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3i Infotech: Margins take a hit

Jul 27, 2010

3i Infotech has announced its 1QFY11 results. The company has reported a marginal 1% QoQ growth in sales during the quarter. Its net profits have however declined by 26% QoQ during the period. Here is our analysis of the results.

Performance summary
  • Consolidated sales grow by around 1% QoQ during 1QFY11.
  • Operating margins contract by 4.3% QoQ during the quarter on account of 6.8% QoQ increase in expenditure.
  • Even after adjusting for a one-off large extraordinary item from 4QFY10, net profit falls drastically by 26% QoQ during 1QFY11. This is largely owing to lower operating margins though marginally offset by the higher other income.

Consolidated financial performance: A snapshot...
(Rs m) 4QFY10 1QFY11 Change
Sales 6,283 6,370 1.4%
Expenditure 5,044 5,385 6.8%
Operating profit (EBITDA) 1,239 985 -20.5%
Operating profit margin (%) 19.7% 15.5%  
Other income 43 64 47.6%
Depreciation 5 3 -49.5%
Interest 381 375 -1.7%
Profit before tax 896 671 -25.1%
Tax 53 51 -3.8%
Profit before exceptional items and minority interest 843 621 -26.4%
Minority Interest 20 9 -54.1%
Exceptional gain/(loss) (2,497) -    
Profit after tax/(loss) (1,673) 612  
Profit after tax/(loss) excl. exceptional items 824 612 -25.7%
Net profit margin (%)*# 13.1% 9.6%  
No. of shares (m) 168.8 191.8  
Diluted earnings per share (Rs)*#   14.0  
P/E ratio (x)*#   4.6  
*On a trailing 12-months basis; # Adjusting for exceptional items

What has driven performance in 1QFY11?
  • 3i Infotech recorded marginal 1% QoQ growth in net sales during the quarter. This was driven by a 3% QoQ growth in the IT solutions business but was marginally offset by the 0.5% QoQ decline in the IT transaction services business. The decline in the latter was mainly due to a volume decline in US. The management is confident of achieving its revenue growth guidance of 11-14% YoY for the full year FY11.

  • 3i Infotech’s operating profits declined by nearly 21% QoQ during the quarter. The company raised salary levels by 10% during the quarter, which led to lower margins. The management does not expect any further salary hikes for the coming quarters. For the full year, it is confident that margins would be sustainable at the current levels.

    Revenue Breakup
    (Rs m) 4QFY10 1QFY11 Change
    On the basis of offerings      
    IT Solutions 3,837 3,935 2.6%
    Transaction Services 2,446 2,435 -0.5%
    On basis of geography      
    South Asia 1,351 1,502 11.2%
    Asia Pacific 212 214 1.1%
    USA 3,555 3,580 0.7%
    MEARC 556 650 16.9%
    Western Europe 450 424 -6.0%

  • 3i Infotech’s net profits fell by 26% QoQ with margins contracting by 3.5%. This was mainly due to lower operating margins. There was an extraordinary item in the last quarter related to the discontinued operations. The decline is adjusted for this. What to expect? At the current price of Rs 64, the stock is trading at a multiple of just around 2.4 times our estimated FY13 earnings (ResearchPro subscribers, kindly look Here). The company has won several deals during the quarter. The management expects growth from the IT solutions business to be in the double digits and the IT services business to grow in single digits. This will help meet the revenue growth guidance of 11-14% for the full year 2011. The management is also confident of being able to sustain margins at the current levels for the entire year. The current order book stands at Rs. 17.3 bn, out of which around 40% is for IT transactions services and the balance 60% is for IT solutions business.

    Post the debt restructuring exercise undertaken by the company, the management feels that the interest costs have peaked and expect this to trend downwards going forward. In our view, though short term concerns remain about the margin impact of discontinuing of some businesses and debt levels, we still believe the company has strong fundamentals and value proposition. We maintain our positive view on the stock.

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