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i-flex: Products lead the charge - Views on News from Equitymaster

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i-flex: Products lead the charge

May 6, 2008

Performance summary
  • Topline grows by 15% YoY in FY08 and 8% QoQ in 4QFY08. Growth driven by product business, which recorded sales growth of 24% YoY on back of strong growth in implementation fees.

  • Operating margins contract by 1.9% YoY in FY08, primarily because of increase in costs of both the product and services segments.

  • Bottomline grows by 12% YoY during the fiscal. Growth impacted by contraction in operating profitability.

Consolidated financial performance snapshot
(Rs m) 3QFY08 4QFY08 Change FY07 FY08 Change
Sales 6,196 6,715 8.4% 20,609 23,802 15.5%
Expenditure 4,866 5,019 3.1% 16,185 19,129 18.2%
Operating Profit 1,330 1,696 27.5% 4,424 4,673 5.6%
Operating Profit margin (%) 21.5% 25.3%   21.5% 19.6%  
Other income 59 454 669.5% 360 640 77.8%
Depreciation 191 155 -18.8% 653 707 8.3%
Profit before tax 1,198 1,995 66.5% 4,131 4,606 11.5%
Tax 129 141 9.3% 416 442 6.3%
Share of profit in associate (2) (2)   8 (4)  
Minority Interest - (4)   - (4)  
Profit after tax/(loss) 1,067 1,848 73.2% 3,723 4,156 11.6%
Net profit margin (%) 17.2% 27.5%   18.1% 17.5%  
No. of shares (m)       83.3 83.8  
Diluted earnings per share (Rs)       44.4 49.6  
P/E ratio (x)         27.8  

What has driven performance in FY08?
  • i-flex recorded a topline growth of 15% YoY in FY08, which was mainly a result of strong performance of the products division. This business, which contributed to almost 60% of the consolidated revenues, grew its sales by 24% YoY during the fiscal. Growth for the products business was led by 35% YoY increase in implementation fees (which formed 59% of product revenues), as the company implemented its products for the licenses that it had sold over the past few quarters. i-flex sold US$ 36 m worth of product licenses during 4QFY08, which has further increased its tank size. The fiscal also saw the company drive growth from the EMEA (Europe, Mid-East and Africa) and Asia-Pacific regions. i-flex’s revenue from Europe and Asia-Pacific grew by 42% YoY and 24% YoY during the fiscal.

    Geographical breakup of revenues
      FY07 % of total FY08 % of total Change
    US 8,146 39% 7841 33% -4%
    Europe 5,699 28% 8111 34% 42%
    Asia -Pacific 3,640 18% 4513 19% 24%
    Middle East India & Africa 2,985 14% 3173 13% 6%
    Latin America and Caribbean 139 1% 164 1% 18%

  • As for the services business, sales grew by a marginal 5% YoY during FY08. A large part of this lackluster performance from the services segment can be attributed to the pressure it had faced during the first two quarters of fiscal, when business was impacted owing to subprime related issues in the US markets (US markets form 56% of i-flex’s services revenues).

  • i-flex’s operating margins contracted by 1.9% YoY in FY08, largely due to cost increases in the product business. As a consequence, operating margins for this segment contracted to 33.7% in FY08, from 36.3% in FY07. i-flex however managed to maintain margins for the service at 19.7% levels.

    Segmental cost analysis
      Products   Services  
    (Rs m) FY07 FY08 Change FY07 FY08 Change
    Revenue 11,211 13,880 23.8% 8,919 9,379 5.2%
    Cost of revenue 4,350 5,986 37.6% 6,391 6,607 3.4%
    Selling and marketing expense 1,961 2,231 13.8% 320 338 5.5%
    General and administration expense 830 980 18.1% 458 584 27.5%
    Total cost 7,141 9,197 28.8% 7,169 7,528 5.0%
    Operating margins 36.3% 33.7%   19.6% 19.7%  

  • i-flex’s net profits grew by 12% YoY during FY08. The expansion was largely driven by increase in other income. Other income grew by 78%, on account of higher interest income and a one-time forex gain.

What to expect?
At the current price of Rs 1,365, the stock is trading at a multiple of 14.4 times our estimated FY10 earnings. We shall update this analysis post the management conference call, details of which have not been released as yet (the conference call was scheduled for yesterday evening but was subsequently postponed). Overall, the company has performed lower than our estimates (12% and 16% lower sales and profits respectively). While maintenance of strong growth momentum by the products business is a positive, we shall await the management’s views with respect to its services strategy. We shall update this analysis and our research report on the company subsequently.

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