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i-flex: Good but not enough - Views on News from Equitymaster

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i-flex: Good but not enough

Jan 29, 2008

Performance summary
  • Topline grows by 8% QoQ during 3QFY08, driven by 10% QoQ growth in products revenues and 6% QoQ rise in services revenue.

  • Operating margins expand by 5% QoQ primarily because of lower costs in the services segment.

  • Bottomline grows by 22% QoQ large due to higher operating profits.

  • On a nine months comparison, topline grows by 17% YoY, while the net profits have de-grown by 4% YoY.

Consolidated financial performance snapshot
(Rs m) 2QFY08 3QFY08 Change 9mFY07 9mFY08 Change
Sales 5,758 6,196 7.6% 14,598 17,087 17.1%
Expenditure 4,804 4,866 1.3% 11,721 14,110 20.4%
Operating Profit 954 1,330 39.4% 2,877 2,977 3.5%
Operating Profit margin (%) 16.6% 21.5%   19.7% 17.4%  
Other income 207 59 -71.5% 282 183 -35.1%
Depreciation 195 191 -2.1% 471 550 16.8%
Profit before tax 966 1,198 24.0% 2,688 2,610 -2.9%
Tax 94 129 37.2% 297 302 1.7%
Share of profit in associate 2 (2)   7 -  
Profit after tax/(loss) 874 1,067 22.1% 2,398 2,308 -3.8%
Net profit margin (%) 15.2% 17.2%   16.4% 13.5%  
No. of shares (m)         83.9  
Diluted earnings per share (Rs)*         43.3  
P/E ratio (x)*         25.8  
* On a trailing 12 months basis

What has driven performance in 3QFY08?
  • i-flex recorded a topline growth of 8% QoQ in 3QFY08. This was driven by 10% QoQ growth in products revenue and 6% QoQ growth in services revenues. Over the last nine months, the topline has grown by 17% YoY. The company recorded a dismal performance in the first quarter where its topline fell by 15% QoQ but since then it has reported decent performance over the last two quarters. However, we had estimated a 30% YoY topline growth for FY08 but the company would fall short of the target largely due to appreciation in currency as the bulk of the appreciation happened in the first quarter. i-flex added 14 new customers across products and services during this quarter and the number of active clients now stand at 131. On the headcount front, the addition has dropped sharply and the company added just 236 employees during the quarter. The attrition rate has remained stable at 19.7%.

    Products revenues by type
      2QFY08 3QFY08  
      % share Rs m % share Rs m Change
    License Fees 19% 626 24% 860 37%
    Implementation Fees 64% 2,108 60% 2,166 3%
    Annual Maintenance Charges 17% 560 16% 596 6%
    Total 100% 3,294 100% 3,623  

  • i-flex’s operating margins expanded by 5% QoQ largely due to reduction in costs in the services segment. The staff costs in the services segment declined by 6% QoQ, which led to the expansion in operating margins. Lower addition of employees also helped to counter the rise in costs.

    Segmental analysis
      Products   Services  
    (Rs m) 2QFY08 3QFY08 Change 2QFY08 3QFY08 Change
    Revenue 3,294 3,623 10.0% 2,313 2,456 6.1%
    Cost of revenue 1,391 1,537 10.5% 1,775 1,661 -6.4%
    Selling and marketing expense 604 582 -3.7% 79 89 12.2%
    General and administration expense 183 273 49.2% 167 149 -11.1%
    Total cost 2,178 2,391 9.8% 2,021 1,898 -6.1%
    Operating margins 33.9% 34.0%   12.7% 22.7%  

  • i-flex’s net profits expanded by 22% QoQ during 3QFY08. The expansion was largely driven by expansion in operating profits, which increased by 39% QoQ but was negatively impacted by lower other income and higher taxes. Other income have declined by 72% QoQ while the taxes rose by 37% QoQ. However, on a nine-month comparison, the net profits have degrown by 4% YoY. This was largely due to 72% QoQ decline in net profits in 1QFY08. The company will have to report 33% QoQ growth in net profits in 4QFY08 to achieve the profits reported in FY07 on an annual basis. This we believe is an uphill task and the net profits could de-grow on a YoY basis in FY08.

    Geographical breakup of revenues
      Products Services
      2QFY08 3QFY08   2QFY08 3QFY08  
      % share Rs m % share Rs m Change % share Rs m % share Rs m Change
    US 16% 523 15% 561 7% 58% 1,334 53% 1,301 -2%
    Middle East and Africa 18% 588 19% 680 16% 3% 76 4% 109 43%
    Asia Pacific 25% 821 22% 805 -2% 20% 465 20% 480 3%
    Europe 40% 1,313 43% 1,544 18% 19% 428 23% 561 31%
    Latin America and Caribbean 2% 50 1% 32 -35% 0% 11 0% 5 -58%
    Total 100% 3,294 100% 3,623 10% 100% 2,314 100% 2,456 6%

What to expect?
At the current price of Rs 1,115, the stock is trading at a multiple of 11.5 times our estimated FY10 earnings. The stock has come down from Rs 2,400 levels post its acquisition by Oracle Corporation. But we believe that significant upside is still not there in the stock at the current levels and more so when the top 4 companies are available at relatively cheaper valuations. While the impact of appreciation has been felt by the entire sector but companies like Infosys and TCS have managed things very well and have grown their net profits by over 25% over the last nine months. The performance of i-flex over the last 9 months has come as a surprise to us and during this period, the net profits have actually de-grown by 4% YoY. The company is not expected to meet our estimated topline and EPS figures and we will downgrade the earnings estimates soon.

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