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3i Infotech: Eyeing domestic IT pie

Jul 28, 2009

Performance summary
  • Consolidated topline declines by 1.5% QoQ in 1QFY10, on account of the economic slowdown resulting in muted demand for IT services and products, particularly in the banking, financial services and insurance segment. Appreciation of rupee during the quarter also impacted the topline. On a YoY basis, sales have grown by 28% during the quarter.
  • Operating margins expand by 0.3% QoQ during the quarter, mainly on account of cost containment measures.
  • Bottomline declines by 4% QoQ during 1QFY10, mainly due to lower sales and increased interest and depreciation charges. However, lower tax expense and exceptional income generated from buyback and cancellation of FCCBs at a discounted price, aided the bottomline. Excluding the exceptional items, net profits declined by over 34% QoQ during the quarter. In YoY terms, the net profits (including exceptional items) increased by 48%.
  • Order book improved by Rs 500 m in 1QFY10. It stood at Rs 14.5 bn at the end of the quarter.

Consolidated financial performance: A snapshot…
(Rs m) 4QFY09 1QFY10 Change
Sales 6,068 5,978 -1.5%
Expenditure 4,877 4,787 -1.8%
Operating profit (EBITDA) 1,190 1,191 0.0%
Operating profit margin (%) 19.6% 19.9%  
Other income 39 44 13.8%
Depreciation 233 286 22.5%
Interest 279 342 22.4%
Profit before tax 716 607 -15.3%
Tax 50 (23)  
Minority Interest 24 41 70.9%
Exceptional Items 260 279 7.4%
Share of profit in associates 3 -  
Profit after tax/(loss) 905 868 -4.1%
Net profit margin (%) 14.9% 14.5%  
No. of shares (m)   130.9  
Diluted earnings per share (Rs)   23.7  
P/E ratio (x)*   3.3  
*On a trailing 12-months basis

What has driven performance in 1QFY10?
  • 3i Infotech recorded 1.5% QoQ decline in topline during 1QFY10. This was largely due to the continued impact of global economic slowdown which resulted in decreased IT spending, particularly in the BFSI (banking, financial services, and insurance) segment. However on the YoY basis, the company registered a robust 27% topline growth. The traction came from the IT services (36% of total revenue) which grew by around 19% QoQ during the quarter.

    Service-offering wise Revenue Breakup
    (Rs m) 4QFY09 1QFY10 % change
    BPO 2,184 1,973 -9.7%
    ERP 182 179 -1.5%
    Insurance 546 538 -1.5%
    Banking 728 658 -9.7%
    Capital Markets 607 478 -21.2%
    IT Services 1,820 2,152 18.2%

  • The company registered a significant growth in its deal pipeline during 1QFY10. This included infrastructure management, technical support and e-governance deals in the South Asian market, banking solution implementation deals in the Middle-East and North American regions, ERP deals in Japan, and capital market solutions deals in the European market.

    Geographical distribution of revenues
    (Rs m) 4QFY09 1QFY10 % change
    South Asia 1,517 1,494 -1.5%
    Asia Pacific 182 239 31.4%
    USA 3,337 3,168 -5.1%
    MEARC 667 717 7.5%
    Western Europe 364 359 -1.5%

  • The company’s top client i.e., ICICI Group contributed 9% to its revenues during the quarter. The contribution from the top 5 and top 10 clients (excluding ICICI) improved to 13% and 20% respectively as compared to 11% and 17% respectively registered in 4QFY09.

  • 3i Infotech’s operating profits remained flat during 1QFY10. However, its operating margins expanded by 0.3% QoQ on account of cost containment measures.

  • 3i Infotech’s bottomline fell by 4.1% QoQ during 1QFY10, with the net profit margin contracting by 0.4% owing to higher interest and depreciation expenses. This happened despite lower tax outlays and a huge component of exceptional items. Exceptional income stood at Rs 292 m on account of buyback and cancellation of FCCBs worth around Rs 824 m at an average discount of 52%. The expenditure incurred for the same was around Rs 13 m, netting the exceptional item at Rs 279 m for the quarter.

What to expect?
At the current price of Rs 79, the stock is trading at a multiple of 3.3 times its trailing 12 months earnings. The performance of 3i Infotech was plagued by the ongoing downturn during 1QFY10, though on the YoY basis it recorded robust growth in topline as well as bottomline. The management is of the view that the company’s de-risking strategy of diversifying the portfolio and timely entry into the emerging markets will place it in good stride, once the recovery begins.

The company is particularly eyeing the growing domestic IT market. It is also worth noting that the company is planning to raise more equity capital through a QIP issue of up to Rs 5 bn, in order to repay a part of its debt, which stood at Rs 22 bn at the end of FY09 (including FCCB debt of Rs 6.7 bn). The debt at the end of 1QFY10 stood at Rs 21 bn with a debt to equity ratio of 2:1. Through the retirement of loans, the company aims to attain a more balanced debt to equity ratio of 1:1 by the end of this year. We will soon update our research report and our view on the company.

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Mar 22, 2019 (Close)


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