i-flex: Past performance, future promise… - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

i-flex: Past performance, future promise…

Feb 14, 2005

In the entire gamut of the Indian software space, there is one company that has brought much-needed recognition to the 'Made in India' brand through its world-class product portfolio. The company is i-flex Solutions, which provides comprehensive IT solutions to the Banking, Financial Services and Insurance (BFSI) vertical. It is mainly a products company (61% of revenues in FY04), with services making up the balance. The company's flagship product, Flexcube, is an end-to-end product suite for retail, corporate and investment banking and asset management. In 2003, International Banking Systems (IBS) ranked it as the number one selling wholesale as well as retail banking back-office solution in the world for the second year running. In this article, we take a look at the company's past performance and see where it is headed going forward.

As a matter of fact, the global financial services industry spends more on technology than any other industry worldwide. According to i-flex's annual report, total IT spending in the global financial services industry is expected to grow from US$ 370 bn in 2002 to US$ 475 bn by 2006. Of this, the target market for i-flex is estimated to grow from US$ 140 bn in 2002 to US$ 186 bn by 2006.

i-flex's business model…

i-flex has classified its revenues into two major business segments – products (comprising of product licenses and related activities) and services (comprising IT solutions and consulting services). The product portfolio comprises of Flexcube (around 97% of product revenues), Reveleus and Daybreak. This business enjoys higher margins, since it is less people-intensive, requires a high level of expertise to create, and is often used in mission-critical functions of the client, enabling it to cut costs, streamline its systems and processes, reduce its time-to-market, and compete effectively in its industry. Revenues from products flow straight to the bottomline after recovering costs associated with producing them, branding and marketing them.

The services business, on the other hand, is highly people-intensive, and therefore, the salaries component of the costs is high. Apart from this, over 60% of i-flex's services revenues come from onsite services, where margins are lower. Thus, the end result is that i-flex's services business margins are lower than those of its peers in the industry. The management has indicated in the past that the services business serves as an 'incubator' for the development of new technologies, and helps in cross-selling opportunities to clients.

Segment-wise performance
(Rs m) FY01 FY02 Change FY03 Change FY04 Change
Net Sales 1729 2529 46.3% 3855 52.4% 4794 24.4%
Operating profit (EBDITA) 848 1148 35.4% 1850 61.1% 2081 12.5%
EBDITA margin (%) 49.0% 45.4%   48.0%   43.4%  
Net Sales 1511 1669 10.5% 2286 37.0% 3085 35.0%
Operating profit (EBDITA) 568 464 -18.3% 448 -3.4% 550 22.8%
EBDITA margin (%) 37.6% 27.8%   19.6%   17.8%  

The consolidated performance…

As can be seen from the table below, while revenue growth has been robust over the years, profit growth has not kept pace. This could be attributed to the pressure on margins on account of increasing expenditure, particularly employee costs, which form an important part of any software company's total expenses. During FY01 to FY04, revenues have risen by over 35% CAGR, but profits have risen by just 21% CAGR. On the other hand, employee costs from FY02 to FY04 have risen at a CAGR of 40%. There has also been a fair amount of earnings volatility for the company. This is typical of a product company like i-flex, whose revenues are highly dependent on the “tank size” (unbilled license fees), time taken for implementation of orders, and receipt of milestone payments. Thus, it is possible that in a particular quarter, there may not be any major implementation and fees received, and hence the quarter may show a poor performance, while in the next quarter, a major implementation may take place, and may result in big profits.

i-flex: Over the years…
(Rs m) FY01 FY02 Change FY03 Change FY04 Change 9mFY05
Net sales 3,241 4,195 29.4% 6,141 46.4% 7,881 28.3% 7,799
Operating profit (EBDITA) 1,183 1,387 17.2% 2,003 44.5% 2,227 11.2% 1,733
EBDITA margin (%) 36.5% 33.1%   32.6%   28.3%   22.2%
Profit after tax/(loss) 1,014 1,153 13.7% 1,709 48.2% 1,788 4.6% 1,286
Net profit margin (%) 31.3% 27.5%   27.8%   22.7%   16.5%
No. of shares (m) 31.9 33.3   73.6   76.9   76.8
Diluted earnings per share (Rs)* 13.2 15.0   22.3   23.3   22.3
(* annualised)                


At the current market price of around Rs 635, the stock trades at 28.5 times annualised 9mFY05 earnings. This is clearly at the higher end of the spectrum. Given the company's growth opportunities, and the fact that it is well positioned to take advantage of them, the risk-return ratio, although skewed towards risk in the short term, does favour investors with a 3-year time horizon.

i-flex, as mentioned above, is a market leader in developing IT solutions for banks and financial institutions. The industry in which it operates is growing at a fast clip, and there is an increasing need for banks, financial institutions, investment banks and asset managers to become more competitive, cost-conscious, respond quickly to market changes, and have a quick time-to-market for their products and services. This clearly underscores the point that they will need to make more investments in technology, and upgrade their legacy systems in order to survive. This only bodes well for i-flex.

Equitymaster requests your view! Post a comment on "i-flex: Past performance, future promise…". Click here!


More Views on News

ORACLE FINANCIAL Announces Quarterly Results (1QFY21); Net Profit Up 27.1% (Quarterly Result Update)

Sep 22, 2020 | Updated on Sep 22, 2020

For the quarter ended June 2020, ORACLE FINANCIAL has posted a net profit of Rs 5 bn (up 27.1% YoY). Sales on the other hand came in at Rs 13 bn (up 4.9% YoY). Read on for a complete analysis of ORACLE FINANCIAL's quarterly results.

ORACLE FINANCIAL Announces Quarterly Results (4QFY20); Net Profit Down 17.4% (Quarterly Result Update)

May 19, 2020 | Updated on May 19, 2020

For the quarter ended March 2020, ORACLE FINANCIAL has posted a net profit of Rs 3 bn (down 17.4% YoY). Sales on the other hand came in at Rs 13 bn (up 4.0% YoY). Read on for a complete analysis of ORACLE FINANCIAL's quarterly results.

More Views on News

Most Popular

It's the Beginning of a New Bull Phase in Smallcaps (Profit Hunter)

Feb 24, 2021

Last time the smallcap index crossed 19k a big correction followed. Here's what makes it different this time.

Make Rs 5,000 Per Day Trading the Market (Fast Profits Daily)

Feb 25, 2021

In this video, I'll show you how to get started on the path to daily trading profits.

The Hidden Tesla in My Great Indian Wealth Project (Profit Hunter)

Feb 23, 2021

An Indian company founded three decades ago in a garage caught my attention...

Gold 65,000 and Silver 84,000 in 2022

Feb 26, 2021

In this episode of the Investor Hour, India's #1 trader, Vijay Bhambwani, talks to us about the stock market, his new targets for gold and silver, the best long-term investment opportunity, and a lot more.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Mar 8, 2021 (Close)


  • Track your investment in ORACLE FINANCIAL with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks