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INFOTECH ENTERPRISES LTD (IEL)
PRICE: RS.125 RECOMMENDATION: BUY
TARGET PRICE: RS.163 FY13E P/E: 7.1X
Infotech's results were better than expected, on the operational front,
largely on the back of higher margins. While volumes grew by 2.3% (4.1%
in 2Q), margins improved by an above-expected 485bps. Apart from
currency, better scale and cost control initiatives helped improve the
margins. The average realisations were almost flat, according to the
management. The company has finalised billing rate increases for a major
part of the business from the largest client (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 and FY13. FY12E earnings now stand at Rs.13.4 per share
(Rs.13.1) and FY13E earnings at Rs.17.6 per share (Rs.16 earlier). The
improvement is largely on the back of changes in currency assumptions. We
tweak our PT to Rs.163 (v/s Rs.155), based on FY13 estimates. At our target
price FY13 estimates will be discounted by about 7.3x. We believe this
discount to larger peers is justified due to the lower margins. We are also
concerned about relatively high proportion of project-based revenues (in
N&CE). We maintain BUY, purely based on valuations and continue to prefer
the larger peers. Expected cash of Rs.43 per share by FY13 end, may provide
cushion to the stock.
Revenues were up 11.8% - Volume growth at 2.3%
n Revenues for the quarter grew by 11.8% QoQ, largely on the back of rupee
depreciation. Volumes were 2.3% higher QoQ.
n While ENGG vertical reported a 2.3% rise in volumes, N&CE (Network and Content
Engineering) saw volumes grow by 2%.
n Infotech bagged 11 new accounts during the quarter of which, 5 were in the
ENGG vertical and the balance in N&CE.
n In N&CE, revenues from USA and APAC grew faster on a sequential basis.
n The company was able to get new accounts in the previous quarter and they are
likely to continue to scale up over the next few quarters.
n Infotech also signed up 2 'must-have' accounts in EMEA during the quarter,
which have the potential to grow into large accounts in FY13. These clients
should help the company 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 power utility and content engineering
business during the quarter.
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 have already 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.
Aerospace and HTH continue to see strong traction.
n The client budgets for about 80% of the clients have been finalised and they are
either flat or marginally high YoY.
n We understand growth came due to the scale up in existing accounts and in new
accounts. Infotech added two potentially large accounts during the quarter.
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.
Average realisations flat
n Infotech has indicated that, average realisations were flat on a QoQ basis.
n In the previous quarters, 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 its largest
client for 2/3rd of its business. This increment is 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 485 bps (318bps in 2Q). This
was above estimates.
n The margins were helped by currency (390bps) and scale / operational efficiencies
(100bps).
n We view this improvement as encouraging as it comes after a large improvement
in 2Q also.
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 in
4Q. 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.315mn (86mn loss in 2Q) due to currency fluctuations
which set-off Rs.84mn of income from investments. This loss led to a relatively
lower growth in PAT.
n The company provided tax at the rate of 36% of PBT. Management expects the
same to remain at around 34% in 4QFY12 and at about 33% in FY13.
Tweak earnings estimates
n We have tweaked our earnings expectations to accommodate the changed currency
scenario.
n For 4QFY12, we have assumed the exchange rate at Rs.51 / USD and for FY13
at 50 / USD.
n For FY13, we expect revenues to grow at 16%, led by volumes.
n Margins are expected to be largely maintained as the company employs various
levers to sustain margins despite salary increments.
n Consequently, EBIDTA is expected to rise by 12%. A relatively higher other income
component may lead to a 33% rise in PAT. Infotech is already a high tax
paying company.
n EPS for FY13E works out to Rs.17.6.
n We expect the company to have net cash of about Rs.4.7bn by FY13 end, which
works out to Rs.43 per share.
Margin performance has to improve for valuations to go up
n Infotech has managed to deepen engagement for clients like UTC, 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 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.
n We accord a suitable discount to Infotech as compared to the valuations of larger
companies and arrive at a PT of Rs.163.
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.125 RECOMMENDATION: BUY
TARGET PRICE: RS.163 FY13E P/E: 7.1X
Infotech's results were better than expected, on the operational front,
largely on the back of higher margins. While volumes grew by 2.3% (4.1%
in 2Q), margins improved by an above-expected 485bps. Apart from
currency, better scale and cost control initiatives helped improve the
margins. The average realisations were almost flat, according to the
management. The company has finalised billing rate increases for a major
part of the business from the largest client (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 and FY13. FY12E earnings now stand at Rs.13.4 per share
(Rs.13.1) and FY13E earnings at Rs.17.6 per share (Rs.16 earlier). The
improvement is largely on the back of changes in currency assumptions. We
tweak our PT to Rs.163 (v/s Rs.155), based on FY13 estimates. At our target
price FY13 estimates will be discounted by about 7.3x. We believe this
discount to larger peers is justified due to the lower margins. We are also
concerned about relatively high proportion of project-based revenues (in
N&CE). We maintain BUY, purely based on valuations and continue to prefer
the larger peers. Expected cash of Rs.43 per share by FY13 end, may provide
cushion to the stock.
Revenues were up 11.8% - Volume growth at 2.3%
n Revenues for the quarter grew by 11.8% QoQ, largely on the back of rupee
depreciation. Volumes were 2.3% higher QoQ.
n While ENGG vertical reported a 2.3% rise in volumes, N&CE (Network and Content
Engineering) saw volumes grow by 2%.
n Infotech bagged 11 new accounts during the quarter of which, 5 were in the
ENGG vertical and the balance in N&CE.
n In N&CE, revenues from USA and APAC grew faster on a sequential basis.
n The company was able to get new accounts in the previous quarter and they are
likely to continue to scale up over the next few quarters.
n Infotech also signed up 2 'must-have' accounts in EMEA during the quarter,
which have the potential to grow into large accounts in FY13. These clients
should help the company 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 power utility and content engineering
business during the quarter.
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 have already 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.
Aerospace and HTH continue to see strong traction.
n The client budgets for about 80% of the clients have been finalised and they are
either flat or marginally high YoY.
n We understand growth came due to the scale up in existing accounts and in new
accounts. Infotech added two potentially large accounts during the quarter.
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.
Average realisations flat
n Infotech has indicated that, average realisations were flat on a QoQ basis.
n In the previous quarters, 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 its largest
client for 2/3rd of its business. This increment is 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 485 bps (318bps in 2Q). This
was above estimates.
n The margins were helped by currency (390bps) and scale / operational efficiencies
(100bps).
n We view this improvement as encouraging as it comes after a large improvement
in 2Q also.
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 in
4Q. 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.315mn (86mn loss in 2Q) due to currency fluctuations
which set-off Rs.84mn of income from investments. This loss led to a relatively
lower growth in PAT.
n The company provided tax at the rate of 36% of PBT. Management expects the
same to remain at around 34% in 4QFY12 and at about 33% in FY13.
Tweak earnings estimates
n We have tweaked our earnings expectations to accommodate the changed currency
scenario.
n For 4QFY12, we have assumed the exchange rate at Rs.51 / USD and for FY13
at 50 / USD.
n For FY13, we expect revenues to grow at 16%, led by volumes.
n Margins are expected to be largely maintained as the company employs various
levers to sustain margins despite salary increments.
n Consequently, EBIDTA is expected to rise by 12%. A relatively higher other income
component may lead to a 33% rise in PAT. Infotech is already a high tax
paying company.
n EPS for FY13E works out to Rs.17.6.
n We expect the company to have net cash of about Rs.4.7bn by FY13 end, which
works out to Rs.43 per share.
Margin performance has to improve for valuations to go up
n Infotech has managed to deepen engagement for clients like UTC, 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 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.
n We accord a suitable discount to Infotech as compared to the valuations of larger
companies and arrive at a PT of Rs.163.
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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