3i Infotech

1QFY2011 Result Update | IT
August 3, 2010

3i Infotech BUY
CMP Rs64
Performance Highlights Target Price Rs100
(Rs cr) 1QFY11 4QFY10 %chg (qoq) 1QFY10 %chg (yoy) Investment Period 12 Months
Net revenue 637 628 1.4 598 6.6 Stock Info
EBITDA margin (%) 19.5 19.7 (0.2) 19.9 (0.4) Sector IT
PAT 61 (167) - 87 (29.5) Market Cap (Rs cr) 1,222
Source: Company, Angel Research
Beta 1.0
3i Infotech reported subdued results, with the top line witnessing miniscule growth 52 Week High / Low 103/60
of 1.4% qoq. Despite slight EBITDA margin dip, the bottom line reported net profit
Avg. Daily Volume 899303
growth in 1QFY2011 v/s net loss witnessed in 4QFY2010.
Face Value (Rs) 10
3i Infotech recorded subdued 1QFY2011 performance: 3i Infotech’s top line grew
BSE Sensex 18,115
by 1.4% qoq (6.6% yoy) to Rs637cr, led by 2.6% qoq growth in IT solutions
business (the erstwhile products segment and the IT services segment will be Nifty 5,440
clubbed under the IT solutions business segment from 1QFY2011). Revenue from Reuters Code TIIN.BO
the top client (ICICI Bank) grew by 1.4% qoq. However, on account of higher
Bloomberg Code III@IN
operational costs, EBITDA margin contracted by 26bp qoq (46bp yoy) during the
quarter. Depreciation costs increased on a sequential basis, while the tax rate
increased to 7.5% in 1QFY2011 from 5.9% in 4QFY2010. Thus, the bottom line
excluding one-time exceptional income and expenses declined by 25.7% qoq (up Shareholding Pattern (%)
3.9% yoy) to Rs61cr, while the bottom line including one-time exceptional income Promoters 20.4
and expenses stood at Rs61cr in 1QFY2011 compared to a net loss of Rs167cr in MF / Banks / Indian Fls 39.9
4QFY2010 (on account of write-off related to discontinuation of the Kiosk
FII / NRIs / OCBs 10.6
business), but was down by 29.5% yoy.
Indian Public / Others 29.2
Outlook and valuation: 3i Infotech maintained its top-line guidance in the range
of Rs2,740cr–2,814cr for FY2011E, growth of 11–14% yoy. This is represented by
a strong pipeline with a pending order book position, which currently stands at
Rs1,730cr. We believe the clubbing of the erstwhile products segment and the IT Abs. (%) 3m 1yr 3yr
services segment under the IT solutions business segment would help the Sensex 4.2 13.8 19.7
company to meet the upcoming demand for the bundled offerings of IT products 3iInfotech (13.0) (17.7) (55.2)
and services, thus enhancing the value proposition in the IT solutions business.
Thus, we expect 3i Infotech to post a 14% CAGR in revenue over FY2010–12E.
However, the ongoing operational and growth-related initiatives are expected to
exert pressure on margins, thereby resulting in a 6.4% CAGR in the bottom line
over FY2010–12E. Hence, we have revised our Target Price downwards to Rs100
(Rs129), implying a P/E multiple of 6x FY2012E earnings and continue to
maintain a Buy recommendation on the stock.

Key Financials (Consolidated)
Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Net sales 2,286 2,449 2,756 3,200
% chg 89.6 7.1 12.6 16.1
Net profit 282 33 291 333
% chg 59.7 (88.1) 770.0 14.3
EBITDA margin (%) 19.3 19.7 18.6 18.2
FDEPS (Rs) 21.6 1.7 14.6 16.7
P/E (x) 3.0 32.3 4.4 3.8
P/BV (x) 0.7 1.0 0.8 0.7
RoE (%) 28.8 2.9 21.0 18.6
RoCE (%) 14.4 12.7 14.1 15.6
Vibha Salvi
EV/Sales (x) 1.1 1.2 1.0 0.8
022 – 4040 3800 Ext: 329
EV/EBITDA (x) 5.6 5.9 5.1 4.0
vibhas.salvi@angeltrade.com

Please refer to important disclosures at the end of this report 1

3i Infotech | 1Q FY2011Result Update

Exhibit 1: 1QFY2011 – Consolidated financial performance
Y/E March (Rs cr) 1QFY11 4QFY10 % chg 1QFY10 % chg FY2010 FY2009 % chg
(qoq) (yoy)
Total revenue 637 628 1.4 598 6.6 2,449 2,286 7.1
Operating costs 513 504 1.7 479 7.2 1,966 1,851 6.2
EBITDA 124 124 0.1 119 4.1 483 434 11.2
Interest 37 38 (1.7) 34 9.5 145 95 52.5
Depreciation & amortisation 26 1 - 29 (9.9) 81 70 16.2
Other income/(expense) 6 4 47.6 4 45.2 20 19 6.0
Income before income taxes 67 90 (25.1) 61 10.6 277 288 (4.0)
Income Taxes 5 5 (3.8) (2) - 11 22 (50.3)
Net income before minority
62 84 (26.4) 63 (1.4) 266 266 (0.2)
interest
Exceptional income - 11 (100.0) 28 (100.0) 28 26 7.3
Extraordinary expenses - (260) - - - (260) 0 -
Minority interest & share of
1 2 (54.1) 4 (77.8) (0) 10 (101.1)
assc. profits
PAT (before extra.ord. items) 61 93 (34.4) 87 (29.5) 294 282 4.2
PAT (after extra.ord. items) 61 (167) (136.6) 87 (29.5) 33 282 (88.1)
Diluted EPS (before extra.ord.
3.1 4.8 (34.4) 4.4 (29.5) 15.0 14.4 4.2
items)
Diluted EPS (after extra.ord.
3.1 (8.5) - 4.4 (29.5) 1.7 21.0 (91.9)
items)
EBITDA margin (%) 19.5 19.7 19.9 19.7 19.0
Net Profit margin (%) 9.6 14.8 14.5 12.0 12.3
Effective tax rate (%) 7.5 5.9 (3.7) 4.0 7.6

Top-line growth driven by IT solutions business

3i Infotech’s top line grew by 1.4% qoq (6.6% yoy) to Rs637cr, led by 2.6% qoq
growth (decline of 1.2% yoy) in the IT solutions business (the erstwhile products
segment and the IT services segment will be clubbed under the IT solutions
business segment from 1QFY2011).

The company has not witnessed any ramp downs in standalone IT products
business during the quarter, but it faced delays from Western Europe, Middle East
and far east markets. The clubbing of IT products with IT services was only for
redefining the product business to extract better value proposition.

However, the transaction services business witnessed a 0.5% qoq decline (22.2%
yoy growth) mainly due to volume decline witnessed in transaction services in the
US market.

Revenue from the company’s top client (ICICI Bank) grew 1.4% qoq. 3i Infotech
witnessed four new deal wins from the core banking domain. Growth remained
stable across geographies on a qoq basis, with good wins in the IT solutions
business; however, on a yoy basis, developed markets grew by 13.8%, while
emerging markets declined by 3.8%.

August 3, 2010 2


Exhibit 2: Segment-wise gross revenue and margins
(Rs. cr) 1QFY11 4QFY10 1QFY10 % chg qoq % chg yoy
IT solutions
Revenue 394 384 398 2.6 (1.2)
Gross profit 173 177 183 (2.4) (5.5)
Gross margin (%) 44.0 46.2 46.0 (2.2) (2.0)
Transaction services (BPO)
Revenue 244 245 199 (0.5) 22.2
Gross profit 86 80 55 7.2 56.2
Gross margin (%) 35.1 32.6 27.5 2.5 7.7
Total
Revenue 637 628 598 1.4 6.6
Gross profit 259 257 238 0.6 8.7
Gross margin (%) 40.6 40.9 39.8 (0.3) 0.8
Source: Company Data, Angel Research; Note: Henceforth, the erstwhile products segment
and the IT services segment will be clubbed under the IT solutions segment

Subdued margins and one-time items drag the bottom line

Despite a 10% wage hike effective in 1QFY2011, 3i Infotech was able to maintain
EBITDA margin at 19.5%, thereby witnessing a slight dip of 26bp qoq (46bp yoy).

Depreciation cost grew on a sequential basis, while the tax rate increased from
5.9% in 4QFY2010 to 7.5% in 1QFY2011. Thus, the bottom line excluding one-
time exceptional income and Kiosk write-off declined by 25.7% qoq (up 3.9% yoy)
to Rs61cr, while bottom line including one-time exceptional income and Kiosk
write-off stood at Rs61cr in 1QFY2011 compared to a net loss of Rs167cr
reported in 4QFY2010 (on account of write-off related to discontinuation of the
Kiosk business), but was down by 29.5% yoy.

Exhibit 3: Gross margin and EBITDA margin trend

50
45
40
35
(%)

30
25
20
15
1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

Gross margins EBITDA margins

Source: Company Data, Angel Research

August 3, 2010 3


Investment Arguments
Re-defining business to derive better value proposition

The clubbing of the erstwhile products segment and the IT services segment under
the IT solutions business segment would help 3i Infotech to meet the upcoming
demand for the bundled offerings of IT products and services. Further, through the
company’s global delivery centres, these integrated offerings are expected to get
a boost in demand, which will enhance the value proposition in the IT solutions
business by undertaking several cross-selling and up-selling opportunities. Further,
through the acquisitions of Regulus and JP Morgan Retail Lock box in the
transaction services segment, the company has now access to large BFSI clients in
the US market and can pitch for more integrated IT offerings in this segment.

Management’s FY2011E guidance maintained

Management continued to maintain its top-line growth guidance in the range of
Rs2,740cr–2,814cr for FY2011E, a yoy increase of 11–14%. This is represented by
a strong pipeline with a pending order book position (representing assured
revenue stream for the next seven months), which currently stands at Rs1,730cr,
comprising 60% of IT solutions business revenue and the remaining of transaction
services business. Growth in the IT solutions business is expected to be stronger
compared to that in the transaction services business. Though the transaction
services business remained subdued during 1QFY2011, it is expected to witness
growth through client acquisitions and vendor consolidations going forward.

Outlook and valuation

We expect 3i Infotech to post a 14% CAGR in revenue over FY2010–12E.
However, the ongoing operational and growth-related initiatives are expected to
exert pressure on margins, thereby resulting in a 6.4% CAGR in bottom line
(adjusted for one-time items) over FY2010–12E. Hence, we have revised our
Target Price downwards to Rs100 (Rs129), implying a P/E multiple of 6x FY2012E
earnings and continue to maintain a Buy recommendation on the stock.

Exhibit 4: Key assumptions
FY2011E FY2012E
Growth in IT solutions 15.0 20.0
Growth in transaction services 9.2 9.0
USD-INR rate (realised) 46.5 47.0
Revenue growth (in INR terms) 12.6 16.1
EBIDTA margin (%) 18.6 18.2
Tax rate (%) 10.0 15.0
EPS growth (%) (2.8) 14.3

August 3, 2010 4


Exhibit 5: Change in estimates
FY2011E FY2012E
Parameter Earlier Revised Var. Earlier Revised Var.
(Rs cr) estimates estimates (%) estimates estimates (%)
Net revenue 2,734 2,756 0.8 3,197 3,200 0.1
EBIDTA 529 513 (3.1) 606 582 (3.9)
PBT 329 323 (1.8) 413 392 (5.3)
Tax 40 32 (18.1) 62 59 (5.3)
PAT 290 291 0.5 351 333 (5.3)

Considering the company’s strong order book and improved business
environment, we have slightly increased our top-line estimates. However, we
believe the ongoing operational and growth-related initiatives are expected to
exert pressure on margins, thereby resulting in lower-than-earlier expected growth
in profitability for FY2011E and FY2012E.

Exhibit 6: One-year forward P/E band

300

250
13x
Share Price (Rs)

200
10x
150
7x
100
4x
50

0
Oct-05

Oct-06

Oct-07

Oct-08

Oct-09
Feb-06

Feb-07

Feb-08

Feb-09

Feb-10
Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Exhibit 7: Recommendation summary
Company Reco. CMP Tgt. price Upside FY2012E FY2012E FY2010-12E FY2012E FY2012E
(Rs) (Rs) (%) P/BV (x) P/E (x) EPS CAGR (%) RoCE (%) RoE (%)
3i Infotech Buy 64 100 57.0 0.7 3.8 208.9 15.6 18.6
Educomp Buy 607 734 21.0 2.7 13.2 26.9 21.0 22.3
HCL Tech Accumulate 391 420 7.3 3.2 14.6 17.9 40.9 24.1
Infosys Neutral 2,785 2,900 4.1 4.6 20.2 12.6 33.1 25.0
Infotech Enterprises Buy 155 192 23.8 1.3 8.0 12.1 18.1 17.0
Mphasis Buy 594 872 46.9 2.4 9.2 14.9 41.6 29.2
NIIT Buy 66 83 25.3 1.7 11.5 16.6 12.1 15.8
TCS Accumulate 833 920 10.4 5.3 19.0 11.7 53.2 30.4
Tech Mahindra Buy 722 950 31.5 2.2 13.6 (0.5) 56.9 18.5
Wipro Accumulate 413 470 13.9 3.5 16.7 14.7 28.0 23.0

August 3, 2010 5


Profit & Loss Statement (Consolidated)
Gross Sales 2,286 2,449 2,756 3,200
Less: Excise duty - - - -
Net Sales 2,286 2,449 2,756 3,200
Other operating income 19 20 22 26
Total operating income 2,305 2,469 2,778 3,226
% chg 88.4 7.1 12.5 16.1
Total Expenditure 1,845 1,966 2,243 2,618
Cost of Equipment 1,007 1,061 1,213 1,424
SGA 278 299 342 394
Cost of IT 513 553 634 736
Other 47 51 55 64
EBITDA 460 503 535 608
% chg 65.8 9.4 6.3 13.8
(% of Net Sales) 19.3 19.7 18.6 18.2
Depreciation & Amortisation 70 81 63 75
EBIT 390 422 472 533
% chg 54.1 8.2 11.9 12.9
(% of Net Sales) 17.0 17.2 17.1 16.7
Interest & other Charges 101 145 149 141
Other Income - -
(% of PBT) - - - -
Share in profit of Associates - - - -
Recurring PBT 289 277 323 392
% chg 58.4 (85.9) 630.1 21.1
Extraordinary Expense/(Inc.) (24.9) 232.6 - -
PBT (reported) 314 44 323 392
Tax 22 11 32 59
(% of PBT) 6.9 24.7 10.0 15.0
PAT (reported) 292 33 291 333
Add: Share of earnings of
- - - -
associate
Less: Minority interest (MI) (10.4) 0.1 - -
Prior period items - - - -
PAT after MI (reported) 282 33 291 333
ADJ. PAT 257 266 291 333
% chg 59.7 (88.1) 770.0 14.3
(% of Net Sales) 12.3 1.4 10.6 10.4
Basic EPS (Rs) 21.6 2.0 14.5 16.6
Fully Diluted EPS (Rs) 21.6 1.7 14.6 16.7
% chg 59.7 (88.1) 770.0 14.3

August 3, 2010 6


Balance Sheet (Consolidated)
SOURCES OF FUNDS
Equity Share Capital 131 169 200 200
Preference Capital 100 100 100 100
Reserves & Surplus 916 848 1,337 1,627
Shareholders’ Funds 1,146 1,117 1,637 1,928
Minority Interest 21 8 8 8
Total Loans 2,202 2,159 1,810 1,464
Deferred Tax Liability (39) (113) - -
Total Liabilities 3,331 3,172 3,455 3,399
APPLICATION OF FUNDS
Gross Block 800 645 720 795
Less: Acc. Depreciation 233 270 333 409
Net Block 567 374 386 386
Capital Work-in-Progress 126 54 14 14
Goodwill 1,700 1,811 1,811 1,811
Investments 4 10 10 10
Current Assets 1,423 1,524 1,792 1,842
Cash 320 190 351 289
Loans & Advances 332 504 534 559
Other 772 831 908 995
Current liabilities 488 602 559 664
Net Current Assets 935 922 1,233 1,178
Mis. Exp. not written off
Total Assets 3,331 3,172 3,455 3,399

Cash Flow (Consolidated)
Profit before tax 288 277 323 392
Depreciation 85 81 63 75
Change in Working Capital 92 (102) (7) 18
Less: Other income (104) (149) - -
Direct taxes paid 46 63 32 59
Cash Flow from Operations 524 342 347 426
(Inc)./ Dec in Fixed Assets (1,044) (419) (35) (75)
(Inc)./ Dec. in Investments 0 - - -
(Inc)./ Dec. in loans and
advances (0.11) 0 (30) (25)
Other income 2 4 - -
Cash Flow from Investing (1,041) (415) (65) (100)
Issue of Equity 1 310 271 -
Inc./(Dec.) in loans 626 (126) (349) (346)
Dividend Paid (Incl. Tax) 30 30 42 42
Others (fx effect) (27) (211) - -
Cash Flow from Financing 570 (57) (121) (388)
Inc./(Dec.) in Cash 53 (130) 161 (62)
Opening Cash balances 267 320 190 351
Closing Cash balances 320 190 351 289

August 3, 2010 7


Key Ratios
Y/E March FY2009 FY2010 FY2011E FY2012E
Valuation Ratio (x)
P/E (on FDEPS) 3.0 32.1 4.4 3.8
P/CEPS 2.4 9.4 3.6 3.1
P/BV 0.7 1.0 0.8 0.7
Dividend yield (%) 3.1 2.4 2.4 2.4
EV/Sales 1.1 1.2 1.0 0.8
EV/EBITDA 5.6 5.9 5.1 4.0
EV / Total Assets 0.7 0.8 0.7 0.6
Per Share Data (Rs)
EPS (Basic) 21.6 2.0 14.5 16.6
EPS (fully diluted) 21.6 1.7 14.6 16.7
Cash EPS 26.9 6.8 17.7 20.4
DPS 2.0 1.5 1.5 1.5
Book Value 89.3 66.7 82.2 96.7
DuPont Analysis
EBIT margin 17.0 17.2 17.1 16.7
Tax retention ratio 93.1 75.3 90.0 85.0
Asset turnover (x) 0.7 0.7 0.8 0.9
ROIC (Post-tax) 10.4 8.9 11.6 12.0
Cost of Debt (Post Tax) 5.4 5.0 6.7 7.3
Leverage (x) 1.6 1.7 0.9 0.6
Operating ROE 18.4 15.7 16.0 14.9
Returns (%)
ROCE (Pre-tax) 14.4 12.7 14.1 15.6
Angel ROIC (Pre-tax) 27.8 25.7 29.1 31.6
ROE 28.8 2.9 21.0 18.6
Turnover ratios (x)
Asset Turnover (Gross Block) 2.9 3.8 3.8 4.0
Inventory / Sales (days) 0 0 0 0
Receivables (days) 121 123 119 113
Payables (days) 58 84 90 85
WC (ex-cash) (days) 61 126 117 101
Solvency ratios (x)
Net debt to equity 1.9 1.9 1.1 0.8
Net debt to EBITDA 4.8 4.3 3.4 2.4
Interest Coverage
3.9 2.9 3.2 3.8
(EBIT / Interest)

August 3, 2010 8


Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

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referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and
risks of such an investment.

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Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
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Disclosure of Interest Statement 3i Infotech
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
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 Rs 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%)

August 3, 2010 9

3i Infotech

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