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3i Infotech: A lacklustre performance again - Views on News from Equitymaster

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3i Infotech: A lacklustre performance again

Jul 22, 2011

3i Infotech has announced the first quarter results of financial year 2011-2012 (1QFY12). The company has reported declines of 26.4% quarter-on-quarter (QoQ) in sales and 27.1% QoQ in net profits. It should be noted that the results are not exactly comparable to the previous period as numbers presented here for 1QFY12 do not include the business from the discontinued operations. Here is our analysis of the results.

Performance summary
  • Net sales declined by 26.4% QoQ in 1QFY12.
  • Operating margins expanded by around 2.0% during the quarter to 21.3% as compared to previous quarter (quarter ended March 2011, 4QFY11).
  • Net profit declined by 27.1% QoQ during the quarter. This was mainly on account of the discontinued operations.

Consolidated financial performance: A snapshot...
(Rs m) 4QFY11 1QFY12 Change
Sales 6,516 4,794 -26.4%
Expenditure 5,256 3,775 -28.2%
Operating profit (EBITDA) 1,260 1,019 -19.1%
Operating profit margin (%) 19.3% 21.3%  
Other income 19 40 116.2%
Depreciation 237 155 -34.5%
Interest 423 430 1.5%
Profit before tax 618 474 -23.3%
Tax (16) 47  
Profit before exceptional items and minority interest 634 427 -32.7%
Minority Interest 3 7  
Exceptional gain/(loss)      
Impact of discontinued business   41  
Profit after tax/(loss) 631 460 -27.1%
Profit after tax/(loss) excl. exceptional items 631 420 -33.5%
Net profit margin (%) 9.7% 8.8%  
Total dividend on preference shares (paid & accrued, including tax)   18  
No. of shares (m)   192.0  
Diluted earnings per share (Rs)*   12.2  
P/E ratio (x)*   3.5  
*On a trailing 12-months basis

What has driven performance in 1QFY12?
  • 3i Infotech recorded 26.4% QoQ decline in sales during the quarter. This was on account of an 80.6% QoQ decline in the Transaction services business segment. This was largely brought on by the sale of the US subsidiary. The other segment IT Solutions also registered a decline of 6.4% QoQ.
  • Segment wise revenue breakup
    (Rs m) 4QFY11 1QFY12 QoQ
    IT Solutions
    Revenue 4,756 4,453 -6.4%
    Gross profit 2,182 2,003 -8.2%
    Gross margins 45.9% 45.0%  
    Transaction service
    Revenue 1760 341 -80.6%
    Gross profit 515 99 -80.8%
    Gross margins 29.3% 28.9%  

  • In terms of geographies, the Company registered growth in Middle East, Africa, Russia and CIS (MEARC) market only from where revenues grew by 18.9% QoQ during the quarter. Revenues from USA market declined by 48.5% QoQ during the quarter as the company has divested the business of US-based Billing and Payment Units. Revenues from Asia Pacific , South Asia and Western Europe declined by 41.8% QoQ, 5.8% QoQ and 5.7% QoQ respectively during the quarter.
  • Revenue Breakup
    (Rs m) 3QFY11 4QFY11 Change
    On basis of geography
    South Asia 2,032 1,914 -5.8%
    Asia Pacific 349 203 -41.8%
    USA 3,206 1,652 -48.5%
    MEARC 604 718 18.9%
    Western Europe 325 307 -5.7%

  • The operating margins increased by around 2% QoQ to 21.3% during the quarter as compared to 19.3% seen during the previous quarter (4QFY11)
  • The net margin declined by 0.9% QoQ during the quarter.
What to expect?
At the current price of Rs 43, the stock is trading at a multiple of just around 4.5 times our estimated FY14 earnings.

Going forward, the management stated that they would concentrate on domain based services and product segment. In terms of geographies, the emerging markets would be the main growth driver for the company. The company has won some big deals in the banking as well as the insurance space. However, the management refrained from giving any specific guidance with regards to growth rates or margins.

The management stated that the company has repaid debt of Rs 4,500 m on 30th June, 2011 and another Rs 500 m in the month of July. The effect of all this would be visible in the next quarter. At an average rate of 8%, this translates to a savings in interest costs by roughly Rs 400 m per annum. With regards to the Foreign Currency Convertible Bonds (FCCBs), the management is optimistic that it would be able to refinance the obligation at attractive terms. It is currently negotiating the same.

We feel that the company would benefit from the selloff of the US operations as it would help in debt repayment. We maintain our 'Hold' view on the company from a 2-3 years perspective.

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