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Infotech-------------------------------------------------------------- Downgrade to UNDERPERFORM
Margin improvement remains a distant dream
● Infotech Enterprises reported in-line revenue growth, but
disappointed on margins leading to EBIT missing our estimates by
10%. Lower tax led to EPS in line with estimates.
● Management has remained optimistic on margins for the past few
quarters but have not been able to meet targets. The bigger
surprise is that the company does not have even one quarter of
margin predictability.
● Revenue growth over the past year has been decent (21% YoY
organic growth) but not outstanding. The company stated that
problems in a couple of large clients limited the revenue numbers.
● We thus find that management guidance of 25%+ revenue growth
(US$ terms) and 16-17% EBITDA margin optimistic and peg our
numbers at 23% revenue growth and 15% EBITDA margin.
● Our FY12/13 EPS estimates decline by 21%/24%. We now set a
target price of Rs140 at 11x FY3/12 EPS. We downgrade the
stock to UNDERPERFORM from (Outperform).
In-line top line, miss on margins
Infotech Enterprises reported 3.8% QoQ revenue growth, largely in line
with our estimates. The engineering vertical grew 6.3% QoQ, while the
NCE vertical degrew 1.4% QoQ due to customer-specific issues.
Margins dropped 60 bp QoQ vs our expectation of a 70 bp
improvement. This led to EBIT missing our estimates by 10%.
Significantly lower taxes more than offset the impact of lower other
income and thus, net profit was 1% ahead of our estimate.
Management explained that margin drop was due to increased
investment in sales and marketing and one-off increases in ‘other
operating costs’ such as accrual revaluations, provisions for
healthcare costs in the Daxcon subsidiary and provision for year-end
commissions.
Wage inflation headwinds in the next quarter
Management informed us that it planned to give wage hikes of 10% to
offshore employees and 2% to onsite employees, in the next quarter.
In our view, this could see an upward revision considering the strong
demand environment.
Four quarters of margin miss a concern
We note that the company has been missing margin estimates for
each of the past four quarters. While management has often indicated
its ambition to improve margins, we continue to be disappointed by
lack of discipline in controlling costs.
Management targets seem too optimistic
The company has guided for US$-revenue growth of 25% YoY and
EBITDA margin of 16-17% in FY12. This compares with organic
revenue growth of ~21% YoY US$-revenue growth and EBITDA
margin of 15% in FY11. Given continued weakness in key customer
accounts and wage inflation headwinds, we believe management
targets are too optimistic.
Downgrade to UNDERPERFORM
We incorporate our views into our model and now build a 23%
revenue growth and 15% EBITDA margins in FY3/12. Our EPS
estimates decline 21% and 24% for FY3/12 and FY3/13, respectively.
Valuing the stock at 11x FY3/12E EPS, we derive our new target price
of Rs140 (Rs200 previously) and downgrade the stock to
UNDERPERFORM.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infotech-------------------------------------------------------------- Downgrade to UNDERPERFORM
Margin improvement remains a distant dream
● Infotech Enterprises reported in-line revenue growth, but
disappointed on margins leading to EBIT missing our estimates by
10%. Lower tax led to EPS in line with estimates.
● Management has remained optimistic on margins for the past few
quarters but have not been able to meet targets. The bigger
surprise is that the company does not have even one quarter of
margin predictability.
● Revenue growth over the past year has been decent (21% YoY
organic growth) but not outstanding. The company stated that
problems in a couple of large clients limited the revenue numbers.
● We thus find that management guidance of 25%+ revenue growth
(US$ terms) and 16-17% EBITDA margin optimistic and peg our
numbers at 23% revenue growth and 15% EBITDA margin.
● Our FY12/13 EPS estimates decline by 21%/24%. We now set a
target price of Rs140 at 11x FY3/12 EPS. We downgrade the
stock to UNDERPERFORM from (Outperform).
In-line top line, miss on margins
Infotech Enterprises reported 3.8% QoQ revenue growth, largely in line
with our estimates. The engineering vertical grew 6.3% QoQ, while the
NCE vertical degrew 1.4% QoQ due to customer-specific issues.
Margins dropped 60 bp QoQ vs our expectation of a 70 bp
improvement. This led to EBIT missing our estimates by 10%.
Significantly lower taxes more than offset the impact of lower other
income and thus, net profit was 1% ahead of our estimate.
Management explained that margin drop was due to increased
investment in sales and marketing and one-off increases in ‘other
operating costs’ such as accrual revaluations, provisions for
healthcare costs in the Daxcon subsidiary and provision for year-end
commissions.
Wage inflation headwinds in the next quarter
Management informed us that it planned to give wage hikes of 10% to
offshore employees and 2% to onsite employees, in the next quarter.
In our view, this could see an upward revision considering the strong
demand environment.
Four quarters of margin miss a concern
We note that the company has been missing margin estimates for
each of the past four quarters. While management has often indicated
its ambition to improve margins, we continue to be disappointed by
lack of discipline in controlling costs.
Management targets seem too optimistic
The company has guided for US$-revenue growth of 25% YoY and
EBITDA margin of 16-17% in FY12. This compares with organic
revenue growth of ~21% YoY US$-revenue growth and EBITDA
margin of 15% in FY11. Given continued weakness in key customer
accounts and wage inflation headwinds, we believe management
targets are too optimistic.
Downgrade to UNDERPERFORM
We incorporate our views into our model and now build a 23%
revenue growth and 15% EBITDA margins in FY3/12. Our EPS
estimates decline 21% and 24% for FY3/12 and FY3/13, respectively.
Valuing the stock at 11x FY3/12E EPS, we derive our new target price
of Rs140 (Rs200 previously) and downgrade the stock to
UNDERPERFORM.
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