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3i Infotech: Going remains good - Views on News from Equitymaster
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3i Infotech: Going remains good
Apr 26, 2008

Performance summary
  • Consolidated topline grows by a whopping 84% YoY in FY08, driven by strong performance from both the products and services segments. Sales growth stands at 10% QoQ for 4QFY08. Actual sales figure matches our estimates.
  • Operating margins expand by 1% YoY in FY08, aided by better utilisation of resources.

  • Bottomline expands by 70% YoY during FY08, 1% QoQ in 4QFY08. Actual profit figure higher by 6% as compared to our estimates.

  • Board recommends dividend of Rs 1.5 per share (dividend yield of 1.3%).

Consolidated financial performance: A snapshot…
(Rs m) 3QFY08 4QFY08 Change FY07 FY08 Change
Sales 3,173 3,499 10.3% 6,553 12,053 83.9%
Expenditure 2,504 2,753 10.0% 5,232 9,503 81.7%
Operating profit (EBITDA) 669 745 11.5% 1,322 2,549 92.9%
Operating profit margin (%) 21.1% 21.3%   20.2% 21.2%  
Other income 61 22 -64.2% 155 183 18.4%
Depreciation 64 80 24.2% 169 244 44.5%
Interest 130 142 9.6% 209 505 141.7%
Profit before tax 536 545 1.7% 1,098 1,983 80.6%
Tax 40 43 8.2% 53 151 182.9%
Minority Interest 12 14 19.8% 7 66 800.0%
Profit after tax/(loss) 485 488 0.8% 1,037 1,766 70.2%
Net profit margin (%) 15.3% 14.0%   15.8% 14.7%  
No. of shares (m)       56.3 130.5  
Diluted earnings per share (Rs)         13.5  
P/E ratio (x)         8.9  

What has driven performance in FY08?
  • 3i-Infotech recorded a whopping 84% YoY growth in topline during FY08. This was a combined effort strong performances from both the services and products divisions. While the former grew sales by 88% YoY, the latter’s growth stood at 81% YoY during the fiscal. The management has attributed this performance to the company’s organic plus inorganic growth strategy, which has done well for it over the past 2-3 years. The company made three key acquisitions during the fiscal, one each in the credit card and loan processing, BPO (transaction services), and payment processing spaces. The fourth quarter also saw the company making its foray into the Chinese market, wherein it signed an agreement with Yucheng Technologies to provide its (3i’s) products and services in the booming Chinese financial services market.

    Segment wise performance…
    (Rs m) FY07 % to total FY08 % of total YoY Change
    Products          
    Revenue 3,319 50.6% 5,961 49.5% 79.6%
    Gross profit 1,802 59.5% 3,269 58.4% 81.4%
    Gross margins 54.3%   54.8%    
    Services          
    Revenue 3,234 49.4% 6,091 50.5% 88.4%
    Gross profit 1,229 40.5% 2,329 41.6% 89.5%
    Gross margins 38.0%   38.2%    
    Total          
    Revenue 6,553   12,053   83.9%
    Gross profit 3,031   5,598   84.7%
    Gross margins 46.3%   46.5%    

  • 3i’s operating profits grew by 93% YoY during the fiscal. This led to its operating margins expand by 1% YoY. Based on cost heads, while cost of revenue declined from 53.7% of sales in FY07 to 53.5% in FY08, sales and administrative overheads declined from 22.1% to 21.9%.

  • On the back of a strong growth in topline and 1% expansion in operating margins, 3i grew its net profits by 70% YoY during FY08. However, the net profit margin contracted by 1.1% owing to higher interest and tax expenses. As a matter of fact, the company’s effective tax rate increased from 4.9% in FY07 to 7.6% in FY08.

What to expect?
At the current price of Rs 121, the stock is trading at a multiple of 7.5 times our estimated FY10 earnings. The FY08 results have been in line with our estimates. The fact that 3i has not seen any issues of currency volatility (unlike its larger peers) stands the company in good stead in these troubled times for the industry. The management has indicated of maintaining its strategy of focusing on the Asian (especially India) and other emerging markets for growth, which we believe is a positive. The company derives only about 27% of revenues in US dollars but even this is negated by an almost equal share of US dollar costs. So the net impact of rupee’s appreciation on its profits is nullified. Furthermore, the company’s focus in the Indian market makes it a strong contender for outsourcing deals in domestic market and huge e-governance roll out in the government sector.

For FY09, the management expects revenue and net profit growth to come at 40% YoY and 30% YoY respectively, which is again fairly in line with what we have estimated. We shall soon update our research report on the company, factoring in the actual performance for FY08 and incorporating our estimates for FY11.

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