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3i Infotech: On the fast track!
Jan 25, 2006

Performance Summary
3i Infotech reported its results for 3Q and 9mFY06 yesterday. The topline has witnessed a strong double-digit sequential growth, driven by strong performances from both the products as well as services businesses. Margins expanded due to lower cost of revenues. The margin expansion, aided by a more than doubling of other income, led to a strong bottomline growth, despite higher interest costs and lower deferred taxes. The performance in 9mFY06 has been highly impressive, with strong revenue growth, margin expansion and an impressive bottomline growth being the redeeming features.

Consolidated financial performance: A snapshot
(Rs m) 2QFY06 3QFY06 Change 9mFY05 9mFY06 Change
Revenues 974 1,120 15.0% 2,083 2,978 43.0%
Expenditure 774 886 14.5% 1,744 2,376 36.2%
Operating profit (EBDITA) 200 234 17.1% 339 602 77.8%
Operating profit margin (%) 20.5% 20.9%   16.3% 20.2%  
Other income 10 24 131.9% 19 46 143.4%
Depreciation 73 66 -9.9% 140 196 39.8%
Interest 13 20 47.7% 77 55 -28.2%
Profit before tax 123 172 39.4% 141 398 182.0%
Tax (10) 7   (105) (3) -97.0%
Extraordinary items - -   - -  
Minority interest - 2   - 2  
Profit after tax/(loss) 133 163 22.0% 246 399 62.2%
Net profit margin (%) 13.7% 14.5%   11.8% 13.4%  
No. of shares (m) 52.8 52.9   31.0 52.9  
Diluted earnings per share (Rs)*         9.0  
P/E ratio (x)*         20.9  
* On a trailing 12-month basis

What is the company’s business?
3i Infotech is an IT company focussing mainly on the banking, financial services and insurance (BFSI) vertical. It was incorporated in 1993 as a back-office IT services provider to the ICICI Group and has since metamorphosed into a technology company providing IT services and solutions to over 500 clients in over 30 countries. 3i Infotech earns revenues from products as well as IT services. The company has products for the BFSI space, with a presence in insurance, treasury, asset-liability management, risk management, core banking and investment management. It also has an ERP product suite, providing solutions for the retail, manufacturing, distribution, trading, fashion, automotive, pharmaceutical and chemical industries. Its main focus in IT services is in the region of enterprise application integration, systems integration and e-governance. The company recently acquired three companies with a focus on business intelligence, security consulting and anti-money laundering software.

What has driven performance in 3QFY06?
All-round growth: 3i Infotech saw an impressive 15.0% sequential growth in its topline. This was driven by good performance of both its products as well as services businesses. The services business grew at 16.2% sequentially, while for the products business, the growth stood at 11.7%. The company won some major orders during the quarter across its product lines, such as anti-money laundering, general, health and life insurance, lending as well as ERP. In terms of break-up, the ERP product suite increased its share to 27% of total product revenues, from 25% last quarter.

The services business was aided mainly by the acquisition of Innovative Business Solutions. 3i Infotech acquired this company in order to get a stronger foothold in the US market and access to skills in the security-consulting domain. Therefore, the growth was mainly inorganic. Going forward, the company will now look to get organic growth in the services business.

3i Infotech added as many as 45 clients during 3QFY06. The active client base now stands at 552. The ICICI Group contributed 20% of the company’s total revenue in 3QFY06, down from 22% last quarter. The client metrics have also improved, with the share of the top 5 and top 10 customers contributing to just 12% and 18% of total revenues respectively, down from 22% and 28% last quarter. The revenue visibility is strong, with the products order book at Rs 945 m (73% of FY05 product revenues) and the services order book at Rs 1.3 bn (80% of FY05 services revenues).

Segment-wise performance…
(Rs m) 2QFY06 % of total 3QFY06 % of total Change
Services
Revenues 530 54.5% 592 52.9% 11.7%
Gross profit 199 47.1% 229 44.4% 15.1%
Gross margins 37.5%   38.6%   1.1%
Products
Revenues 443 45.5% 528 47.1% 19.0%
Gross profit 223 52.9% 286 55.6% 28.2%
Gross margins 50.3%   54.1%   3.9%
Total          
Revenues 974   1,120   15.0%
Gross profit 422   514   22.0%
Gross margins 43.3%   45.9%   2.6%

Cost savings drive margins: 3i Infotech saw a near-40 basis points margin expansion during 3QFY06. This was a result of savings in the costs of revenues, which declined from 56.7% of revenues in 2QFY06 to 56.2% this quarter. As regards segmental margins, product margins soared from 50.3% to 54.1% sequentially, while services margins increased slightly from 37.5% to 38.6%.

Higher margins, higher other income aid the bottomline: Driven by the higher margins as well as higher other income due to translation gains, 3i Infotech reported a highly impressive 22.0% sequential profit growth. This was despite lower deferred taxes.

What to expect?
At the current price of Rs 187, 3i Infotech’s stock is trading at a price to earnings multiple of 9.7 times our estimated FY08 earnings. Given the continuing impressive performances of the company so far in FY06 and the fact that it has already achieved nearly 90% of our full-year EPS estimates this financial year, we will be revising our estimates upwards. As a matter of fact, the management has revised its revenue growth upwards from 25% to 30% earlier to 40% to 50% now. This will be partly driven by the recent acquisitions made. The EPS has also been revised upwards, from a range of Rs 8.5 to Rs 9.5 a share earlier, to Rs 9.2 to Rs 9.6 a share now. This signifies the increasing level of confidence of the management in the company’s growth prospects.

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