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3i Infotech: Healthy performance - Views on News from Equitymaster
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3i Infotech: Healthy performance
Jul 25, 2008

Performance summary
  • Consolidated topline grows by 80% YoY in 1QFY09, driven by all round growth. Transaction service segment reports growth of 222% YoY in 1QFY09.

  • Operating margins contract by 1.6% YoY during the quarter, mainly on account of overall increase in costs, especially SG&A expenses (as percentage of sales).

  • Bottomline grows by 50% YoY during 1QFY09. Higher depreciation and tax outgo though take some sheen off the profit.



Consolidated financial performance: A snapshot…
(Rs m) 1QFY08 1QFY09 Change
Sales 2,603 4,684 80.0%
Expenditure 2,056 3,773 83.5%
Operating profit (EBITDA) 547 911 66.5%
Operating profit margin (%) 21.0% 19.4%
Other income 39 32 -19.4%
Depreciation 48 118 146.3%
Interest 103 180 75.2%
Profit before tax 435 644 48.0%
Tax 32 63 97.7%
Minority Interest 11 (6) -150.2%
Profit after tax/(loss) 392 586 49.5%
Net profit margin (%) 15.1% 12.5%
No. of shares (m) 130.7
Diluted earnings per share (Rs) 15.0
P/E ratio (x)* 7.20
*On a trailing 12-months basis

What has driven performance in FY08?
  • 3i-Infotech recorded 80% YoY growth in topline during 1QFY09. This growth was a healthy mix of both the services and products divisions. While the former grew by 53% YoY, the latter grew by 69% YoY during the quarter. The third segment of ‘transaction services’ also registered a strong growth during the quarter, as its sales were up by a whopping 222% YoY.

    The company’s sales growth during the quarter consisted of 32.9% of organic growth and 45.6% of inorganic growth. 3i is aggressively moving on an inorganic path to grow its capabilities going forward. The company has made following significant acquisitions in the first quarter of FY09 –

    1. Acquired 26% strategic stake in Locuz Enterprise Solutions Ltd, which will help 3i in specialising in IT Infrastructure solutions and services.

    2. Acquired 51% stake in FinEng Solutions Pvt. Ltd. FinEng is into creating and selling software products and developing software solutions. This acquisition will help 3i to cater to the financial sector, including mutual funds, wealth management and credit risk space.

    3. Completed acquisition of 100% stake in the US-based Regulus Group LLC (Regulus), the largest independent remittance provider and the leading providers of document (bills) processing services in the US. This acquisition will help 3i in growing its transaction service business.

    Segment wise performance…
    (Rs m) 1QFY08 % to total 1QFY09 % of total YoY
    Products
    Revenue 1,219 53.3% 1,869 39.9% 53.3%
    Gross profit 669 62.7% 992 50.5% 48.1%
    Gross margins 54.9% 53.1%
    Services
    Revenue 1,070 46.7% 1,803 38.5% 68.5%
    Gross profit 399 37.3% 679 34.6% 70.1%
    Gross margins 37.3% 37.6%
    Transaction service
    Revenue 314.1 14% 1012.1 21.6% 222.2%
    Gross profit 117.0 11% 291.7 14.9% 149.4%
    Gross margins 37.2% 28.8%
    Total
    Revenue 2,289 4,684 104.7%
    Gross profit 1,068 1,962 83.6%
    Gross margins 46.7% 41.9%

  • 3i’s operating profits grew by 67% YoY during 1QFY09. However, its operating margins dipped by 1.6% YoY. Based on cost heads, while cost of revenue grew from 54.5% of sales in 1QFY08 to 58.1% in 1QFY09, sales and administrative overheads declined from 21.5% to 20.1%.
  • On the back of a strong growth in topline, 3i-Infotech grew its net profits by 50% YoY during 1QFY09. 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 7.4% in 1QFY08 to 9.8% in 1QFY09.

    What to expect?
    At the current price of Rs 108, the stock is trading at a multiple of 6.7 times our estimated FY10 earnings. The management has indicated that on the back of strong order book position and a healthy pipeline, it is confident of achieving its stated growth targets for the current fiscal. The management has also indicated that the company’s unique business model, which is spread over diversified geographical locations, insulates it from economic factors such as general business slowdown and currency fluctuations in a specific region. We maintain our positive view on the stock from a 2 to 3 years perspective.

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