Infotech Enterprises - Mid sized IT vendor levered on Engineering and GIS ::Macquarie Research,

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Infotech Enterprises
Mid sized IT vendor levered on Engineering and GIS   
 We spoke with the management of Infotech Enterprises (INFTC IN) to
understand the outlook for the company and Engineering service offerings
and their positioning vs. offerings of the larger Indian IT vendors.
 Infotech is a mid-cap company which offers solutions in the GIS and
Engineering domain with focus on Aerospace, Rail, Hi-tech etc. Its portfolio of
offerings comprises Network & Content Engineering (NC&E) contributing 31%
of revenue, and Engineering, Manufacturing and Industrial Products
contributing 69% of revenue.
Margins look under pressure going forward
 Operating margins declined to 15% in FY11 (vs 22% in FY10). Based on our
interactions, we feel that margin pressure would be evident from: (1) Wage
inflation from a ~10% salary increment to staff in April-11, (2) Tax rate
shooting to ~30% in current year from 17% in FY11.  We believe that high
utilisation rates, 1,500+ net additions in FY12 would make it difficult to control
margins.
High client concentration risk
 The top 5 and 10 clients of Infotech Enterprises contribute 23% of total
company revenues and the top 5 and 10 clients contribute 38% and 57%,
respectively. The company focuses on Aerospace Engineering which
contributed ~40% of revenues in FY11.
Recent M&A would help top-line growth
 Infotech Enterprises saw a spate of M&A activity in CY2010. These should
help drive revenue growth. But cross border acquisitions tend to stress
margins due to high cost base and integration costs. A list of M&A  done by
the company includes:
 Acquired Wellsco, Inc, USA in Aug, 10. The company focuses on telecom
and employed 180 people.
 Acquired Daxcon Engineering, USA in Jan, 10. The company focuses on
Heavy equipment  and employed 150 people
 Long-term multi-year contracts with Hamilton Sundstrand Corporation,
Westinghouse Electric Company and Seawell AS of Norway during 2010.
Time for cherry picking selective mid caps
 We have positive investment views on Indian IT Services sector.  Our
preference is for mid-cap companies which are seeing strong demand
conditions and a rising margin profile resulting in better earnings in FY12-13.
 Among the mid caps, we prefer owning Hexaware and Mindtree on back of
better valuations and earnings growth in FY12. Among large caps, we like
Infosys and TCS.