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3i Infotech: Margins aid bottomline - Views on News from Equitymaster

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3i Infotech: Margins aid bottomline
Jan 23, 2010

Performance summary
  • Consolidated sales decrease by 5% QoQ in 3QFY10, primarily because of appreciation of rupee during the quarter, which impacted sales by 2.8%. The company also saw a dip in volumes for its IT products and services.
  • Operating margins expand by 0.9% QoQ during the quarter, aided by a 6% decline in operating expense.
  • Bottomline improves significantly by 15% QoQ during 3QFY10, mainly on back of improvement in margins.
  • Order book improves by Rs 210 m in 3QFY10, currently stands at Rs 15.9 bn.


Consolidated financial performance: A snapshot…
(Rs m) 2QFY10 3QFY10 Change 9MFY09 9MFY10 Change
Sales 6,263 5,962 -4.8% 16,789 18,203 8.4%
Expenditure 5,060 4,766 -5.8% 13,635 14,612 7.2%
Operating profit (EBITDA) 1,203 1,196 -0.5% 3,154 3,590 13.8%
Operating profit margin (%) 19.2% 20.1%   18.8% 19.7%  
Other income 59 57 -4.1% 152 159 4.6%
Depreciation 304 219 -28.1% 467 809 73.2%
Interest 363 362 -0.2% 670 1,067 59.3%
Profit before tax 594 672 13.0% 2,169 1,873 -13.6%
Tax 22 57 155.4% 171 57 -66.7%
Minority Interest 43 (104)   83 (21)  
Exceptional Items - (109)   - 169  
Profit after tax/(loss) 529 610 15.3% 1,915 2,006 4.8%
Net profit margin (%) 8.4% 10.2%   11.4% 11.0%  
No. of shares (m)       130.8 168.7  
Diluted earnings per share (Rs)         17.3  
P/E ratio (x)*         5.1  
*On a trailing 12-months basis

What has driven performance in 3QFY10?
  • 3i Infotech recorded a 5% QoQ decline in topline during 3QFY10. Though forex fluctuation impacted the company’s billing rates, decline in volumes also impacted its topline. Its IT services (28% of sales) and IT products (32% of total sales) segments saw revenue decline of 15% and 4% QoQ respectively during the quarter. Nevertheless, its transaction services or BPO business (40% of sales) saw some traction and grew by 2% QoQ.

  • The company registered a muted growth in its deal pipeline during 3QFY10. The order book increased by US$ 210 m on back of a number of deals in infrastructure management, banking product implementation, cheque processing and financial professional services deals in markets like North America, South Asian, India and Middle East. The company saw maximum traction coming from South Asian markets including India. The capital market segment, which contributed 8% of the total sales, grew by around 9% QoQ during the quarter.

  • 3i's top client i.e., ICICI Group contributed 7% to total revenues during the quarter. The contribution from the top 5 and top 10 clients (excluding ICICI) stood at 12% and 18% respectively as compared to 16% and 22% respectively in 2QFY10.

    Revenue Breakup
    (Rs m) 2QFY10 3QFY10 Change
    On the basis of offerings      
    Products 2,000 1,931 -3.5%
    Services 1,932 1,647 -14.8%
    Transaction Services 2,331 2,385 2.3%
    On basis of geography      
    South Asia 1,691 1,550 -8.3%
    Asia Pacific 188 238 26.9%
    USA 3,507 3,398 -3.1%
    MEARC 501 417 -16.7%
    Western Europe 376 358 -4.8%
    On basis of segments      
    BPO 2,317 2,385 2.9%
    ERP 188 179 -4.8%
    Insurance 501 477 -4.8%
    Banking 814 775 -4.8%
    Capital Markets 438 477 8.8%
    IT Services 2,004 1,669 -16.7%

  • 3i’s operating margins improved by 1% QoQ during 3QFY10. This was on the back of efficient cost containment. However, its operating profits declined by 0.5% QoQ on account of decline in topline.

  • The company’s net profits surged by 15% QoQ during 3QFY10, with the net profit margin expanding by 2%. This happened on the back of better operational performance and lower depreciation. However, significant increase in interest outgo and depreciation cost impacted bottomline during 9mFY10.

What to expect?
At the current price of Rs 88, the stock is trading at a multiple of 4.2 times our estimated FY12 earnings, which we believe makes it extremely attractive for long term investors. The 3QFY10 performance of 3i Infotech was plagued by the slow pace of recovery in the banking and insurance verticals. Despite a decline in the topline on account of adverse currency movement, the company managed to maintain its margin which shows that its margins are more or less insulated from the currency fluctuation.

The management during the conference call indicated that there is a slow but steady improvement in the overall business environment. The company's quarterly revenue was impacted by foreign exchange fluctuation to the extent of 2.8%. Adding to this, there was a seasonal dip in the e-commerce business in the US where during the festive season, clients prefer not to tweak their e-commerce projects. This was the major reason for decline in volumes to the extent of 3.5% during the quarter. The management also highlighted its strategy of exiting some of the government to customer (G2C) businesses wherein the company managed and operated customer centers (kiosks) in rural locations. On account of government's adequate support in terms of data and regulations, the company has planned to restrict its capital expenditure in developing such kiosks. This has resulted in a one-time penalty of Rs 109 m which appears as exceptional items on company's 3QFY10 results. The company reiterated its focus towards lowering its debt to equity ratio to 1:1 within next 18 months, primarily through internal accruals.

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