Rating: Buy; Target Price: Rs410; CMP: Rs341; Upside: 20%
Attractively valued acquisition, but in competitive space
Infotech Enterprises announced the much anticipated acquisition of
Softential on the March7. While the exact financial terms have not
been disclosed, valuation seems attractive at an EV of 1.1x revenue
for a firm with 25%+ EBITDA margins. But we are not overly
enthusiastic and note that Softential operates in an area (IT Service
Management) where competition is intensifying from Tier-1 providers
with HCL Tech in particular being aggressive in this space. As the
full financial details of the transaction are not available, we retain
our estimates for now, but roll over our estimates to Mar-16 and
introduce a new 1-Year TP of Rs410 and change our recommendation from
Hold to Buy.
$ Valuation of 1.1x revenues attractive considering Softential's 25%+
EBITDA: At 1.1x revenue upfront payment and an earn-out component
based on next year's performance, the valuation seems attractive.
Softential's blended realizations are significantly higher (at
USD65-70/hr as per our estimates) than Infotech's blended billing rate
of ~USD15 for its Utilties, Telecom, Data Transformation & Analytics
(UT and D&A) vertical. The acquisition is well structured with 50% of
the upfront payment being financed by cash and 50% by USD denominated
debt at ~3% interest rate. With ~60% of its ~140 personnel offshore,
Softential's margins EBITDA of 25%+ are at least 500bps higher than
Infotech's margins of 19.6% (for 3QFY14).
$ Impressive clientele list including several US defence contractors:
Softential has been in IT Service Management (ITSM) since 2000 and has
done over 200 successful engagements. Its client list is impressive
with several marquee corporate names such as Coca Cola, Johnson &
Johnson, Time Warner, Cox etc. and defence contractors such as
Lockheed Martin, BAE Systems and Nothrop Grumman (see Exhibit-1 for
details).
$ But ITSM is an increasingly competitive area with aggressive Tier-1
competition: Given aggressive Tier-1 competition in ITSM (HCL Tech's
Alt ASM proposition for ITSM is particularly aggressive) and growing
interest in Network Operations Centre (NOC) services, we think it may
not be easy for Infotech to achieve its target of growing revenues
(including cross-selling Infotech's services) to USD30Mn by CY16 from
Softential's CY13 runrate of USD17Mn.
$ Maintaining estimates; changing recommendation to Buy given current
price: Given the lack of exact financials for Softential and given our
reservations about entering a highly competitive area within IT
Services, we maintain our estimates. However, given the steep fall in
stock price recently, and expecting the acquisition to be at least 2%
EPS accretive based on rough estimates, we think that the risk-reward
is in favour of the acquisition. We roll over our estimates to Mar-16,
introduce a new 1-year TP of Rs410 (10x 1-Year Fwd EPS at Mar'15) and
change our recommendation from Hold to Buy. Key downside risks to our
call are 1) loss of Softential's employees post merger and 2) sharp
INR appreciation.
Thanks & Regards
--
Attractively valued acquisition, but in competitive space
Infotech Enterprises announced the much anticipated acquisition of
Softential on the March7. While the exact financial terms have not
been disclosed, valuation seems attractive at an EV of 1.1x revenue
for a firm with 25%+ EBITDA margins. But we are not overly
enthusiastic and note that Softential operates in an area (IT Service
Management) where competition is intensifying from Tier-1 providers
with HCL Tech in particular being aggressive in this space. As the
full financial details of the transaction are not available, we retain
our estimates for now, but roll over our estimates to Mar-16 and
introduce a new 1-Year TP of Rs410 and change our recommendation from
Hold to Buy.
$ Valuation of 1.1x revenues attractive considering Softential's 25%+
EBITDA: At 1.1x revenue upfront payment and an earn-out component
based on next year's performance, the valuation seems attractive.
Softential's blended realizations are significantly higher (at
USD65-70/hr as per our estimates) than Infotech's blended billing rate
of ~USD15 for its Utilties, Telecom, Data Transformation & Analytics
(UT and D&A) vertical. The acquisition is well structured with 50% of
the upfront payment being financed by cash and 50% by USD denominated
debt at ~3% interest rate. With ~60% of its ~140 personnel offshore,
Softential's margins EBITDA of 25%+ are at least 500bps higher than
Infotech's margins of 19.6% (for 3QFY14).
$ Impressive clientele list including several US defence contractors:
Softential has been in IT Service Management (ITSM) since 2000 and has
done over 200 successful engagements. Its client list is impressive
with several marquee corporate names such as Coca Cola, Johnson &
Johnson, Time Warner, Cox etc. and defence contractors such as
Lockheed Martin, BAE Systems and Nothrop Grumman (see Exhibit-1 for
details).
$ But ITSM is an increasingly competitive area with aggressive Tier-1
competition: Given aggressive Tier-1 competition in ITSM (HCL Tech's
Alt ASM proposition for ITSM is particularly aggressive) and growing
interest in Network Operations Centre (NOC) services, we think it may
not be easy for Infotech to achieve its target of growing revenues
(including cross-selling Infotech's services) to USD30Mn by CY16 from
Softential's CY13 runrate of USD17Mn.
$ Maintaining estimates; changing recommendation to Buy given current
price: Given the lack of exact financials for Softential and given our
reservations about entering a highly competitive area within IT
Services, we maintain our estimates. However, given the steep fall in
stock price recently, and expecting the acquisition to be at least 2%
EPS accretive based on rough estimates, we think that the risk-reward
is in favour of the acquisition. We roll over our estimates to Mar-16,
introduce a new 1-year TP of Rs410 (10x 1-Year Fwd EPS at Mar'15) and
change our recommendation from Hold to Buy. Key downside risks to our
call are 1) loss of Softential's employees post merger and 2) sharp
INR appreciation.
Thanks & Regards
--
