- Price target: Rs180
- Market cap: Rs1,715 cr
- 52 week high/low: Rs165/84
- NSE volume: 4.6 lakh
(No of shares) - BSE code: 532628
- NSE code: 3IINFOTECH
- Sharekhan code: 3IINFOTECH
- Free float: 7.9 cr
(No of shares)
- 3i Infotech''s consolidated revenues grew by 10.3% quarter on quarter (qoq) and 66.5% year on year (yoy) to Rs349.9 crore in Q4FY2008. While, the organic revenue growth was 7.1% sequentially, acquisitions contributed 3.2% to the sequential growth in the top line during the quarter.
- The operating profit margin (OPM) was flat at 24.8% in Q4FY2008. The operating profit grew 9.9% qoq to Rs86.7 crore during the quarter.
- The company''s net profit grew by 0.6% to Rs48.8 crore, which was below our expectation of Rs53.7 crore. This was primarily due to lower than expected other income on account of foreign exchange mark-to-market losses in foreign currency convertible bonds (FCCBs). The company reported other income of Rs2.2 crore during the quarter compared to Rs6.1 crore in the previous quarter.
- For FY2009, the company guided a top line growth of 40% to ~Rs1,700 crore and an earning growth of around 30%, leading to a fully diluted earnings per share (EPS) of Rs13-Rs13.5. The guidance has factored in only the organic growth and the fully diluted capital including FCCBs.
- The company proposed a dividend of Rs1.5 per share for FY2008.
- 3i Infotech acquired Regulus for $80 million. Regulus generated sales of $148 million and earnings before interest, depreciation, tax and amortisation (EBITDA) of $20 million in CY2007. The acquisition is funded through syndicated loans with interest rate of Libor plus the premium (base rate of 7%). The company has acquired Regulus at attractive valuation of enterprise value (EV)/EBITDA of 4.0x CY2007. The acquisition appears to be cash accretive since this will directly contribute ~$15 million (EBITDA of $20 million-interest expenses of $5.6 million [7% on $80 million]) to the bottom line next year.
- To fine tune our earning estimates, we have revised our FY2009 earning estimates by 3.4% and have introduced FY2010 earning estimates in this note. At the current market price, the stock is trading at 9.8x FY2009 and 8.4x FY2010 earning estimates. We maintain our Buy recommendation on the stock with price target of Rs180.
Shareholding pattern
| Price performance | ||||
| (%) | 1m | 3m | 6m | 12m |
| Absolute | 34.5 | 13.1 | -1.9 | -11.5 |
| Relative to Sensex | 21.7 | 15.4 | 12.3 | -29.6 |
| Result table | Rs (cr) | ||||
| Particular | Q4FY08 | Q4FY07 | Q3FY08 | yoy (%) | qoq (%) |
| Net sales | 349.9 | 210.2 | 317.3 | 66.5 | 10.3 |
| Software development cost | 185.9 | 112.2 | 168.4 | 65.6 | 10.4 |
| Gross profit | 164.0 | 98.0 | 148.8 | 67.4 | 10.2 |
| SG&A expenses | 77.3 | 45.5 | 70.0 | 69.9 | 10.4 |
| Total operating cost | 263.2 | 157.7 | 238.4 | 66.9 | 10.4 |
| Operating profit | 86.7 | 52.5 | 78.8 | 65.2 | 9.9 |
| Software development cost | 12.1 | 7.3 | 12.0 | - | 1.5 |
| Other income | 2.2 | 0.8 | 6.1 | 184.3 | -64.2 |
| Interest | 14.2 | 6.1 | 13.0 | 131.9 | 9.6 |
| Depreciation | 8.0 | 5.8 | 6.4 | 37.6 | - |
| PBT | 54.5 | 34.0 | 53.6 | 60.4 | 1.7 |
| Provision for tax | 4.3 | 2.0 | 4.0 | - | - |
| Tax | 4.3 | 1.2 | 6.0 | 268.5 | -28.2 |
| Deferred tax | 0.0 | 0.8 | -2.1 | - | - |
| Net Profit | 50.2 | 32.0 | 49.6 | 56.7 | 1.1 |
| Extra-ordinary items | 0.0 | | 0.0 | - | - |
| Less: Minority interest | 1.4 | 0.2 | 1.2 | - | - |
| RPAT | 48.8 | 32.2 | 48.5 | 51.6 | 0.7 |
| Equity capital | 130.5 | 56.3 | 129.9 | | |
| EPS (Rs) | 3.7 | 5.7 | 3.7 | | |
| Margins (%) | |||||
| GPM | 46.9 | 46.6 | 46.9 | | |
| OPM | 24.8 | 25.0 | 24.8 | | |
| NPM | 14.4 | 15.2 | 15.6 | ||
Regulus acquisition—Cash accretive
3i Infotech announced that it has acquired Regulus for $80 million. Regulus generated sales of $148 million and EBITDA of $20 million in CY2007. The acquisition is funded through syndicated loans with interest rate of Libor plus the premium (base rate of 7%). The company has acquired Regulus at attractive valuation of EV/EBITDA of 4.0x CY2007. The acquistion appears to cash accretive since this will directly contribute ~$15 million (EBITDA of $20 million--interest expenses of $5.6 million) to the bottom line next year. While, Regulus provides processing services to (Banking, finance, services and insurance) BFSI clients, J&B software is the product company for BFSI. By combining services of both these companies, 3i Infotech is targeting $25 million revenue from India over the next two-three year period.
However, we have not incorporated Regulus acquisition in our earning estimates since the regulatory approval for the acquisition is still pending. The company expects the approval process to take 30-120 days.
Segmental performance
After a muted performance last quarter, the company registered an impressive 11.7% sequential growth in the service revenues. This was largely on account of increased traction in business process outsourcing (BPO) services. Products revenues during the quarter also grew by 9% qoq to Rs179.6 crore during the quarter. Moving ahead, the company expects IT services, products and BPO services to contribute equally to the revenue in the next two to three year period.
| Revenues mix | |||||
| (Rs cr) | Q4FY08 | Q4FY07 | Q3FY08 | yoy (%) | qoq (%) |
| Products | 179.6 | 107.6 | 164.8 | 66.9 | 9.0 |
| Services | 170.3 | 102.6 | 152.4 | 65.9 | 11.7 |
| Total | 349.9 | 210.2 | 317.3 | 66.4 | 10.3 |
Service business margin improvement offset product business margin decline
A 10-basis-point decline in the gross margin of the product business was offset by a 20-basis-point improvement in the gross margin of the services business. Hence, the overall gross margin was flat during the quarter.
| Margins | |||||
| (Rs cr) | Q4FY08 | Q4FY07 | Q3FY08 | yoy (%) | qoq (%) |
| Products | 98.5 | 58.0 | 90.4 | 69.9 | 9.0 |
| Services | 65.5 | 40.0 | 58.4 | 63.7 | 12.1 |
| Total gross profit | 164.0 | 98.0 | 148.8 | 67.4 | 10.2 |
| GPM (%) | |||||
| Products | 54.8 | 53.9 | 54.9 | ||
| Services | 38.5 | 39.0 | 38.3 | ||
Order backlog continues to be healthy
The order backlog grew 10.2% qoq to Rs864.7 crore on account of strong growth in the services order backlog. The services order backlog grew 13.8% qoq to Rs475 crore on the back of increased focus in the transaction services business.
| Order backlog | |||||
| (Rs cr) | Q4FY08 | Q4FY07 | Q3FY08 | yoy (%) | qoq (%) |
| Products | 389.7 | 277.8 | 367.2 | 40.3 | 6.1 |
| Services | 475.0 | 290.9 | 417.3 | 63.3 | 13.8 |
| Total | 864.7 | 568.7 | 784.5 | 52 | 10.2 |
To fine tune our earning estimates, we have revised up the earning estimates for FY2009 by 3.4% and have introduced FY2010 earning estimates. Our earning estimates does not incorporate Regulus acquisition since regulatory approval for the same is yet to be obtained. At the current market price, the stock is trading at 9.8x FY2009 and 8.4x FY2010 earning estimates. We maintain our Buy recommendation on the stock with price target of Rs180.
| Valuation table | Rs (cr) | |||
| Paticulars | FY2007 | FY2008 | FY2009E | FY2010E |
| Net sales (Rs cr) | 655.3 | 1205.3 | 1720.3 | 2142.0 |
| Adj net profit (Rs cr) | 98.0 | 169.4 | 223.8 | 260.2 |
| Share in issue (cr) | 13.5 | 16.6 | 16.6 | 16.6 |
| EPS (Rs) | 7.3 | 10.2 | 13.5 | 15.7 |
| % yoy growth | - | 40.6 | 32.1 | 16.3 |
| PER (x) | 18.2 | 12.9 | 9.8 | 8.4 |
| Book value (Rs) | 56.4 | 102.9 | 115.6 | 130.6 |
| P/BV (x) | 2.3 | 1.3 | 1.1 | 1.0 |
| EV/Ebidta (x) | 8.1 | 5.2 | 4.2 | 3.6 |
| Dividend yield (%) | 1.5 | 1.1 | 1.5 | 1.5 |
| RoCE (%) | 11.4 | 12.4 | 14.6 | 15.4 |
| RoNW (%) | 13.7 | 10.7 | 12.5 | 12.8 |
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