1. 2QFY2011 Result Update | IT
October 14, 2010
Infotech Enterprises ACCUMULATE
CMP `175
Performance Highlights Target Price `184
(` cr) 2QFY11 1QFY11 %chg (qoq) 2QFY10 %chg (yoy) Investment Period 12 Months
Net revenue 295.5 253.0 16.8 237.3 24.5
EBITDA margin (%) 15.5 16.0 (50)bp 21.7 (620)bp Stock Info
PAT 33.1 32.9 0.8 35.2 (5.9) Sector IT
Source: Company, Angel Research Market Cap (` cr) 1,943
Strong volume-led revenue growth: For 2QFY2011, Infotech Enterprises (IEL) Beta 0.54
reported 16.8% qoq revenue growth to `295.5cr. Growth was led by qoq volume 52 Week High / Low 206/111
growth of 15.8% and 13.0% in the utility, telecom and government (UTG) and the
Avg. Daily Volume 22862
engineering and mechanical (EMI) segments, respectively. Growth in the UTG
Face Value (`) 5
segment was impressive because of the 9.4% qoq volume growth due to Wellsco’s
acquisition (integrated since August 9, 2010) and 6.4% organic growth. BSE Sensex 20,497
Nifty 6,177
Disappointing operational performance: IEL’s EBITDA margin dipped by 50bp to
Reuters Code INFE.BO
15.5% due to grid-correction exercise to retain talent, which escalated cost,
impacting margins by 166bp. This, in addition to the integration of Wellsco (with Bloomberg Code INFTC@IN
EBITDA margin ~8% lower than IEL’s average), took away gains that came in
from strong volume growth as well as cross-currency benefit.
Shareholding Pattern (%)
Other key highlights: During 2QFY2011, IEL added 12 new clients, 7 in UTG and
Promoters 23.1
5 in EMI. The company made net addition of whopping 454 employees (including
MF / Banks / Indian Fls 14.1
229 from Wellsco).
FII / NRIs / OCBs 55.8
Outlook and valuation: For FY2011, IEL has raised its net hiring target from
Indian Public / Others 7.1
1,678 (end of 1QFY2011) to 2,775 on the back of higher demand for
engineering services by hi-tech and heavy engineering industries. We expect IEL to
record a 24.5% revenue CAGR over FY2010–12E on the back of strong inorganic
Abs. (%) 3m 1yr 3yr
growth due to Daxon and Wellsco acquisitions aiding growth, while net profit
growth will be subdued at a 4.4% CAGR mainly on account of lower orbit for Sensex 13.5 18.2 7.6
operating margins. Thus, we recommend Accumulate on IEL with a Target Price of Infotech (1.0) 43.0 33.0
`184, valuing the stock at 11x FY2012E EPS of `16.8 i.e., at 50% discount to
Infosys’ target multiple of 22x.
Key financials (Consolidated)
Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E
Net sales 889.8 953.1 1,190.8 1,478.3
% chg 32.0 7.1 24.9 24.1
Net profit 92.4 170.9 151.3 186.4
% chg 6.5 85.0 (11.4) 23.2
EBITDA margin (%) 20.1 21.9 16.4 17.3
FDEPS (`) 8.6 15.4 13.6 16.8
P/E (x) 20.3 11.4 12.8 10.4
P/BV (x) 2.4 2.1 1.9 1.6
ROE (%) 12.8 20.4 15.5 16.4
ROCE (%) 17.5 19.4 15.1 17.3
Srishti Anand
EV/Sales (x) 1.8 1.6 1.3 1.0
022 – 4040 3800 Ext: 345
EV/EBITDA (x) 8.9 7.3 7.7 5.6
Srishti.anand@angeltrade.com
Source: Company, Angel Research; Note: *FDEPS for FY2009 and FY2010 adjusted for 1:1 bonus
effective June 12, 2010
Please refer to important disclosures at the end of this report 1
2. IT | 2QFY2011 Result Update
Exhibit 1: 2QFY2011 performance (Consolidated)
Y/E March (` cr) 2QFY2011 1QFY2011 % chg 2QFY2010 % chg 1HFY2011 1HFY2010 % chg
Total revenue 295.5 252.9 16.9 237.4 24.5 548.4 470.0 16.7
Salary cost 184.5 156.7 17.7 133.7 38.0 341.2 267.2 27.7
Gross Profit 111.0 96.2 15.4 103.7 7.0 207.2 202.8 2.1
% margins 37.6 38.0 (47 ) bp 43.7 (612) bp 37.8 43.2 (538 ) bp
Travel expenditure 18.8 16.4 14.8 13.6 38.2 35.2 25.0 40.7
Purchases for products/re-sale 10.4 8.6 20.2 6.8 51.3 19.0 15.4 23.0
Professional charges 7.6 7.6 (0.4) - 15.2 6.8 123.7
Other operating costs 28.5 23.2 22.7 31.8 (10.3) 51.7 51.7 0.0
EBITDA 45.8 40.4 13.4 51.5 (11.1) 86.2 103.9 (17.1)
% margins 15.5 16.0 (50) bp 21.7 (620) bp 15.7 22.1 (640) bp
Depreciation & amortisation 12.4 11.7 6.3 11.4 8.9 24.1 23.2 4.0
Financial expenses 0.6 0.2 137.5 0.2 137.5 0.8 0.5 68.8
Other Income 6.6 8.1 (17.8) 4.5 48.7 14.7 20.8 (29.3)
PBT 39.4 36.5 7.9 44.3 (11.1) 75.9 101.1 (24.9)
Tax 8.0 7.4 7.6 12.4 (35.5) 15.4 27.3 (43.8)
PAT 31.5 29.1 8.0 32.0 (1.6) 60.6 73.8 (17.9)
Share of profits 1.6 3.7 (56.0) 3.3 (50.8) 5.3 7.4 (28.7)
Minority Interest (0.0) (0.1) (20.0) 0.1 (0.1) 0.5 (118.8)
PAT after share of profits 33.1 32.9 0.8 35.2 (5.9) 66.0 80.7 (18.3)
PAT margins (%) 11.0 12.6 (163) bp 14.5 (359) bp 11.7 16.4 (473) bp
EPS (`) 3.0 3.0 0.3 3.3 (9.7) 5.9 5.3 11.9
Source: Company, Angel Research
Strong volume growth aiding top line
For 2QFY2011, IEL posted 16.9% qoq (24.5% yoy) revenue growth, backed by
qoq volume growth of 15.8% and 13.0% in the UTG and EMI segments,
respectively. Growth momentum in the EMI segment continues, whereas growth in
the UTG segment was stupendous because of 9.4% volume growth due to
Wellsco’s acquisition, which further aided the 6.4% organic volume growth. The
cross-currency movement, which acted as a spoilsport in 1QFY2011, aided the
top line by 3% as USD depreciated by 4%, 1.8% and 3% against GBP, Euro and
AUD, respectively. In USD terms, revenue grew by 14.6% qoq to US $63.5mn.
Exhibit 2: Segment-wise trend in volume growth
20.0%
15.0%
10.0%
% qoq
5.0%
0.0%
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
-5.0%
EMI UTG
Source: Company, Angel Research
October 14, 2010 2
3. IT | 2QFY2011 Result Update
Exhibit 3: Segment-wise trend in utilisation
90%
85%
80%
75%
%
70%
65%
60%
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
EMI UTG
Source: Company, Angel Research
During the quarter, upbeat demand for engineering services from verticals like
aerospace, heavy engineering and hi-tech resulted in strong utilisations despite the
spurt in voluntary attrition, which was as high as 5.6%. Demand for geospacial
information solutions (GIS) services also gained traction, with IEL witnessing over
20% qoq growth in its top two clients in the UTG segment. During 2QFY2011,
utilisation of the UTG segment fell primarily because of addition of 229 employees
from Wellsco’s acquisition.
Poor margin performance due to unanticipated cost escalation
EBITDA margin slipped by 50bp qoq due to unplanned grid correction exercise,
which became a necessity for the company to retain key skills. This impacted
EBITDA margin by 166bp qoq, which was further accentuated by lower pricing
and margin dilution due to Wellsco’s integration (with ~8% EBITDA margin lower
than the company’s average) taking away gains due to strong volume growth as
well as favourable cross-currency benefit.
Exhibit 4: Trend in margins
25.0
20.0
15.0
%
10.0
5.0
-
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11E
EBITDA EBIT
Source: Company, Angel Research
October 14, 2010 3
4. IT | 2QFY2011 Result Update
Back to the hiring spree
During 2QFY2011, IEL made net employee addition of 454, with 229 employees
from Wellsco’s integration. For FY2011, the company has increased its net hiring
target from 1,678 to 2,775 on the back of a pick-up in demand.
Investment arguments
Strong growth momentum in EMI continues with UTG back on
the growth path
IEL is witnessing strong deal discussions in North America and Europe. In the EMI
segment, IEL along with aerospace (57% to revenue) verticals like heavy
engineering (10% to revenue) and hi-tech (11% to revenue) is gaining strong
momentum. Thus, the nature of spend in the EMI segment is becoming more
broad-based, resulting in robust volume growth. Some of the new long-term
projects in the EMI segment, such as the Hamilton Sunstrand, Seawell (engineering
support services for its drilling operations) and the recently signed US-based
Westinghouse (for providing nuclear energy-related network) projects, are
expected to witness strong ramp-ups with qoq growth of over 30% in the Hamilton
Sunstrand project and triple-digit growth in each of the latter two projects.
Moreover, IEL is witnessing deal discussions, which are larger in size typically
demanding 100–200 people instead of 30–40 billable resources few
quarters back.
The UTG segment is also back to strong growth after declining for more than two
quarters. Though the 15.8% volume growth was on the back of 9.4% coming in
from Wellsco’s acquisition, organically the company grew by 6.3% qoq. This is
primarily because the company’s top two clients grew by over 20% qoq. In fact,
going forward, IEL expects growth to be persistent in the UTG segment.
Outlook and valuation
Management is confident of recording an 8–10% CQGR over 2HFY2011 on the
back of broad-based growth in the EMI segment as well as stability in the UTG
vertical. We expect the company to grow at a 24.5% CAGR over FY2010–12E due
to inorganic initiatives like Daxon and Wellsco boosting volumes. However,
margins for FY2011 and FY2012 will settle at lower orbits of 16.4% and 17.3%,
respectively, as compared to 21.9% for FY2010 due to stronger rupee, competitive
cost pressures such as wage inflation and dilution due to integration of the
above-mentioned acquisition. This will lead to muted PAT CAGR of 4.4% over
FY2010–12E. Hence, we recommend an Accumulate rating on the stock with a
Target Price of Rs184, valuing the stock at 11x FY2012E EPS of `16.8 i.e., at
historical discount of 50% to Infosys’ target multiple of 22x, implying an upside of
5% from current levels.
October 14, 2010 4
5. IT | 2QFY2011 Result Update
Exhibit 5: Key assumptions
FY2011E FY2012E
Revenue growth (US $) 30.0 27.0
USD-INR rate (realised) 45.5 44.5
Net revenue growth (`) 24.9 24.2
EBIDTA margin (%) 16.4 17.3
Effective tax rate (%) 24.0 25.0
PAT growth (%) (11.5) 23.2
Source: Company, Angel Research
Exhibit 6: Change in estimates
FY2011E FY2012E
Parameter Earlier Revised Var. Earlier Revised Var.
(` cr) estimates estimates (%) estimates estimates (%)
Net revenue 1,095.0 1,190.6 8.7 1,264.0 1,478.3 17.0
EBITDA 199.0 195.0 (2.0) 228 255.0 11.8
PAT 154.0 151.3 (1.8) 178 186 4.5
Source: Company, Angel Research
We have upgraded our FY2011E and FY2012E revenue estimates due to
integration of strong growth in acquisitions like Daxon and factoring in Wellsco’s
numbers. EBITDA margins have been downgraded due to acquisition integration
effect, stronger rupee and competitive cost pressure like wage inflation to be
persistent.
Exhibit 7: One-year forward P/E band
350
300
250
Share Price (Rs)
200
150
100
50
0
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Apr-05
Jul-05
Apr-06
Jul-06
Apr-07
Jul-07
Apr-08
Jul-08
Apr-09
Jul-09
Apr-10
Jul-10
Price 5x 10x 15x 20x
Source: Company, Angel Research
October 14, 2010 5
11. IT | 2QFY2011 Result Update
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement Infotech
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
October 14, 2010 11
