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3i Infotech: Service business slows down
Jan 27, 2011

3i Infotech has announced its 3QFY11 results. The company has reported a marginal 0.9% QoQ decline in sales during the quarter. Its net profits have increased marginally by 0.5% QoQ during the period. Here is our analysis of the results.

Performance summary
  • Consolidated sales decline by around 0.9% QoQ during 3QFY11.
  • Operating margins fall sequentially by 0.8% QoQ during the quarter on account of higher operating expenses (as percentage of sales).
  • Net profit increases by 0.5% QoQ on the back of higher other income and deferred tax gains during the quarter.


Consolidated financial performance: A snapshot...
(Rs m) 2QFY11 3QFY11 Change 9MFY10 9MFY11 Change
Sales 6,434   6,378 -0.9% 18,203  19,181 5.4%
Expenditure  5,138 5,147 0.2%  14,612 15,400 5.4%
Operating profit (EBITDA)  1,296 1,231 -5.0% 3,590  3,781 5.3%
Operating profit margin (%) 20.1% 19.3% -0.8% 19.7% 19.7%  
Other income 35   76 117.2% 159 159 -0.1%
Depreciation  258 252 -2.5%  809 768 -5.1%
Interest 391 412 5.3% 1,067  1,178 10.4%
Profit before tax 681 642 -5.6%  1,873  1,994 6.5%
Tax 43 (1)   57  92  
Profit before exceptional items and minority interest  638 644 0.9%  1,816  1,902 4.7%
Minority Interest (2) 1   (21) 8  
Exceptional gain/(loss) - -   169 -  
Profit after tax/(loss)  640 643 0.5% 2,006  1,894 -5.6%
Profit after tax/(loss) excl. exceptional items  640 643 0.5%  1,837  1,894 3.1%
Net profit margin (%)*# 9.9% 10.1%   10.1% 9.9%  
No. of shares (m) 191.9 191.9   168.7 191.9  
Diluted earnings per share (Rs)*#         15.6  
P/E ratio (x)*#         3.6  
*On a trailing 12-months basis; # Adjusting for exceptional items

What has driven performance in 3QFY11?
  • 3i Infotech recorded 0.9% QoQ decline in sales during the quarter. This was on account of a 15% QoQ decline in the transaction services segment. The management expects the volume loss in this segment to be temporary and on account of the slowdown in North America. It further expects volumes in this segment to pick up next year. The IT solutions business grew by around 7% QoQ during the quarter.

  • 3i Infotech’s operating margins declined by 0.8% QoQ during the quarter. This was on account of higher operating costs (as percentage of total sales).

    Segment wise revenue breakup
    (Rs m) 2QFY11 3QFY11 QoQ
    IT Solutions      
    Revenue 4,264 4,543 6.5%
    Gross profit 2,090   2,073 -0.8%
    Gross margins 49.0% 45.6%  
    Transaction service      
    Revenue 2170 1835 -15.4%
    Gross profit 554 533 -3.8%
    Gross margins 25.5% 29.1%  

  • 3i Infotech’s net profits grew by 0.5% QoQ. This was mainly due to higher other income as well as deferred tax gains, which offset the impact of lower operating margins for the company. The management had guided earlier that they expect the net margins to be around 10% for the second half of this year.

What to expect?
At the current price of Rs 56, the stock is trading at a multiple of just around 3.6 times our estimated FY13 earnings (ResearchPro subscribers, kindly look here).

For the transactions service segment, the company has witnessed a decline in volumes. Especially from US. To this decline, the management expects total revenues to be flat over the next few quarters. Going forward, the management expects growth to be fuelled by the emerging markets. The current order book stands at Rs 17.3 bn. The growth in the order book is largely fuelled by the IT solutions segment.

There was no repayment of the debt in the current quarter. The company has the first tranche of US$ 50 m worth of FCCB repayment coming up in March 2011. It plans to fund its redemption through internal accruals as well as through refinancing. The management is confident that it will be able to refinance the debt; however, it would be at interest rates that are higher than the current rates.

Despite the headwinds, we maintain our positive view on the stock from a 2-3 year perspective.

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