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i-flex: March quarter disappoints - Views on News from Equitymaster
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  • May 16, 2003

    i-flex: March quarter disappoints

    i-flex Solutions has reported a 37% rise in its net profit for the year ended March 2003. However, the profits are down 38%, sequentially, for 4QFY03. On the revenue front, the standalone figure is reported to be 36% up for FY03, while for the final quarter, the revenues have seen a degrowth of 3.5%. Importantly, while the company has managed to hold on to its operating margins for the full year, the last quarter witnesses a substantial dip of over 1,000 basis points for the same. This was mainly on account of pressure on both the revenue front as well as operating expenses front in the March quarter. On a consolidated basis net profits of the company have grown by 48%, while the revenues are up by 45% for FY03.
    Rs m 3QFY03 4QFY03 Change FY02 FY03 Change
    Sales 1,503 1,450 -3.5% 4,150 5,638 35.9%
    Other Income 60 13 -78.6% 102 167 63.4%
    Expenditure 910 1,031 13.3% 2,690 3,638 35.2%
    Operating Profit (EBDIT) 593 419 -29.3% 1,460 2,001 37.0%
    Operating Profit Margin (%) 39.5% 28.9%   35.2% 35.5%  
    Depreciation 34 37 8.8% 145 134 -7.7%
    Profit before Tax 619 395 -36.2% 1,417 2,034 43.5%
    Extraordinary items -38 0    0 -44  
    Tax 54 67 24.1% 150 246 64.0%
    Profit after Tax/(Loss) 527 328 -37.8% 1,267 1,744 37.6%
    Net profit margin (%) 35.1% 22.6%   30.5% 30.9%  
    No. of Shares 37.3 37.3   37.3 37.3  
    Diluted Earnings per share* (Rs) 56.5 35.2   34.0 46.7  
    P/E Ratio (x) 15 24   25 18  
    (* annualised)            

    Rise in topline is mainly attributed to the company's products' business. This segment, which has grown by 55% during FY03, has contributed around 64% (60% in FY02) to the company's topline. Revenues from this segment include license fees, professional fees for implementation and enhancement services and annual maintenance contracts fees. Flexcube, the flagship product is continuing its momentum upwards. International Banking Systems, UK, ranked it the numero-uno selling banking product for the year 2002. Flexcube is also the number one selling commercial and retail banking back-office system.

    Apart from the products' business, the company reported a rise in revenues from its services business. This is encouraging considering the fact that nearly 64% of the company’s revenues are derived from a single product. Going forward growth in other services revenues may be a key point to look in to.

    One noticeable feature about the company's generation of revenues from different regions is that, unlike its other peers that have a major contribution from the US market, i-flex's portfolio is more balanced for the US, European and Asia-Pacific market. This picture is a bit skewed as a result of the fact that, due to Regulation K, the company was not permitted to enter in to the US markets till FY01, other than providing products and services to the Citigroup entities. This means that going forward i-flex is likely to target the US markets agressively in order to grow revenues. Hence in the future the mix of geographies may change significantly.

    Contribution to revenues: Region-wise
    Rs m 2001 2002 2003
    US 34% 32% 37%
    Mid-East & Africa 23% 26% 26%
    Asia Pacific 21% 21% 18%
    Europe 21% 20% 18%
    Latin America 1% 1% 1%

    Despite sequential fall in margins, growth witnessed in the products' segment kept margins steady for the full year. For FY03, the products segment operated at a high margin of 54%, while the similar figure for the services segment stands at a mere 14%. Higher margins from selling products are not unusual as products involve a one-time cost for development and incremental costs are very low for the same. However, investing in developing products is comparatively risky because if the product fails to perform, the research and development costs incurred for the same yield no returns. For the services segment, the revenue growth was comparatively lower at 21% while the exorbitant rise of 41% on the expenditure front, has taken its toll on the margins of this segment, which has fallen by around 1,200 basis points. the fall in margins of the services business is in line with the general industry trends. However operating margins of the services business of the company is comparatively very low compared to its peers.

    Segment-wise performance
      Products   Services  
    Rs m FY02 FY03 Change FY02 FY03 Change
    Sales 2,484 3,622 46% 1,666 2,016 21%
    Expenditure 1,325 1,651 25% 1,227 1,726 41%
    Operating Profit (EBDIT) 1,159 1,971 70% 439 290 -34%
    Operating Profit Margin (%) 46.7% 54.4%   26.4% 14.4%  

    The company, during the year, added 295 new employees to take the tally to 2,327. This seems to have been the main cause of pressure on the operating margins, especially since employee costs contribute over 22% (19% for FY02) of total sales. Quite interestingly, when during these tough economic times the marketing budgets of IT companies are increasing as they are trying to position their brands better, i-flex has actually seen a drop of 7% in its same segment of its expenditure.

    Apart from the effect of lower revenues and falling margins, the net profit figure for 4QFY03 is down substantially due to sharp reductions in other income and provisioning for higher depreciation and tax. Due to this net profit growth for the full year has been restricted to 37%.

    At the current market price of Rs 846, the stock is trading at a P/E multiple of 18x its FY03 earnings. As we had reiterated in the past, the company has immense growth potential going forward, however the company's performance in the March quarter is a cause of concern. i-flex also has not been forthcoming regarding the details as to why there was a sequential dip in the topline. Also the operating margins of the company have dipped significantly in the March quarter. The stock may languish at current levels as investors may be cautious going forward and would want to look at the performance of the company in the next 2-3 quarters.



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