INFOTECH ENTERPRISES Prospects to brighten ::Edelweiss

We recently met Infotech Enterprises (Infotech) management to get an
impression on the outlook of the company. The key message that we
inferred from our discussion was that the environment has improved
considerably compared to the previous quarter and the company remains
confident of achieving a growth higher than the industry. Further,
Infotech aspires to maintain margins at 18% levels. We remain confident
of the margin improvement on a YoY basis and expect revenue
momentum to pick up from Q2 onwards. At 8x FY14E earnings, we deem
valuations as attractive thus maintain ‘BUY’ with a TP of INR220.

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Growth momentum to pick up from Q2FY13 onwards
While the revenue growth has been sluggish for the past three quarters, we expect the
momentum to pick up due to a ramp-up in projects that were delayed in Q1FY13. The
management too indicated that the momentum is much better than that in the
previous quarter. In the Q1 concall, the management had indicated 14% plus USD
revenue growth for FY13 in CC. While we expect growth to be driven by Engineering
segment, it remains confident of UT&C segment too, due to improving deal pipeline.
Operating margins sustainable in 17%-18% range
Margin dipped 670bps in FY11 due to salary hikes, lower price realizations and
consolidation of low margin acquisitions (Wellsco, Daxcon and TTM). The management,
being cognizant of this margin concern, has taken various initiatives like broadening of
the pyramid, offshore shift and bringing in operational efficiencies which have led to
margins improving to ~18.7% in Q1FY13. As the growth traction improves focus on
operational tightening further, margin improvement will continue. We believe its
EBITDA margin is sustainable in the 17%-18% range.
Outlook and valuations: On right track; maintain ‘BUY’
As the momentum returns and Infotech delivers on its stated strategy and improves
cash generation and return ratios, valuations will improve from current P/E of 8.0x
FY14EPS which is lower than its historic range of 10-11x. We re-iterate our ‘BUY’
recommendation with target of INR220.