.5x and 5.9x FY12E and FY13E
estimates.
Key DCF assumptions
1. We have done DCF on FCF basis from FY11E to FY22E. We have considered a uniform
growth rate of 15% from FY15-22E to reach our target price.
2. Cost of Equity and WACC both at 13.1%, considering negligible debt levels.
3. Terminal Growth rate taken at 3%.
Peer Comparison
Despite company’s superior earnings growth (FY10-13E CAGR of 30.3% vs average of ~15% for
mid-cap IT companies) and one of the highest RoE the stock’s has been at trading at a huge
~50% discount to its peers. We believe that main reasons for the discount are primarily its high
revenue concentration from few large clients, geographical revenue concentration and exposure
to riskier revenue models. Going forward we believe that with the company’s proven track record
to manage large clients, ability to ramp-up operations effectively, traction in new deal won, higher
revenue growth, diversification in revenue stream ( from clients and geographies), and expansion
in margins in the next few quarters will narrow down the discount considerably and the company
will trade at valuations compared to its peers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Company Overview
Infinite Computers Solutions (India) Ltd is a global service provider of Infrastructure Management
Services (IMS), Intellectual Property (IP) based Leveraged Solutions, and Application Development
& Maintenance (ADM) services, primarily focused on few large clients across Telecom, Media, Technology,
Manufacturing, Energy & Utilities and Healthcare verticals.
Investment Rationale
Strong Fundamentals and differentiated business model
Infinite revenues has grown at a healthy 3 year CAGR of 24.1% to Rs 6.6 bn in FY10, margins expanded
1,293 bps (FY07-10) to 17.3% and profits grew at a 3 year CAGR of 102.6% to Rs 840 mn
in FY10. The company has been able to maintain long term relationship with its top clients and have
competed successfully against most Tier-I players due to adoption of aggressive pricing and flexible
business engagement terms. In view of existing relationship with top clients, winning of new large
deals involving different engagement models, we expect the top line to grow at a healthy CAGR of
26.5% for FY10-13E. The company has been transforming itself from a onsite player to a typical
offshore one along with the adoption of new non-linear pricing models, which helped the company to
expand its margins along with maintaining its healthy top line growth rate. Going forward, we expect
further rise in off shoring activity, adoption of non-linear pricing mechanism to expand EBITDA margins
and increase profitability. We expect the EBITDA and PAT to grow at a CAGR of 29.8% and
30.3% respectively for FY10-13E.
Long-term and stable relationship with large Marquee clients to drive top-line growth
Infinite strategy to focus on few large clients have paid off well as it has been able to acquire, continue
and expand business with large clients such as Verizon, IBM, Fujitsu, Tellabs, Motorola and
Affiliated Computer Services (ACS). Verizon has been the top revenue contributing client since the
last ten years and has a current run rate of ~US$ 40 mn ( ~20% of revenues) down from ~40% in
FY10. We expect Infinite strong ability to service large clients effectively will boost top line and also
provide strong references for new client acquisitions (e.g. Motorola which is a client of Verizon).
Recent deal wins provide optimistic revenue outlook, further margin expansion possible
Infinite recent deal wins with clients such as Motorola, iyogi, ACS and Govt of Utharakhand provide
optimistic revenue outlook for the future. Moreover these deals are non linear engagements
(Revenue Sharing and Pay as per use) which typically have higher margins than T&M, thus boosting
margins as well. The company have spiced up higher margin RIM business by winning Fujitsu deal
in FY09 and iYogi in Q1FY11. The 4 year Fujitsu deal involves assured off take with 60% guarantee
and 40% variable payout while iYogi is expected to contribute ~US$10 mn in FY12E. Motorola deal
is expected to contribute ~US$ 40 mn in FY12E as revenue share contribution for infinite becomes
70% for 2nd to 5th year of operation with around 45% EBITDA which will boost margins.
Outlook and Valuation
In view of company’s ability to maintain long term relationships with large marquee clients, new deals
wins providing robust revenue visibility along with higher margins, shift to non linear pricing models
and efficient management we expect the company revenue and earnings to grow at 26.1% and
34.7% to Rs 11.1 bn and Rs 1.5 bn respectively in FY12E. The stock currently trades at a P/E of
4.7x and 3.7x FY12E and FY13E earnings which we think is at a steep discount to its peers considering
its high growth rate and healthy return ratios. We initiate the company with a “BUY” rating and
a DCF based target price of Rs 249 an upside of 58.6% from current levels. At this fair value the
stock trades at a P/E of 7.5x and 5.9x FY12E and FY13E estimates.
Investment Rationale
Strong long term relationship with large clients to drive growth further
Infinite strategy has always been to concentrate primarily on few larger clients (primarily fortune
500) and serve them well. Since inception, Infinite has been successful in acquiring and retaining
large clients like Verizon, IBM, Fujitsu, Tellabs, Motorola and ACS. Despite maintaining strong
long term relationship with its top clients it has been able to grow revenues consistently from them
and has been able to maintain a yearly revenue run rate of around US$10-20 mn. Infinite top 5
client contribute around 80% of its total revenues whereas it stands at ~30-40% for its peers.
However this client concentration has not hampered Infinite growth and it has been able to maintain
a health revenue CAGR growth of 24.1% during FY07-10 which includes the peak recession
period. We expect Infinite excellent client mining capability and ability to maintain strong relationship
with clients to help maintain its strong revenue growth rate in the coming years.
Infinite long term relationship can be attributed to its differentiated services offerings as follows.
Infinite has the strategy to focus more on onsite work during the initial years of association with
the clients and gradually move to offshore work as the client becomes old. This can be attributed
to the fact that the onsite revenue contribution has declined from 71.9% in FY09 to 66.2% in
FY10.
The company has an average onsite billing rate of US$ 50-65/hour which is around 20-25% discount
to other peers thus it helps the company to be more competitive.
It offers huge discount in offshore billing rate which as high as 40% as compared to its peers
which makes its services more attractive and more cost efficient for the client. The company
charges around US$ 15-20/ hour for offshore billing.
Differentiated Business model of engaging into higher margin -- Non linear pricing
models or new engagement models (NEMs)
Infinite engages with its clients using innovative risk-reward, revenue-sharing models, which allows
its customers to better align their R&D spend, extend flexible multi-vendor product portfolios
to their end clients and reduce their risks. The strategy also allows Infinite to increase its value
offering to its customers, who, in turn, benefit in the form of a more long term, sustainable and
profitable business model. The recent deal wins such as Motorola, iyogi, APDRP are examples of
such deal and revenues from these engagements will start pouring in from end of FY11E and
FY12E. The Revenue Sharing model accounted for 7% of the company’s revenue, while the traditional
T&M and Fixed price model contributed 51% and 42% to its total revenue in FY10. The contribution
of revenue sharing model accounted to 13.2% of revenues for 9M FY11 due to the contribution
of Motorola contract.
The company expects to derive around 33% from T&M, revenue share and fixed bid each by the
end of FY14 which we believe will help the company expand its margins while maintaining topline
growth. The nonlinear engagement model typically operate at around 40% margins, hence has
become the area of interest of all major IT companies. IT biggies such as Infosys and TCS are
also aggressively planning to increase their revenue from new engagement models, like profit
sharing, revenue sharing and usage based pricing. TCS has recently launched a cloud computing
initiative involving nonlinear pricing model and is targeting $1 bn revenues in the next few years.
Infosys targets around 8% of its revenues from new engagement models (NEM’s) in the next few
years.
Gradual shift towards higher margin services
The company follows a strategy of starting a relationship with a new client by offering lower margins
ADM services, slowly build the relationship with clients then gradually moved toward higher
margins non linear pricing models offering services like IP-based solutions, testing services and
RIM services. This has worked really well for Infinite and it has retained and grown relationship
with its top client since the last many years. Earlier Infinite was heavily focused on ADM services
for its large clients but now has been gradually shifting to other services such as IP leverage services,
Remote infrastructure management (RIM) and Enterprise solution software which usually
have higher margins. The contribution of ADM declined from 76% in FY08 to 58.9% for 9M FY11
while for IP leverage and RIM increased from 15.0% and 11.6% in FY08 to 19.5% and 11.3% in
9M FY11 respectively. We expect the company will continue focusing on non ADM services more
and contribution of non ADM services to increase further going further hence will provide boost to
margins.
Infinite has managed its margins pretty well and has consistently expanded since FY07. The margins
earlier were lower primarily due to focus on lower margins ADM business, higher onsite focus
and lower billing rates as compared to its peers. The company has done well in expanding its
margins, expanded it from 4.3% in FY07 to 17.3% in FY10. The massive expansion in margins
were primarily due to continued efforts to move work offshore and diversify revenues with increased
share of high-margin non ADM services. Contribution from ADM services reduced from
77% in FY08 to 64% in FY10. Also, the onsite revenue share reduced from 81% in FY08 to 66%
in FY10 thus boosting margins. Margin performance in FY11E is expected to be under a bit pressure
and decline 52 bps to 16.8% due to appreciating rupee, increase in onsite employee cost
due to transition of Motorola employees to Infinite and lower employee utilization in the RIM segment.
Sufficient Margins Levers present to expand Margins in FY12E
We expect margins to stabilize in coming years and we expect it to expand by 97 and 92 bps in
FY12E and FY13E to 17.7% and 18.6% respectively. The expansion in FY12E and FY13E will
primarily be driven by higher Utilization rates, shifting work offshore, and higher proportion of
revenues from higher margin revenue sharing IP leverage and fixed price pricing models.
The company onsite revenue proportion in Q3 stood at 66.1% as compared to 72% in FY09,
which we expect to decline further and will provide boost to margins in FY12E. The onsite revenue
proportion increased in H1 FY11 to 71.6% as compared to 66% in FY10 primarily due to
ramp-ups in Motorola deal though we expect it to decline as the company starts shifting work offshore.
Old Client References helped win new deals
Infinite has effectively used its old client’s references to win new clients. In the past four years, it
has acquired clients like ACS, Fujitsu, Tellabs and Motorola through old client’s references like
Verizon. It has effectively demonstrated its ability to leverage on its service delivery capabilities
and client references to achieve its goal of acquiring large clients involving different engagement
pricing models. We expect the company to further leverage its capability of mining existing client’s
contacts to win new deals. For example, Existing clients like ACS, which has been acquired by
Xerox, and Motorola, which has sold its network solutions business to Nokia Siemens Networks,
can provide access to even larger client accounts involving different revenue model.
IP-leverage and Testing based solutions to drive growth
Infinite successfully leveraged its experience in the Telecom vertical and started provided IP leverage
services. As a strategy for strengthening its IP-based solutions capabilities it acquired Comnet
International in August 2007. The acquisition provided Infinite access to product engineering
and lifecycle management related IP-based solutions and helped the company to add client accounts
like Alcatel-Lucent and Tellabs (both in which were in the telecom sector). As a result the
revenue from IP leverage and testing services shoot up from US$ 12.8mn in FY08 to US$ 30.5
mn in FY09 up 139.0% Y-o-Y. We believe the recent win of the Motorola deal in the IP leverage
space will be a revenue booster for the company and revenues will start flowing in completely in
FY12E. Interestingly the 9M FY11 revenues at US$ 42.5 mn has well surpassed the FY10 revenues
of US$ 39.5 mn primarily due to the start of inflow from the Motorola deal in Q3 FY11.We
believe with strong client references in the bag, Infinite plans to achieve the next level of growth
through higher-end services like IP-based solutions and testing services.
Valuation & Recommendation
In view of company’s ability to maintain long term relationships with large marquee clients, new
deals wins providing robust revenue visibility along with higher margins, shift to non linear pricing
models and efficient management we expect the company revenue and earnings to grow at
26.1% Y-o-Y and 34.7% Y-o-Y to Rs 11.1 bn and Rs 1.5 bn in FY12E. For FY13E we estimate
revenues and earnings to grow 20.7% Y-o-Y and 27.8% Y-o-Y to Rs 13.5 bn and Rs 1.9 bn Respectively.
We have estimated EPS to grow at a 3 year CAGR of 25.5% to Rs 42.3 in FY13E. The
stock currently trades at a P/E of 4.7x and 3.7x FY12E and FY13E earnings which we think is at a
steep discount to its peers considering its high growth rate and healthy return ratios. We initiate
the company with a “BUY” rating and a DCF based target price of Rs 249 an upside of 58.6%
from current levels. At this fair value the stock trades at a P/E of 7.5x and 5.9x FY12E and FY13E
estimates.
Key DCF assumptions
1. We have done DCF on FCF basis from FY11E to FY22E. We have considered a uniform
growth rate of 15% from FY15-22E to reach our target price.
2. Cost of Equity and WACC both at 13.1%, considering negligible debt levels.
3. Terminal Growth rate taken at 3%.
Peer Comparison
Despite company’s superior earnings growth (FY10-13E CAGR of 30.3% vs average of ~15% for
mid-cap IT companies) and one of the highest RoE the stock’s has been at trading at a huge
~50% discount to its peers. We believe that main reasons for the discount are primarily its high
revenue concentration from few large clients, geographical revenue concentration and exposure
to riskier revenue models. Going forward we believe that with the company’s proven track record
to manage large clients, ability to ramp-up operations effectively, traction in new deal won, higher
revenue growth, diversification in revenue stream ( from clients and geographies), and expansion
in margins in the next few quarters will narrow down the discount considerably and the company
will trade at valuations compared to its peers.
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