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3i Infotech: Acquisitions driven growth - Views on News from Equitymaster

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3i Infotech: Acquisitions driven growth
Jan 23, 2009

Performance summary
  • Sales grow marginally by 1% QoQ in 3QFY09, almost doubles on a YoY basis during 9mFY09. Growth during the latter period largely driven by the company’s acquisitions.
  • Operating margins contract by 0.9% QoQ during the quarter.
  • Net profits decline by 6% QoQ during the quarter, largely on the back of lower operating margins and higher depreciation charges.


Consolidated financial performance: A snapshot
(Rs m) 2QFY09 3QFY09 Change 9mFY08 9mFY09 Change
Revenues 6,016 6,088 1.2% 8,554 16,789 96.3%
Expenditure 4,874 4,988 2.4% 6,750 13,635 102.0%
Operating profit (EBDITA) 1,142 1,100 -3.7% 1,804 3,154 74.8%
Operating profit margin (%) 19.0% 18.1%   21.1% 18.8%  
Other income 53 68 28.5% 161 152 -5.5%
Depreciation 153 196 27.7% 164 467 184.9%
Interest 236 254 7.3% 363 670 84.5%
Profit before tax 806 719 -10.8% 1,438 2,169 50.8%
Tax 86 21 -75.5% 108 171 58.2%
Minority interest 36 52 45.5% 52 83 57.4%
Profit after tax/(loss) 683 645 -5.6% 1,277 1,915 49.9%
Net profit margin (%) 11.4% 10.6%   14.9% 11.4%  
No. of shares (m)       130.4 130.8  
Diluted earnings per share (Rs)*         18.4  
P/E ratio (x)*         1.7  
* On a trailing 12-months basis

What has driven performance in 3QFY09?
  • 3i-Infotech recorded 1% QoQ growth in topline during 3QFY09 and 96% YoY during 9mFY09. The nine-month performance was a mix of organic and inorganic (acquisition led) growth of 31% YoY and 63% YoY respectively. The growth in topline was also led by the company’s ‘transaction service’ business (BPO/KPO), where sales grew 7% QoQ during the quarter. While the IT services business registered growth of almost 2% QoQ, revenues from the product business declined by 5% QoQ during the quarter.

    Segment-wise performance
    (Rs m) 2QFY09 3QFY09 Change 9mFY08 9mFY09 Change
    Software products            
    Revenues 2,125 2,028 -4.5% 4,165 6,022 44.6%
    Gross margins 56.3% 52.1%   54.8% 53.9%  
    IT services            
    Revenues 1,944 1,973 1.5% 3,330 5,720 71.8%
    Gross margins 35.9% 35.1%   38.8% 36.2%  
    Transaction services            
    Revenues 1,948 2,087 7.2% 1,059 5,047 376.7%
    Gross margins 29.0% 29.3%   36.2% 29.1%  

  • 3i Infotech’s operating profits declined by 4% QoQ during 3QFY09. Subsequently the operating margins fell to around 18%, from 19% in 2QFY09.

  • The company recorded decline of 6% QoQ in net profits during 3QFY09. Net profit margin contracted by 0.8% owing to higher depreciation and interest expense.

What to expect?
At the current price of Rs 32, the stock is trading at a multiple of 1.7 times our estimated FY11 earnings. The management has indicated that going forward growth momentum will be tepid on account of changed economic environment globally. However, amidst the ongoing financial crisis, the management is confident of the company achieving its stated growth targets for the current fiscal. The company has around Rs 14 bn worth of pending orders at the end of December 2008. This gives strong revenue visibility going forward. Overall, we maintain our positive view on the stock from a 2 to 3 years perspective.

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