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3i Infotech: Strong show again - Views on News from Equitymaster

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3i Infotech: Strong show again
Jan 25, 2008

Performance summary
  • Consolidated topline grows 14% QoQ in 3QFY08, driven by 27% QoQ growth in product revenues and 3% QoQ growth in service revenues.

  • Operating margins declines by 0.1% QoQ due to higher S,G&A.

  • Total order book stands at Rs 7.8 bn (0.74 times of TTM revenues).

  • Bottomline expands by 21% QoQ during 3QFY08, aided by growth in operating profits.

Consolidated financial performance: A snapshot…
(Rs m) 2QFY08 3QFY08 Change 9MFY07 9MFY08 Change
Sales 2,779 3,173 14.2% 4,451 8,554 92.2%
Expenditure 2,190 2,504 14.3% 3,581 6,750 88.5%
Operating profit (EBITDA) 588 669 13.7% 870 1,804 107.4%
Operating profit margin (%) 21.2% 21.1%   19.5% 21.1%  
Other income 61 61 1.0% 147 161 9.7%
Depreciation 52 64 24.5% 111 164 48.1%
Interest 131 130 -0.8% 148 363 145.7%
Extraordinary items - -   120 -  
Profit before tax 467 536 14.8% 878 1,438 63.7%
Tax 36 40 9.9% 34 108 219.8%
Minority Interest 30 12 -60.9% 9 52 475.6%
Profit after tax/(loss) 401 485 20.9% 835 1,277 52.9%
Net profit margin (%) 14.4% 15.3%   18.8% 14.9%  
No. of shares (m)         130.4  
Diluted earnings per share (Rs)*         11.3  
P/E ratio (x)*         11.5  
* On a trailing 12-month basis

What has driven performance in 3QFY08?
3i-Infotech recorded a 14% QoQ growth in its topline during 3QFY08. This was mainly driven by 27% growth in the products segments. The services segment recorded 3% QoQ growth. The pending order book now stands at Rs 7.8 bn. This order book is executable within a period of 12 months. On a nine month comparison, the performance is even better with topline growing by 92% YoY.

Segment wise performance…
(Rs m) 2QFY08 % of total 3QFY08 % of total % change
Products          
Revenues 1,298 46.7% 1,648 52.0% 26.9%
Gross profit 711 55.3% 904 60.7% 27.2%
Gross margins 54.8%   54.9%    
Services          
Revenues 1,480 53.3% 1,524 48.0% 3.0%
Gross profit 574 44.7% 584 39.3% 1.7%
Gross margins 38.8%   38.3%    
Total          
Revenues 2,779   3,173   14.2%
Gross profit 1,285   1,488   15.8%
Gross margins 46.3%   46.9%    

3i’s operating profits expanded by 13.7% QoQ with topline growth flowing to the EBITDA. The operating margins, however, declined marginally by 0.1% QoQ. This was due to 0.1% QoQ rise in S, G&A as percentage of revenues. S,G&A expenses which constituted 21.5% of revenues in 2QFY08 increased to 21.6% of revenues in 3QFY08 which led to slight decline in operating margins. Staff costs, however, remained stable. On a nine-month comparison, the operating margins increased from 19.5% to 21.1%.

Geographical distribution of revenues
  2QFY08 3QFY08  
  % Share (Rs m) % Share (Rs m) % change
India 31.0% 861 37.0% 1,174 36.3%
MEARC 16.0% 445 14.0% 444 -0.1%
USA 25.0% 695 27.0% 857 23.3%
Asia Pacific 9.0% 250 5.0% 159 -36.6%
Western Europe 19.0% 528 17.0% 539 2.2%
Total 100.0% 2,779 100.0% 3,173 14.2%

3i’s net profits grew by 21% QoQ during 3QFY08. The growth was mainly due to rise in operating profits, which have flown to bottomline. Apart from growth in operating profits, decline in interest expenses and minority interest also aided the bottomline growth.

What to expect?
At the current price of Rs 130, the stock is trading at a multiple of 6.1 times our estimated FY10 earnings.

The company has given strong results in the last three quarters despite the sluggish industry environment. The prime concern for the sector is that of rupee appreciation, but 3i-Infotech will not be affected by it. This is because about 27% of revenues come from US (dollar revenues) and 22% of costs are also in US dollars. So the net impact on inflows is only to the tune of 5%. This is very little when compared with Tier I companies who derive more than 60% of revenues from US.

Secondly, the company’s focus in the domestic arena makes it a strong contender for outsourcing deals in domestic market and huge e-governance roll out in the government sector. Here, 3i-Infotech has to compete with CMC (subsidiary of TCS). In 3QFY08, the company associated with the Haryana government for e-Disha Ekal Seva Kendra Project. We believe that the domestic market offers huge opportunities and by the time other Tier I companies (apart from TCS) expand their presence in India, 3i-Infotech will be a large domestic player.

Thirdly, we believe that 3i-Infotech will not be hit by the ongoing sub-prime crisis mainly because its revenues from the banking sector in US constitute roughly about 5% of the revenues (revenues derived from J&B Software). Also J&B is involved in payment processing transactions, which cannot be stopped even in time of economic downturn as these are basic needs of banks and are routine in nature. The stock is currently trading at very attractive valuations and we remain positive on the stock from a long-term perspective.

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