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INFOTECH ENTERPRISES LTD (IEL)
PRICE: RS.115 RECOMMENDATION: BUY
TARGET PRICE: RS.155 FY13E P/E: 7.2X
Infotech's results were better than expected. While volumes grew by 4.1%,
margins improved by an above-expected 318bps. Apart from currency, better
scale and cost control initiatives helped improve the margins. The company
is witnessing good traction from clients and has also finalised billing rate
increases from two large accounts (WEF January 2011). However, we believe
that, the overall uncertainties in the macro environment may restrict
significant improvement in billing rates. We tweak our earnings estimates
for FY12. FY12E earnings now stand at Rs.13.1 per share (Rs.12.9). We
introduce FY13 estimates where we expect EPS of Rs.16. We maintain our PT
at Rs.155, based on FY13 estimates. At our target price FY13 estimates will
be discounted by about 10x. We believe this discount to larger peers is
justified due to the lower margins. We are also concerned about the
relatively high proportion of project-based revenues (in N&CE). We
recommend BUY (Accumulate), purely based on valuations and continue to
prefer the larger peers. Expected cash of Rs.41 per share by FY13 end, may
provide cushion to the stock.
Revenues were up 7.5% - Volume growth in line
n Revenues for the quarter grew by 7.5% QoQ. Volumes were 4.1% higher QoQ.
n While ENGG vertical reported a 5% rise in volumes, N&CE (Network and Content
Engineering) saw volumes grow by 6.3%.
n Infotech bagged 11 new accounts during the quarter of which, 7 were in the
ENGG vertical and the balance in N&CE.
n In N&CE, revenues from Europe grew on a sequential basis. The company was
able to get new accounts and tide over the impact of a ramp down in two large
accounts (BT and Rural Payment Agency).
n The company continued to see traction in the telecom vertical. 2Q had seen traction
with a couple of telecom customers and also in revenue from three new
customers.
n Infotech witnessed good traction in North America, with increased volumes from
some of its largest telecom and utility clients.
n This vertical has been facing continuing client issues. The projects-based nature
of N&CE revenues also adds to the uncertainty.
n Within this vertical, 45% of revenues come from telecom, 30% from content
engineering and the balance from utilities.
n In ENGG, the revenues from Aerospace Engineering has crossed the Rs.2.5bn
quarterly mark.
n ENGG has been witnessing consistent growth over the past few quarters on the
back of significant new additions and scale up of existing accounts.
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 Aerospace and HTH continue to see strong traction.
n The client budgets are expected to be higher for companies in these verticals. Hitech
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 in existing accounts and scale
up in new accounts.
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 Within ENGG, aerospace contributes 55% of revenues, rail transportation 20%,
heavy engineering 15% and hitech, the balance.
Marginal realisation increases
n Infotech has indicated that, average realisations went up by about 0.5%. In the
previous quarter, the management had conceded that, some of the billing rate
increases, which were expected to come in, had failed to materialise.
n We understand that, the company has negotiated price increases with two of its
large customers. These increments are expected to come in WEF 1QCY12.
n We view this positively but would like to see actual implementation of these increases,
in the backdrop of the macro uncertainties.
EBIDTA margins were a positive surprise
n EBITDA margins for the quarter were up by about 318bps. This was above estimates.
n The margins were helped by currency (100bps), pricing (30bps) and scale / operational
efficiencies.
n We view this improvement as encouraging but also note that, it comes after a
larger-than-expected fall in the previous quarter.
n Margin performance of Infotech has been disappointing for the past few quarters
and is a reflection of the challenges faced by mid-tier companies from attrition
and S&M investments, which they are forced to make.
n We have been indicating that, salary increments, higher levels of attrition and
need to invest in business generating initiatives will put pressure on margins.
n The management now expects to improve margins (ex-forex) by about 100bps
per quarter in 2H. This is expected to be led by the pyramid effect, cost rationalization
and scale benefits.
"Other income' and tax
n Infotech reported a loss of Rs.86mn due to currency fluctuations which set-off
Rs.64mn of income from investments. This loss led to a relatively lower growth in
PAT.
n The company provided tax at the rate of 34% of PBT. Management expects the
same to remain at around these levels in 2HFY12 and in FY13.
Tweak FY12 estimates; introduce FY13 estimates
n We have tweaked our earnings expectations to accommodate the changed currency
scenario.
n For 2HFY12, we have assumed the exchange rate at Rs.47.5 / USD.
n Consequently, EPS is expected to be marginally higher at Rs.13.1.
n For FY13, we expect revenues to grow at 17%, led by volumes. We have assumed
a more normalised exchange rate of about Rs.46 / USD in FY13.
n Margins are expected to be maintained as the company employs various levers
to sustain margins despite salary increments.
n Consequently, PAT is expected to rise by 22% to Rs.1.78bn, resulting in an EPS
of Rs.16.
n We expect the company to have net cash of about Rs.4.6bn by FY13 end, which
works out to Rs.41 per share.
Deep relationships augur well; however margins performance
has to improve
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 However, margins have a lot of scope for improvement.
n These reflect the challenges of a mid-tier company and we will become more
positive only after seeing a sustained improvement in the same.
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.115 RECOMMENDATION: BUY
TARGET PRICE: RS.155 FY13E P/E: 7.2X
Infotech's results were better than expected. While volumes grew by 4.1%,
margins improved by an above-expected 318bps. Apart from currency, better
scale and cost control initiatives helped improve the margins. The company
is witnessing good traction from clients and has also finalised billing rate
increases from two large accounts (WEF January 2011). However, we believe
that, the overall uncertainties in the macro environment may restrict
significant improvement in billing rates. We tweak our earnings estimates
for FY12. FY12E earnings now stand at Rs.13.1 per share (Rs.12.9). We
introduce FY13 estimates where we expect EPS of Rs.16. We maintain our PT
at Rs.155, based on FY13 estimates. At our target price FY13 estimates will
be discounted by about 10x. We believe this discount to larger peers is
justified due to the lower margins. We are also concerned about the
relatively high proportion of project-based revenues (in N&CE). We
recommend BUY (Accumulate), purely based on valuations and continue to
prefer the larger peers. Expected cash of Rs.41 per share by FY13 end, may
provide cushion to the stock.
Revenues were up 7.5% - Volume growth in line
n Revenues for the quarter grew by 7.5% QoQ. Volumes were 4.1% higher QoQ.
n While ENGG vertical reported a 5% rise in volumes, N&CE (Network and Content
Engineering) saw volumes grow by 6.3%.
n Infotech bagged 11 new accounts during the quarter of which, 7 were in the
ENGG vertical and the balance in N&CE.
n In N&CE, revenues from Europe grew on a sequential basis. The company was
able to get new accounts and tide over the impact of a ramp down in two large
accounts (BT and Rural Payment Agency).
n The company continued to see traction in the telecom vertical. 2Q had seen traction
with a couple of telecom customers and also in revenue from three new
customers.
n Infotech witnessed good traction in North America, with increased volumes from
some of its largest telecom and utility clients.
n This vertical has been facing continuing client issues. The projects-based nature
of N&CE revenues also adds to the uncertainty.
n Within this vertical, 45% of revenues come from telecom, 30% from content
engineering and the balance from utilities.
n In ENGG, the revenues from Aerospace Engineering has crossed the Rs.2.5bn
quarterly mark.
n ENGG has been witnessing consistent growth over the past few quarters on the
back of significant new additions and scale up of existing accounts.
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 Aerospace and HTH continue to see strong traction.
n The client budgets are expected to be higher for companies in these verticals. Hitech
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 in existing accounts and scale
up in new accounts.
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 Within ENGG, aerospace contributes 55% of revenues, rail transportation 20%,
heavy engineering 15% and hitech, the balance.
Marginal realisation increases
n Infotech has indicated that, average realisations went up by about 0.5%. In the
previous quarter, the management had conceded that, some of the billing rate
increases, which were expected to come in, had failed to materialise.
n We understand that, the company has negotiated price increases with two of its
large customers. These increments are expected to come in WEF 1QCY12.
n We view this positively but would like to see actual implementation of these increases,
in the backdrop of the macro uncertainties.
EBIDTA margins were a positive surprise
n EBITDA margins for the quarter were up by about 318bps. This was above estimates.
n The margins were helped by currency (100bps), pricing (30bps) and scale / operational
efficiencies.
n We view this improvement as encouraging but also note that, it comes after a
larger-than-expected fall in the previous quarter.
n Margin performance of Infotech has been disappointing for the past few quarters
and is a reflection of the challenges faced by mid-tier companies from attrition
and S&M investments, which they are forced to make.
n We have been indicating that, salary increments, higher levels of attrition and
need to invest in business generating initiatives will put pressure on margins.
n The management now expects to improve margins (ex-forex) by about 100bps
per quarter in 2H. This is expected to be led by the pyramid effect, cost rationalization
and scale benefits.
"Other income' and tax
n Infotech reported a loss of Rs.86mn due to currency fluctuations which set-off
Rs.64mn of income from investments. This loss led to a relatively lower growth in
PAT.
n The company provided tax at the rate of 34% of PBT. Management expects the
same to remain at around these levels in 2HFY12 and in FY13.
Tweak FY12 estimates; introduce FY13 estimates
n We have tweaked our earnings expectations to accommodate the changed currency
scenario.
n For 2HFY12, we have assumed the exchange rate at Rs.47.5 / USD.
n Consequently, EPS is expected to be marginally higher at Rs.13.1.
n For FY13, we expect revenues to grow at 17%, led by volumes. We have assumed
a more normalised exchange rate of about Rs.46 / USD in FY13.
n Margins are expected to be maintained as the company employs various levers
to sustain margins despite salary increments.
n Consequently, PAT is expected to rise by 22% to Rs.1.78bn, resulting in an EPS
of Rs.16.
n We expect the company to have net cash of about Rs.4.6bn by FY13 end, which
works out to Rs.41 per share.
Deep relationships augur well; however margins performance
has to improve
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 However, margins have a lot of scope for improvement.
n These reflect the challenges of a mid-tier company and we will become more
positive only after seeing a sustained improvement in the same.
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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