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3i Infotech: Acquisitions aid growth
Oct 23, 2008

Performance summary
  • Sales grow by 28% QoQ in 2QFY09, almost double on a YoY basis during 1HFY09. Growth during both the periods largely driven by the company’s acquisitions.

  • Operating margins contract by 0.5% QoQ during the quarter.

  • Net profits grow 17% QoQ during the quarter. However, growth much lower than that recorded in topline owing to higher depreciation and interest charges.



Consolidated financial performance: A snapshot

(Rs m) 1QFY09 2QFY09 Change 1HFY08 1HFY09 Change
Sales 4,685 6,016 28.4% 5,381 10,701 98.8%
Expenditure 3,773 4,874 29.2% 4,246 8,647 103.6%
Operating profit (EBDITA) 911 1,142 25.3% 1,135 2,054 80.9%
Operating profit margin (%) 19.5% 19.0%   21.1% 19.2%  
Other income 32 53 67.5% 100 84 -15.5%
Depreciation 118 153 29.6% 100 271 172.7%
Interest 180 236 30.9% 234 417 78.4%
Profit before tax 644 806 25.1% 902 1,450 60.8%
Tax 63 86 36.5% 68 150 119.4%
Minority interest (6) 36   41 30  
Profit after tax/(loss) 587 683 16.5% 793 1,270 60.2%
Net profit margin (%) 12.5% 11.4%   14.7% 11.9%  
No. of shares (m)       129.9 130.8  
Diluted earnings per share (Rs)*         17.2  
P/E ratio (x)*         2.9  
* On a trailing 12-months basis

What has driven performance in 2QFY09?
  • 3i-Infotech recorded 28% QoQ growth in topline during 2QFY09, which was a mix of organic and inorganic revenue growth of 8.5% QoQ and 20.5% QoQ respectively. The company acquired - Locuz Enterprise Solutions, FinEng Solutions and the US based Regulus Group during the quarter, which contributed to the stupendous sales growth. The growth in topline was also led by Transaction service business, which grew by 92% QoQ. The product and service business also registered healthy growth of 14% QoQ and 8% QoQ respectively.

    Segment wise performance...

    (Rs m) 1QFY09 2QFY09 Change 1HFY08 1HFY09 Change
    Software products            
    Revenues 1,869 2,125 13.7% 2,517 3,993 58.7%
    Gross margins   56.3%   54.8% 54.8%  
    IT services            
    Revenues 1,803 1,944 7.8% 2,159 3,748 73.6%
      35.9%   39.3% 36.7%  
    Transaction services            
    Revenues 1,012 1,948 92.4% 705 2,960 319.5%
    Gross margins   29.0%   34.3% 29.0%  
    Total            
    Revenues 4,684 6,016 28.4% 5,381 10,701 98.8%
    Gross margins   40.9%   45.9% 41.3%  


  • The company’s operating profits grew by 25% QoQ during 2QFY09. However, operating margins declined marginally by 0.5% QoQ. Based on cost heads, while cost of revenue grew from 58% of sales in 1QFY09 to 59% in 2QFY09, sales and administrative overheads remained stable.

  • On the back of a strong growth in topline, the company grew its net profits by 17% QoQ during 2QFY09. However, the net profit margin contracted by 1% owing to tax expenses (effective tax rate increased from 9.8% in 1QFY09 to 10.7% in 2QFY09) and interest expense.

    What to expect?
    At the current price of Rs 50, the stock is trading at a very attractive multiple of 3 times our estimated FY11 earnings. Amidst the ongoing financial crisis, the management is confident of achieving its stated growth targets for the current fiscal. The management has also indicated that the company’s unique business model and its spread in geographies like India, Russia and Middle East region negate the impact of economic slowdown. It has indicated that the company will not raise further debt or equity to fund its inorganic growth going forward. Overall, we maintain our positive view on the stock from a 2 to 3 years perspective.

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