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3i Infotech: Emerging markets aid performance
Nov 3, 2010

3i Infotech has announced its 2QFY11 results. The company has reported a marginal 1% QoQ growth in sales during the quarter. Its net profits have increased by 5% QoQ during the period. Here is our analysis of the results.

Performance summary
  • Consolidated sales grow by around 1% QoQ during 1QFY11.
  • Operating margins improve marginally by 0.7% QoQ during the quarter on account of marginal savings in operating costs (as a percentage of total sales).
  • Net profit increases by 4.6% QoQ on the back of better operating margins and lower tax rates during the quarter.

(Rs m) 1QFY11 2QFY11 Change 1HFY10 1HFY11 Change
Sales 6,370 6,434 1.0% 12,240 12,804 4.6%
Expenditure 5,131 5,138 0.1% 9,847 10,254 4.1%
Operating profit (EBITDA) 1,240 1,296 4.5% 2,393 2,550 6.5%
Operating profit margin (%) 19.5% 20.1%   19.6% 19.9%  
Other income 64 35 -45.3% 103 83 -19.0%
Depreciation 258 258 0.3% 590 516 -12.6%
Interest 375 391 4.5% 705 766 8.6%
Profit before tax 671 681 1.4% 1,201 1,351 12.5%
Tax 51 43 -15.0% 0 94  
Profit before exceptional
items and minority interest
621 638 2.8% 1,201 1,258 4.8%
Minority Interest 9 (2) -122.2% 84 7 -91.7%
Exceptional gain/(loss) - -   279 -  
Profit after tax/(loss) 612 640   1,396 1,251  
Profit after tax/(loss)
excl. exceptional items
612 640 4.6% 1,117 1,251 12.0%
Net profit margin (%)*# 9.6% 9.9%   9.1% 9.8%  
No. of shares (m) 191.8 191.9   168.4 191.9  
Diluted earnings per share (Rs)*#         14.6  
P/E ratio (x)*#         4.6  
*On a trailing 12-months basis; # Adjusting for exceptional items

What has driven performance in 2QFY11?
  • 3i Infotech recorded 1% QoQ growth in topline during the quarter. This was driven by a 8% QoQ growth in the IT solutions business but was offset by the 11% QoQ decline in the IT transaction services business. The decline in IT transaction services was mainly due to a volume decline in US and other developed markets as seen during the quarter. The management expects revenue growth to be flat for the second half of the year.

  • 3i Infotech's operating margins improved marginally by 0.7% QoQ during the quarter. This was on account of lower operating costs (as percentage of total sales).

    Segment wise revenue breakup
    (Rs m) 1QFY11 2QFY11 QoQ
    IT Solutions      
    Revenue 3,935 4,264 8.4%
    Gross profit 1,731 2,090 20.8%
    Gross margins 44.0% 49.0%  
    Transaction service      
    Revenue 2435 2170 -10.9%
    Gross profit 856 554 -35.2%
    Gross margins 35.1% 25.5%  

  • 3i Infotech's net profits increased by 4.6% QoQ. This was mainly due to better operating margins and lower tax rates during the quarter. This offset the decline in other income which fell by 45.3% QoQ during the quarter. For the second half of the year, the management expects margins to be around 10%.

What to expect?
At the current price of Rs 68, the stock is trading at a multiple of just around 3.3 times our estimated FY13 earnings (ResearchPro subscribers, kindly look here).

For the transactions service segment, the company has witnessed a decline in volumes. Especially from US. To this decline, the management expects total revenues to be flat over the next few quarters. Going forward, the management expects growth to be fuelled by the emerging markets. While this shift in focus has led to an increased working capital position for the company, the management expects this to normalize over a period of time. The current order book stands at Rs 16.8 bn.

While the company has repaid part of the debt, it continues to remain high due to increased working capital requirements. The management is confident that it will be able to refinance the debt; however, it would be at interest rates that are higher than the current rates. The management does not expect any equity dilution on account of its FCCBs. We maintain our positive view on the stock

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