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i-flex: Forex gains aid bottomline
Oct 26, 2007

Performance summary
  • Topline grows by 12% QoQ during 2QFY08, driven by 9% QoQ growth in products revenues. Services revenue declines by 2% QoQ

  • Operating margins expands by 3% QoQ. Lower costs in the products segments leads to margin expansion.

  • Bottomline grows by 138% QoQ large due to higher operating profits and other income.

  • Products tank size (order backlog of unexecuted license fee) stands at US$ 80 m.

Consolidated financial performance snapshot
(Rs m) 1QFY08 2QFY08 Change 1HFY07 1HFY08 Change
Sales 5,133 5,758 12.2% 9,025 10,891 20.7%
Expenditure 4,440 4,804 8.2% 7,407 9,244 24.8%
Operating Profit 693 954 37.7% 1,618 1,647 1.8%
Operating Profit margin (%) 13.5% 16.6% 3.1% 17.9% 15.1%  
Other income (83) 207   217 124 -42.9%
Depreciation 164 195 18.9% 308 359 16.6%
Profit before tax 446 966 116.6% 1,527 1,412 -7.5%
Tax 79 94 19.0% 247 173 -30.0%
Share of profit in associate - 2   6 2  
Profit after tax/(loss) 367 874 138.1% 1,286 1,241 -3.5%
Net profit margin (%) 7.1% 15.2%   14.2% 11.4%  
No. of shares (m)         83.7  
Diluted earnings per share (Rs)*         43.9  
P/E ratio (x)*         36.0  
* On a trailing 12 months basis

What is company’s business?
i-flex is India’s premier software products company, focused on the banking and financial services (BFSI) vertical. The company’s portfolio of offerings comprises products (54% of FY07 consolidated revenues) like Flexcube, an end-to-end product suite for retail, corporate and investment banking, asset management and treasury. The company also provides software services (46% of revenues) like application software development and deployment, maintenance and business and IT consulting. For the year 2007, International Banking Systems (IBS) ranked the company’s flagship product, Flexcube, as the number one selling wholesale as well as retail back-office banking solution in the world for the fifth year running. In fact, Flexcube has been rated among the top-selling banking solutions for the last seven years.

What has driven performance in 2QFY08?
Products lead topline growth: i-flex recorded a topline growth of 12% QoQ in 2QFY08. This was driven by 9% QoQ growth in products revenue. The services revenue, however, declined by 2% QoQ. In the services segment, the company saw a pricing increase of 2.2% to 2.5%. The tank size (order backlog of unexecuted license fees) increased by US$ 5 m QoQ basis and stood at US$ 80 m at the end of September 2007. The company also signed new license fees of US$ 22 m during the quarter.

Products revenues by type
  1QFY08 2QFY08 Change
  % share Rs m % share Rs m  
License Fees 21% 620 19% 603 -3%
Implementation Fees 59% 1,716 64% 2,032 18%
Annual Maintenance Charges 20% 577 17% 540 -6%
Total 100% 2,912 100% 3,174  

i-flex added 13 new customers across products and services during this quarter and the number of active clients now stands at 130. On the headcount front, the company added a net of 1,245 employees during the quarter and the total headcount now stands at close to 10,800. The attrition rate has dropped by 1.5% QoQ and the annualised attrition now stands at 19.5%.

Geographical breakup of revenues
  Products Services
  1QFY08 2QFY08   1QFY08 2QFY08  
  % share Rs m % share Rs m Change % share Rs m % share Rs m Change
US 22% 641 16% 503 -21% 59% 1,348 58% 1,288 -5%
Middle East and Africa 20% 582 18% 566 -3% 5% 115 3% 73 -37%
Asia Pacific 16% 466 25% 791 70% 17% 382 20% 449 18%
Europe 41% 1,194 40% 1,265 6% 19% 423 19% 413 -2%
Latin America and Caribbean 1% 29 2% 48 66% 0% 8 0% 11 31%
Total 100% 2,912 100% 3,174 9% 100% 2,277 100% 2,234 -2%

Products expands operating margins: i-flex’s operating margins expanded by 3% QoQ largely due to reduction in overall costs in the products segment. Margins of the products segment expanded by 10% QoQ while margins in the services segment declined by 7% QoQ. On a consolidated basis, while the selling and marketing expenses increased by 1.9% QoQ, a big fall of 4.4% QoQ in staff costs and 0.7% QoQ fall in administrative expenses helped the operating margins to expand.

Segmental analysis
  Products   Services  
(Rs m) 1QFY08 2QFY08 Change 1QFY08 2QFY08 Change
Revenue 2,912 3,174 9.0% 2,277 2,234 -1.9%
Cost of revenue 1,513 1,270 -16.0% 1,662 1,728 4.0%
Selling and marketing expense 458 596 30.2% 69 77 11.8%
General and administration expense 214 204 -4.7% 127 166 30.9%
Total cost 2,184 2,069 -5.2% 1,858 1,971 6.1%
Operating margins 25.0% 34.8%   18.4% 11.8%  

Higher other income boosts bottomline: i-flex’s net profits expanded by 138% QoQ during 2QFY08. This was on the back of higher other income and lower effective taxes. The company had recorded a forex loss of Rs 110 m in 1QFY08 and in this quarter it booked Rs 60 m as forex gains, which helped the bottomline expansion. The effective taxes also came down on a QoQ basis. In 1QFY08, the effective tax rate was 18% while in this quarter it was 10%. This was mainly due to two reasons. First, company was entitled to MAT credit and secondly, there was reduction in taxes at the Europe subsidiary due to which the effective tax rates have come down.

What to expect?
At the current price of Rs 1,582, the stock is trading at a multiple of 16.7 times our estimated FY10 earnings. The company has forayed into IMS and has now about 20 customers for this service across Asia Pacific and the US. We believe this is a good move in the services space. In products business, we do not see any long-term concerns except for the fact that in the short term Equinox revenue could suffer due to on-going sub prime crisis in the US. However, i-flex’s direct exposure to sub prime lending segment in less than 0.5% of the consolidated topline. Barring the stock’s valuations, we remain positive on the company’s business from a long-term perspective.

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