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i-flex: Bottomline blues - Views on News from Equitymaster
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  • Aug 1, 2003

    i-flex: Bottomline blues

    i-flex Solutions, world’s leading provider of software solutions to the banking industry, has reported a YoY topline growth of 23% for June quarter, for the standalone entity. On a consolidated basis, the revenues have grown by a higher 32% for the same period. However, relatively higher expenses and lower other income has resulted in standalone profits declining by around 9% and consolidated profits by 5% YoY. Also, operating margins have taken a severe hit, and are down by 580 basis points for the standalone entity.

    The standalone picture...
    Rs m 1QFY03 1QFY04 Change
    Sales 1,317 1,623 23.3%
    Other Income 31 (27) -187.5%
    Expenditure 825 1,105 34.0%
    Operating Profit (EBDIT) 492 518 5.3%
    Operating Profit Margin (%) 37.4% 31.9%  
    Interest - -  
    Depreciation 30 23 -22.2%
    Profit before Tax 494 468 -5.3%
    Extraordinary items 0 0  
    Tax 59 70 18.2%
    Profit after Tax/(Loss) 435 398 -8.5%
    Net profit margin (%) 33.0% 24.5%  
    No. of Shares 37.3 38.2  
    Diluted Earnings per share* (Rs) 45.5 41.7  
    P/E Ratio (x)   28  
    (* annualised)      

    The topline growth for i-flex has been contributed by growth in both its segments, i.e., products and services. Product revenues grew by around 24% in 1QFY04 over the corresponding period last year. However, due to increased expenses, operating margins for the segment have declined by about 300 basis points. Also, revenue growth for the services segment has been around 21% for 1QFY04, but margins for this segment (33% contribution to total revenues) have declined by around 1200 basis points, reducing to almost one-thirds of that in 1QFY03. Major contributors to the revenue growth for i-flex’s flagship product ‘Flexcube’ were Germany and Egypt from where the company garnered major client wins. During 1QFY04, i-flex added 9 new clients to take its clientele to over 150.

    Contributors to growth...
    (Rs m) 1QFY03 1QFY04 Change
    Revenues 880 1,092 24.2%
    % Contribution 66.8% 67.3%  
    Operating margins 55.1% 52.2%  
    Revenues 437 531 21.4%
    % Contribution 33.2% 32.7%  
    Operating margins 18.7% 6.7%  
    Total revenues 1,317 1,623 23.3%

    Significant investments in sales and marketing infrastructure saw i-flex’s total expenditure rise by a substantial 34% YoY, thus putting pressure on the bottomline. In 1QFY04, cost of revenues as a percent of total revenues increased to 45% (39% in 1QFY03). Also, selling and marketing expenditure rose by 28% over the same period. Operating margins have suffered on this account. Apart from rise on the abovementioned expenditure fronts, a substantial rise in i-flex’s taxation expenses has also put pressure on the bottomline. The company has added 112 employees in the June quarter to take its total number of employees to 2,439.

    Rising Costs...
    Rs m 1QFY03 1QFY04 Change
    Cost of revenues 516 730 42%
    % of revenues 38.9% 45.0%  
    Selling & marketing 108 138 28%
    % of revenues 8.1% 8.5%  
    General & administration 201 237 18%
    % of revenues 15.2% 14.6%  
    Total Costs 825 1,105 34%
    % of revenues 62.3% 68.1%  
    Revenues 1,324 1,623 23%

    Apart from major client wins in German and Egyptian markets, i-flex has increased its share of revenues from the US market from 30% in 1QFY03 to 41% in the June quarter this fiscal. This is of much importance because i-flex has been allowed access to the US markets only after FY01 (the company, being a Citigroup entity, was earlier prohibited under the US ‘Regulation K’ to tap clients in the US markets apart from Citigroup). Since then, the company has been gradually increasing its presence in the US market and has been able to find success in this initiative. This is of much importance because most of the major banks in the US are in a mode of replacing their legacy systems to new ones, and i-flex that has carved a niche in banking solutions, is likely to gain tremendously going forward. The company’s penetration in other markets (like Middle-East, Africa and Asia-Pacific) has, however, declined over 1QFY03.

    At the current market price of Rs 1,185, the stock is trading at a P/E multiple of 28x its annualized 1QFY04 earnings. While i-flex has immense growth potential going forward, its performance over the past couple of quarters is of concern. Due to its focus on products business that requires heavy investments in marketing and branding, the pressure on operating margins is likely to continue. The stock has seen a continuous rally since its initial listing and is nearing its all-time highs. However, considering the stock’s expensive valuations (relative to the industry) and pressure on the company due to the global economic slowdown and consequent rationalization of budgets in the banking industry, investors need to exercise caution.



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