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3i Infotech: Continuing the strong run - Views on News from Equitymaster

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3i Infotech: Continuing the strong run
Oct 25, 2007

Performance summary
  • Consolidated topline grows 7% QoQ in 2QFY08, driven by 7% QoQ growth in product revenues and 4% QoQ growth in service revenues.
  • Operating margins expands by 0.3%mainly due to decline in staff costs (as percentage of sales).

  • Total order book stands at Rs 7.2 bn (1.1 times FY07 revenues).

  • Bottomline expands by 2% QoQ during 2QFY07, aided by expansion in operating margins and higher other income.

Consolidated financial performance: A snapshot…
(Rs m) 1QFY08 2QFY08 Change 1HFY07 1HFY08 Change
Sales 2,603 2,779 6.8% 2,735 5,381 96.8%
Expenditure 1,978 2,103 6.3% 2,101 4,081 94.3%
Operating profit (EBITDA) 625 675 8.1% 634 1,300 105.0%
Operating profit margin (%) 24.0% 24.3%   23.2% 24.2%  
Other income 39 61 55.3% 86 100 15.8%
Software development cost 78 87 12.0% - 165  
Depreciation 48 52 8.2% 169 100 -41.1%
Interest 103 131 27.0% 76 234 205.5%
Profit before tax 435 467 7.2% 475 902 89.9%
Tax 32 36 13.3% 30 68 129.0%
Minority Interest 11 30 164.4% 6 41 550.9%
Profit after tax/(loss) 392 401 2.2% 439 793 80.7%
Net profit margin (%) 15.1% 14.4%   16.0% 14.7%  
No. of shares (m)         129.9  
Diluted earnings per share (Rs)*         10.7  
P/E ratio (x)*         13.0  
* On a trailing 12-month basis
Software development costs were amortised from 3QFY07.
Hence it is not included in 1HFY07 to make the figures comparable.

What is the company business?
3i Infotech is an IT company focusing mainly on the banking, financial services and insurance (BFSI) vertical. It was incorporated in 1993 as a back-office IT services provider to the ICICI Group and has since metamorphosed into a technology company providing IT services and solutions to over 500 clients in over 45 countries. 3i Infotech earns revenues from products as well as IT services. The company has products for the BFSI space, with a presence in insurance, treasury, asset-liability management, risk management, core banking and investment management. It also has an ERP product suite, providing solutions for the retail, manufacturing, distribution, trading, fashion, and automotive, pharmaceutical and chemical industries. Its main focus in IT services is in the region of enterprise application integration, systems integration, security consulting and e-governance. It acquired four companies in FY06 with a focus on business intelligence, security consulting, anti-money laundering software, ERP software and a mutual fund product.

What has driven performance in 2QFY08?
Products drive topline: 3i-Infotech recorded a 7% QoQ growth in its topline during 2QFY08. This was driven by all round growth in services as well as the products segments. While the products segment recorded 7% QoQ growth, the services segment notched up 4% QoQ growth in topline during the quarter. The current order book now stands at Rs 7.2 bn as against Rs 6.5 bn in 1QFY08. The products and services order book have grown at 12% QoQ and 11% QoQ in 2QFY08 respectively. This order book is executable within a period of 12 months.

In terms of geographies, while there have not been any changes in revenue contribution from major geographies, Asia-Pacific revenues grew by 37% QoQ and its share in total revenues increased from 7% in 1QFY08 to 9% in 2QFY08. On the clientele front, 3i added 3 US$ 1 m clients during the quarter and revenue from its top customer (ICICI Bank) remained stable at around 15%.

Geographical distribution of revenues
  1QFY08 2QFY08  
  % Share (Rs m) % Share (Rs m) % change
India 31.0% 807 31.0% 861 6.8%
MEARC 17.0% 442 16.0% 445 0.5%
USA 25.0% 651 25.0% 695 6.8%
Asia Pacific 7.0% 182 9.0% 250 37.3%
Western Europe 20.0% 521 19.0% 528 1.4%
Total 100.0% 2,603 100.0% 2,779 6.8%

Margin expansion: 3i’s operating margins expanded by 0.3% QoQ, largely due to overall reduction in costs. The staff costs in 2QFY08 came down by 1% QoQ and SG&A costs went up marginally leading to overall reduction in costs. One thing worth noting here is that 3i has not been significantly impacted (rather will not be affected significantly) due to the appreciation in rupee. This is because the company derives 25% of its revenues from the US markets and 20% of its costs are in US dollar terms, thereby almost negating the volatility in the rupee-dollar rate.

Segment wise performance…
(Rs m) 1QFY08 % of total 2QFY08 % of total % change
Products          
Revenues 1,219 46.1% 1,298 46.7% 6.5%
Gross profit 669 54.7% 711 55.3% 6.2%
Gross margins 54.9%   54.8%    
Services          
Revenues 1,423 53.9% 1,480 53.3% 4.0%
Gross profit 555 45.3% 574 44.7% 3.5%
Gross margins 39.0%   38.8%    
Total          
Revenues 2,642   2,779   5.2%
Gross profit 1,224   1,285   5.0%
Gross margins 46.3%   46.3%    

Higher other income aids bottomline: 3i’s net profits grew by 2% QoQ during 2QFY08. This was largely due to the strong growth in other income segment. The company lost almost 5% QoQ of the bottomline due to minority interest.

Performance over the recent past…
Particulars (%) 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08 2QFY08
Sales growth (QoQ) 7.1 12.9 18.3 22.5 23.8 6.8
Operating margins 22.8 23.5 24.8 25.0 24.0 24.3
Profits growth (QoQ) 21.9 5.5 22.2 -18.7 21.7 2.2

What to expect?
At the current price of Rs 139, the stock is trading at a multiple of 6.6 times our estimated FY10 earnings. The company has given strong results over the past couple of years and the future looks equally vibrant with the strong order book supporting the facts. Secondly, the company’s focus in the domestic arena makes it a strong contender for outsourcing deals in domestic market and huge e-governance roll out in the government sector. We remain positive on the stock from a long-term perspective.

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