Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INFOTECH ENTERPRISES LTD (IEL)
PRICE: RS.139 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.155 FY12E P/E: 10.4X
Infotech's results were disappointing. While volumes grew at a decent 5.6%
QoQ, EBIDTA margins fell more than expected. The management has
indicated that, pricing improvements have not materialised to the desired
extent. We had assumed some benefit in margins because of the expected
increase in billing rates. The margin performance reflects the continuing
pressure of attrition and salaries on mid-tier company, which also have to
invest in demand generating initiatives. Overall, we tweak our earnings
estimates for FY12. FY12E earnings now stand at Rs.13.3 per share (Rs.14.9).
Consequently, our PT stands revised to Rs.155 v/s Rs.174 earlier. At our
target price FY12 estimates will be discounted by about 12x. We believe this
discount to larger peers is justified due to the pressure on margins. We
maintain ACCUMULATE. We believe that, Infotech will have to address the
above mentioned concerns before we turn more positive on the stock. We
are also concerned about the relatively high proportion of project-based
revenues (in N&CE), in addition to currency fluctuations
Revenues were up 6% - Volume growth in line
n Revenues for the quarter grew by 6.4% QoQ. Volumes were 5.6% higher QoQ.
n While ENGG vertical reported a 6.3% rise in volumes, N&CE (Network and Content
Engineering) saw volumes grow by 4.4%.
n Infotech bagged 7 new accounts during the quarter of which, 3 were in the
ENGG vertical and the balance in N&CE.
n In N&CE, revenues from Europe were impacted in 4QFY11 as two of the top 5
clients (BT and Rural Payment Agency) reduced / tightened their budgets. However,
we understand that, the company has been able to tide over this impact in
1QFY12.
n The company saw traction with a couple of telecoms 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 The company signed a long term agreement with one of the global leaders in
mining and construction equipment.
n This vertical has been facing continuing client issues. The projects-based nature
of N&CE revenues also adds to the uncertainty.
n In ENGG, the revenues from Aerospace Engineering has crossed the $100mn
annual mark. The company entered into a strategic partnership with a chip OEM
in the previous quarter and this is expected to scale up in due course. This was
its second such partnership in the HiTech space.
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 The client budgets are expected to be higher for companies in these three verticals.
Hi-tech 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 is existing accounts and scale
up in new accounts from Hamilton Sunstrand and Westinghouse. However, the
scale up in Westinghouse will be more gradual.
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.
Marginal realisation increases - lower than expected
n Infotech has conceded that, some of the billing rate increases, which were expected
to come in, have failed to materialise.
n Due to this, there was a meagre 0.1% improvement in average realisations in
1Q.
n In the previous quarter, the company had indicated that, it will secure billing rate
increases for off-shore services. The full impact is expected to be felt WEF
1QFY12.
n We view this with concern because in absence of these rate increases, the company
will find it difficult to sustain and improve margins significantly.
EBIDTA margins were a negative surprise.
n EBITDA margins for the quarter were down on a QoQ basis by 190bps. This was
disappointing, especially after a steep fall in 4QFY11. 4QFY11 also had a one
time impact of about 80bps, which was expected to cushion the margin fall.
n The margins were impacted by salary hikes given during the quarter - 3% on-site
and about 12% off-shore, according to the management.
n Margin performance of Infotech has been disappointing for the past few quarters
and we see this as a reflection of the challenges faced by mid-tier companies
from attrition and S&M investments, which they are forced to make.
n We had indicated that, salary increments, higher levels of attrition and need to
invest in business generating initiatives will put pressure on margins.
n The management has scaled down its target margins from about 18% to 15-
16% (by Fy12 end).
"Other income' and tax
n Infotech reported other income of Rs.64mn, which was higher than our expectations.
n The company provided tax at the rate of 33% of PBT which was higher than
expectations.. Management expects the same to move up to about 30% in
FY12E.
Tweak estimates
n We have tweaked our earnings expectations to accommodate the lower than
expected margins in 1QFY12.
n For FY12, we have assumed a revenue growth of about 26%, led by ENGG.
n EBIDTA margins are expected to fall marginally on the back of salary increases
and assumed rupee appreciation. Higher capacity utilisation and rightsizing initiatives
may cushion some impact.
n We have assumed tax rate to rise to 29% of PBT in FY12 v/s about 17% in FY11,
in line with the management guidance of 30% - 31%.
n Consequently, PAT is expected to rise by about 6% to Rs.1.48bn, resulting into
an EPS of Rs.13.3.
n We expect the company to have net cash of about Rs.4.5bn by FY12 end, which
works out to Rs.40 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 We have in our DCF model built in higher growth rates for Infotech over the
medium term, given the improving demand environment.
n However, margins have a lot of scope for improvement. They have fallen by
1000bps over the past 8 quarters.
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.139 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.155 FY12E P/E: 10.4X
Infotech's results were disappointing. While volumes grew at a decent 5.6%
QoQ, EBIDTA margins fell more than expected. The management has
indicated that, pricing improvements have not materialised to the desired
extent. We had assumed some benefit in margins because of the expected
increase in billing rates. The margin performance reflects the continuing
pressure of attrition and salaries on mid-tier company, which also have to
invest in demand generating initiatives. Overall, we tweak our earnings
estimates for FY12. FY12E earnings now stand at Rs.13.3 per share (Rs.14.9).
Consequently, our PT stands revised to Rs.155 v/s Rs.174 earlier. At our
target price FY12 estimates will be discounted by about 12x. We believe this
discount to larger peers is justified due to the pressure on margins. We
maintain ACCUMULATE. We believe that, Infotech will have to address the
above mentioned concerns before we turn more positive on the stock. We
are also concerned about the relatively high proportion of project-based
revenues (in N&CE), in addition to currency fluctuations
Revenues were up 6% - Volume growth in line
n Revenues for the quarter grew by 6.4% QoQ. Volumes were 5.6% higher QoQ.
n While ENGG vertical reported a 6.3% rise in volumes, N&CE (Network and Content
Engineering) saw volumes grow by 4.4%.
n Infotech bagged 7 new accounts during the quarter of which, 3 were in the
ENGG vertical and the balance in N&CE.
n In N&CE, revenues from Europe were impacted in 4QFY11 as two of the top 5
clients (BT and Rural Payment Agency) reduced / tightened their budgets. However,
we understand that, the company has been able to tide over this impact in
1QFY12.
n The company saw traction with a couple of telecoms 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 The company signed a long term agreement with one of the global leaders in
mining and construction equipment.
n This vertical has been facing continuing client issues. The projects-based nature
of N&CE revenues also adds to the uncertainty.
n In ENGG, the revenues from Aerospace Engineering has crossed the $100mn
annual mark. The company entered into a strategic partnership with a chip OEM
in the previous quarter and this is expected to scale up in due course. This was
its second such partnership in the HiTech space.
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 The client budgets are expected to be higher for companies in these three verticals.
Hi-tech 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 is existing accounts and scale
up in new accounts from Hamilton Sunstrand and Westinghouse. However, the
scale up in Westinghouse will be more gradual.
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.
Marginal realisation increases - lower than expected
n Infotech has conceded that, some of the billing rate increases, which were expected
to come in, have failed to materialise.
n Due to this, there was a meagre 0.1% improvement in average realisations in
1Q.
n In the previous quarter, the company had indicated that, it will secure billing rate
increases for off-shore services. The full impact is expected to be felt WEF
1QFY12.
n We view this with concern because in absence of these rate increases, the company
will find it difficult to sustain and improve margins significantly.
EBIDTA margins were a negative surprise.
n EBITDA margins for the quarter were down on a QoQ basis by 190bps. This was
disappointing, especially after a steep fall in 4QFY11. 4QFY11 also had a one
time impact of about 80bps, which was expected to cushion the margin fall.
n The margins were impacted by salary hikes given during the quarter - 3% on-site
and about 12% off-shore, according to the management.
n Margin performance of Infotech has been disappointing for the past few quarters
and we see this as a reflection of the challenges faced by mid-tier companies
from attrition and S&M investments, which they are forced to make.
n We had indicated that, salary increments, higher levels of attrition and need to
invest in business generating initiatives will put pressure on margins.
n The management has scaled down its target margins from about 18% to 15-
16% (by Fy12 end).
"Other income' and tax
n Infotech reported other income of Rs.64mn, which was higher than our expectations.
n The company provided tax at the rate of 33% of PBT which was higher than
expectations.. Management expects the same to move up to about 30% in
FY12E.
Tweak estimates
n We have tweaked our earnings expectations to accommodate the lower than
expected margins in 1QFY12.
n For FY12, we have assumed a revenue growth of about 26%, led by ENGG.
n EBIDTA margins are expected to fall marginally on the back of salary increases
and assumed rupee appreciation. Higher capacity utilisation and rightsizing initiatives
may cushion some impact.
n We have assumed tax rate to rise to 29% of PBT in FY12 v/s about 17% in FY11,
in line with the management guidance of 30% - 31%.
n Consequently, PAT is expected to rise by about 6% to Rs.1.48bn, resulting into
an EPS of Rs.13.3.
n We expect the company to have net cash of about Rs.4.5bn by FY12 end, which
works out to Rs.40 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 We have in our DCF model built in higher growth rates for Infotech over the
medium term, given the improving demand environment.
n However, margins have a lot of scope for improvement. They have fallen by
1000bps over the past 8 quarters.
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.
No comments:
Post a Comment