Infotech Enterprises - In the value zone; company update; Buy :: Edelweiss

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Infotech Enterprises (INFTC IN, INR 120, Buy)

Our recent meeting with the Infotech Enterprises (Infotech) management indicates that the weak macro environment has not impacted demand. While seasonal and one-off event may result in H2FY12 volume growth in the 3-4% range, we expect the company grow 20% (USD) in FY13E. Further, we  expects operating margins to continue to expand from 15.7% to over 19.0% driven by rightsizing the employee pyramid, turnaround in Daxcon (acquired company) and major benefit from weak INR. We revise our EBITDA margin assumption up to 16.8% for FY12 and 16.0% for FY13 leading to 6% EPS upgrade for FY13E. With P/E at 7x and EV/EBITDA at 2.9x FY13E, we reiterate ‘BUY’.  

Heavy engineering, aero and hi-tech lend growth visibility

We note that none of Infotech’s top10 clients are under stress or have witnessed demand breakdown from their end customers. This, in addition to new wins and ramp-up plans, is leading to 20% plus growth visibility in the engineering segment (contributes 70% to revenue). This is essentially spread across verticals such as heavy engineering, aerospace, utilities and energy segment.

No price pressure; sustainable margin improvement expected

Except for one large client in the telecom segment (where Infotech will consciously ramp-down, impacting growth in N&CE in Q4FY12) the company has not seen any pricing pressure. Infact, in one of Daxcon’s client pricing discount given earlier has been rolled back. This is likely to improve profitability of Daxcon (acquired company) that has so far not contributed to company profitability. Further, as FY12 growth will also be serviced by lower experienced employees, margin leverage will play out in H2FY12.

Outlook and valuations: Attractive; maintain ‘BUY’

At CMP of INR120, valuations at 7x P/E and 2.9x EV/EBITDA are attractive. Healthy revenue growth, margin accretion and increased dividend payout ratio will lead to upward re-rating of the stock. We reiterate ‘BUY/Sector Outperformer’.