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3i- Infotech: Surviving the rupee rise - Views on News from Equitymaster

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3i- Infotech: Surviving the rupee rise
Sep 28, 2007

Over the past month, we have been flooded with subscriber queries regarding our view on the software sector. We believed it would be a good idea to give short views on the different companies rather than providing with a general overview on the sector as a whole. Over the last two articles, we gave discussed our views on Geometric Software and i-flex solutions. In this article, we take a look at 3i-Infotech. We had last recommended 3i-Infotech in March 2007 at Rs 116 (adjusted for bonus issue), with a target price of Rs 155 from a March 2009 perspective. Since then, the stock has already touched a high of Rs 164. It currently trades at Rs 145, which implies a multiple of 6.9 times our estimated FY10 earnings for the company.

As a matter of fact, 3i-Infotech is the fourth largest Indian software products company and is among the frontrunners in the BFSI products space. While its closest peer in the sector, i-flex solutions is among the leading banking products company globally, 3i has largely focused its energies on the domestic market, with the same contributing to around 35% of its total revenues.

Here the factors that makes the company one of the better mid-cap investment options in the Indian technology space.


  1. Not highly susceptible to rupee appreciation: Perhaps one of the main positives working in favour of 3i is its relatively low penetration in the US market. Its revenues from the US were only 28% of consolidated revenues in FY07. This makes its less susceptible to the negative impact of rupee appreciation against the US dollar. Secondly, it also has a natural hedge as an almost equivalent proportion of its costs are billed in US dollar terms.

  2. De-risked business model: In its initial years, 3i was focusing more on widening its client base and geographical reach. In order to achieve this, the company adopted a ‘solutions’ strategy with a mix of product and services. To expand it offerings, the company adopted an inorganic growth strategy with a revenue mix of 50:50 for products and services. In FY07, the company made 6 acquisitions and this year too it has made two small acquisitions in the BPO space. In the past the company has shown its capabilities in integrating these acquisitions well and believe that these strategy is likely to benefit the company in the long run.

  3. Spread across geographies: 3i is one Indian tech company, which is really diversified across geographies. It generates 35% of its revenues from India, 21% from EMEA (Europe, Middle East and Africa) and 28% from the US. With extensive focus in the domestic market, the company is well poised to benefit from the India growth story. With all Tier 1 players focussing on the global economy, we believe that 3i is well placed to reap the benefits of a huge e-governance roll out in the country. This will not only boost revenues but also increases growth visibility and help it increase its dominance in the market.

  4. Diverse product suite: 3i product offerings include Premia – an end-to-end solution for insurance companies, Kastle – the retail lending, treasury and risk management solution for banks and financial institution in EMEA, Mfund – an integrated mutual fund solution in Asia Pacific (APAC), Rhyme systems products – a private wealth management solution in UK and Orion – the ERP package in the Middle East and APAC. We believe that such a wide range of products not only provides revenue visibility but also revenue predictability.

  5. Growth initiatives in the domestic BPO market: 3i provides complete end-to-end outsourcing solutions to various industries mainly in the domestic market. The company has specialised in non-voice based BPO services. It has made several small acquisitions of Indian BPO companies in FY07 and its two acquisition in FY08 were also in the BPO space - namely AOK BPO and HCCA Business Services. Investors should note here is that outsourcing is not just restricted to the US and Europe but the domestic market also offers enormous opportunities and we believe that 3i has done the right thing by tapping the domestic market as by the time the major players starts focusing on the domestic segment, 3i would have established a stronghold.

Conclusion
3i is one of the leading players in the Indian technology mid-cap space and we are very confident of the company’s growth prospects. A strong order book also supplements our claim. But the main concern we believe for the stock (not company) is the dilution in equity because of the FCCB conversions in the future. Barring this, we maintain our positive recommendation on the stock from a 2 to 3 years perspective.

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