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3i Infotech: Weak quarter, strong year - Views on News from Equitymaster
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3i Infotech: Weak quarter, strong year
Apr 25, 2009

Performance summary
  • Sales grow by 90% YoY during FY09, decline marginally on the sequential basis for the fourth quarter.
  • Operating margins contract by 2.1% YoY during the fiscal.
  • Net profits grow by 60% YoY during the fiscal, largely on the back of a strong topline performance though impacted by lower operating margins.
  • Board recommends a dividend of Rs 1.5 per share (dividend yield of 3.6%).

Consolidated financial performance: A snapshot
(Rs m) 3QFY09 4QFY09 Change FY08 FY09 Change
Revenues 6,088 6,068 -0.3% 12,053 22,856 89.6%
Expenditure 4,988 4,877 -2.2% 9,504 18,512 94.8%
Operating profit (EBDITA) 1,100 1,190 8.2% 2,549 4,344 70.4%
Operating profit margin (%) 18.1% 19.6%   21.1% 19.0%  
Other income 68 39 -43.2% 183 191 4.2%
Depreciation 196 233 19.3% 244 701 187.1%
Interest 254 279 10.2% 505 950 88.0%
Profit before tax 719 716 -0.4% 1,983 2,885 45.5%
Tax 21 50 133.5% 151 221 45.9%
Minority interest 52 24 -54.6% 66 106 60.4%
Exceptional income / (loss) - 260   - 260  
Share of profit in associates - 3   - 3  
Profit after tax/(loss) 645 905 40.3% 1,766 2,820 59.7%
Net profit margin (%) 10.6% 14.9%   14.6% 12.3%  
No. of shares (m)       130.5 130.8  
Diluted earnings per share (Rs)         21.6  
P/E ratio (x)         1.9  

What has driven performance in FY09?
  • 3i-Infotech recorded almost 90% YoY growth in topline during FY09. This was a mix of organic and inorganic (acquisition led) growth of 38% YoY and 51% YoY respectively. However, on the sequential basis the topline declined marginally by 0.3%. The growth during the fiscal was led by ‘transaction service’ segment. Revenues from this segment grew by almost four times (contributes 32% of the total revenues). The ‘IT service’ and ‘software product’ segments also recorded healthy growth during the fiscal, as they grew by 61% YoY and 36% YoY respectively.

    Segment-wise performance
    (Rs m) 3QFY09 4QFY09 Change FY08 FY09 Change
    Software products            
    Revenues 2,028 2,091 3.1% 5,961 8,112 36.1%
    Gross margins 52.1% 54.8%   54.8% 54.1%  
    IT services            
    Revenues 1,973 1,761 -10.7% 4,639 7,482 61.3%
    Gross margins 35.1% 36.3%   40.8% 36.2%  
    Transaction services            
    Revenues 2,087 2,216 6.2% 1,453 7,262 400.0%
    Gross margins 29.3% 28.4%   30.1% 28.9%  

  • 3i-Infotech’s operating margins declined by 2.1% YoY during FY09. The decline in margin was mainly on account of expenses incurred by the company for its new initiatives that includes Kiosks, Taxsmile and Elegon.

  • The company recorded increase of 60% YoY in net profits during the fiscal. These grew largely on the back of higher operating profits and higher exceptional income. During the fourth quarter, the company bought back FCCBs of the face value of US$ 25.1 m and Euro 4 m that resulted into exceptional income of around Rs 771 m. However, net exception income got reduced as the company incurred an amount of Rs 511 m towards the advisory fees, legal & other professional fees and other expenses for various financial re-structuring assignments including fees and other expenses in respect of the buyback. Thus, the company recorded exceptional income of Rs 260 m. Excluding this exceptional income the company registered growth of 45% YoY in its net profits during the fiscal.

What to expect?
At the current price of Rs 42, the stock is trading at a multiple of 2.5 times our estimated FY11 earnings. 3i Infotech has managed to beat our FY09 estimates for sales and profits by wide margins and as such we shall have to revise our numbers upwards. However, one concerning aspect that came out of the company’s conference call was the management’s declaration of a large debt of around Rs 22 bn on the company’s books, which is available given that the company is continuing to scout for acquisitions. This debt includes Rs 6.5 bn of FCCB money that does not need immediate servicing. The management has though outlined its intentions of bring the debt levels down.

Overall, the management has indicated that it expects the demand environment to remain uncertain for the next 2-3 quarters and then witness some improvement. Notwithstanding the short term concerns, we remain positive on the stock given its extremely low valuations and the company’s strong growth momentum.

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