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3i Infotech: High leverage takes its toll
Oct 24, 2009

Performance summary
  • Consolidated sales increase by 5% QoQ in 2QFY10. Growth on account of some revival in business particularly for software products and transaction processing businesses. Appreciation of rupee during the quarter impacted sales to some extent.
  • Operating margins contracted by 0.7% QoQ during the quarter, mainly on account of increase in wage expenses and professional fees.
  • Bottomline declines drastically by 39% QoQ during 2QFY10, mainly due to absence of one-time exceptional income of Rs 279 m generated from buyback and cancellation of FCCB (at discounted price) during the last quarter. Increased interest and depreciation charges also dent net profits. Excluding the exceptional items, net profits decline by over 10% QoQ during the quarter.
  • Order book improves by Rs 1,200 m in 2QFY10, currently stands at Rs 15.7 bn.


Consolidated financial performance
(Rs m) 1QFY10 2QFY10 Change 1HFY09 1HFY10 Change
Sales 5,978 6,263 4.8% 10,701 12,240 14.4%
Expenditure 4,787 5,060 5.7% 8,647 9,847 13.9%
Operating profit (EBITDA) 1,191 1,203 1.0% 2,054 2,393 16.5%
Operating profit margin (%) 19.9% 19.2%   19.2% 19.6%  
Other income 44 59 34.5% 84 103 21.8%
Depreciation 286 304 6.5% 271 590 117.4%
Interest 342 363 6.2% 417 705 69.2%
Profit before tax 607 594 -2.0% 1,450 1,201 -17.2%
Tax (23) 22   150 (0)  
Minority Interest 41 43 6.4% 30 84 175.5%
Exceptional Items 279 -   - 279  
Profit after tax/(loss) 868 529 -39.0% 1,270 1,396 9.9%
Net profit margin (%) 14.5% 8.4%   11.9% 11.4%  
No. of shares (m)       130.7 168.4  
Diluted earnings per share (Rs)         17.5  
P/E ratio (x)*         5.4  
*On a trailing 12-months basis

What has driven performance in 2QFY10?
  • 3i Infotech recorded 5% QoQ growth in topline during 2QFY10. Though the overall business scenario remained constrained, there was some traction for company’s products (32% of total sales) and transaction processing (BPO, 37% of sales) businesses, which grew by 7% and 17% QoQ during the quarter. However, the IT services business (31% of sales) segment saw a revenue decline of 8% QoQ during the quarter.

  • The company registered a significant growth in its deal pipeline during 2QFY10. This included infrastructure management, technical support and banking product deals in the South Asian market, banking and insurance solution implementation deals in the Middle-East, and capital market solutions deals in the European market.

  • The company’s top client i.e., ICICI Group contributed 8% to its revenues during the quarter. The contribution from the top 5 and top 10 clients (excluding ICICI) improved to 16% and 22% respectively as compared to 13% and 20% respectively registered in 1QFY10.

    Revenue Breakup
    (Rs m) 1QFY10 2QFY10 Change
    On the basis of segment      
    Products 1,876 2,000 6.6%
    Services 2,108 1,932 -8.3%
    Transaction Services 1,993 2,331 16.9%
    On basis of geography      
    South Asia 1,494 1,691 13.1%
    Asia Pacific 239 188 -21.4%
    USA 3,168 3,507 10.7%
    MEARC 717 501 -30.2%
    Western Europe 359 376 4.8%
    On basis of service offerings      
    BPO 2,152 2,317 7.7%
    ERP 179 188 4.8%
    Insurance 538 501 -6.9%
    Banking 717 814 13.5%
    Capital Markets 598 438 -26.7%
    IT Services 1,793 2,004 11.8%

  • 3i Infotech’s operating profits increased by 1% during 2QFY10. However, its operating margins contracted by 0.7% QoQ on account of increase in salary expenses.

  • 3i Infotech’s net profits fell by 39% QoQ during 2QFY10, with the net profit margin contracting by 6%. This happened on account of absence of exceptional income generated from buyback and cancellation of FCCBs during the last quarter. Excluding exceptional items, profits declined by just about 10% owing to higher interest and depreciation expenses.

What to expect?
At the current price of Rs 94, the stock is trading at a multiple of 4.5 times our estimated FY12 earnings, which we believe makes it extremely attractive for long term investors. The 2QFY10 performance of 3i Infotech was plagued by the slow pace of recovery in the banking and insurance verticals. Another major spoilsport for the company has been its high debt, which has resulted in huge interest outgo. However, the recent QIP issue of Rs 3.2 bn is expected to reduce the debt levels of the company to around 1.3:1 as the repayment will occur on a phased manner over the next 3 months. We maintain a positive view on the stock.

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