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i-flex : Products propel growth

Aug 1, 2002

i-flex solutions (i-flex) has posted a strong 53% growth in topline for 1QFY03, on a YoY basis. This is on the back of a steep 75% rise in product sales. The rise in net profits is marginally lower at 51% due to a decline of 1.5% in operating margins.

(Rs m)1QFY021QFY03Change
Sales 863 1,324 53.4%
Other Income 21 31 49.5%
Expenditure 525 825 57.1%
Operating Profit (EBDIT) 338 500 47.7%
Operating Profit Margin (%)39.2%37.7% 
Interest - -  
Depreciation 26 30 13.4%
Profit before Tax33350150.5%
Tax 40 59 47.3%
Profit after Tax/(Loss) 293 442 51.0%
Net profit margin (%)33.9%33.4% 
Diluted number of shares 37.3 37.3  
Diluted Earnings per share*31.447.4 
P/E (x) 9.8 

The growth in revenues at 9% was equally strong when compared on a sequential (QoQ) basis and the net profit have jumped by a steep 23% on the back of a significant improvement in operating margins.

Though the growth in products sales has outpaced the growth in revenues from services, the operating margins have headed south. This is a bit intriguing since, products are a high margins business and increased contribution to revenues should results into higher margins. Due to the swift growth in product sales, the contribution of products to revenues increased significantly. The gains, from a higher contribution of products, have likely been offset by to a sharp rise in employee costs. The company’s cost sales figure has jumped by 78%, YoY. The remaining part of the revenues came from the services business.

(Rs m)1QFY021QFY03Change
Products 505 885 75.2%
% contribution58.5%66.8% 
Services 358 440 22.8%
% contribution41.5%33.2% 

In the past restrictions due to ‘Regulation K’, a regulatory frame work in the US, there was only a limited amount of product related business i-flex could tap from Citigroup. However, subsequent amendments to the regulation have enabled i-flex to ramp up business significantly from its largest client. As a result, products sales have seen a significant rise in the US geography. The trend is likely to continue in the future, considering the fact that i-flex is yet to establish a considerable presence in the US markets.

Of the total revenues from product sales, 98% came from a single product, FLEXCUBE, the company’s flagship product. Other products of the company are Microbanker that contributed 2% to the revenues from products. The company also had another product Promotr that had sales of Rs 4 m in 1QFY02, but did not see any revenues in the 1QFY03.

Picture is not so rosy for the services business. The revenues from the largest market US showed a steep decline of 20% on a YoY basis. This was offset by growth in revenues from the Europe, Asia Pacifica, Middle East and Africa. Other than Europe and Asia Pacific the demand for services from these non-US geographies could be very erratic. Also, the margins from the services business at 19% are much lower compared to those seen for other software services companies.

i-flex added 12 new clients during the quarter of which 6 were for FLEXCUBE. In FY02, the company had added 66 new clients (38 for products). In 1QFY02, the company earned 93% of its services revenues from just 10 ten clients, with Citigroup and its entities contributing 82%. However, it has managed to substantially de-risk its concentration in 1QFY03. The revenues from top ten clients have come down to 76% and revenues from Citigroup are down sharply to 21%. As far as the concerns regarding receivables, i-flex has managed to reduce debtor’s days outstanding from 144 days to 136. However, of the total receivables of Rs 1,979 m (US$ 40 m), 13% has been outstanding for more than 180 days.

At the current market price of Rs 465, the stock is trading at a P/E multiple of 10x its 1QFY03 estimated earnings. Until the company posts sustained growth in the products business, the valuations are likely to remain subdued compared to others in the software sector. Thus, the stock price is likely to remain range bound going forward.

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