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Please refer to important disclosures at the end of this report 1
We recently attended the analyst meet of Infotech Enterprises (Infotech) held at
Hyderabad. The meet focused on giving investors an idea about the company’s
systems and processes through presentation by various business heads,
sub-vertical heads and demo of a range of company’s projects. The major take
away from the meet was that the company is on the right track in terms of making
investments to strengthen its product portfolio and is taking initiatives to improve
its financial metrics. Infotech’s performance over the past six quarters has been
mixed, with operational margins being the major disappointment, which the
company is now focusing to improve. We maintain our Accumulate
recommendation on the stock.
Focus on systems and process to provide scalability: During the meet, Mr. BVR
Mohan Reddy, Infotech’s Chairman and Managing Director, highlighted that the
company is now focusing on strengthening its leadership along with improving its
systems and processes and making them scalable. Further, the company will take
in SAP integration, as currently three of the company’s subsidiaries are operating
independently. Along with integrating processes, Infotech is trying to expand its
footprint in other addressable markets with existing clients.
Healthy market opportunity: As per Zinnov Consulting, a leading IT consulting
firm, the engineering market is expected to reach US$40bn by 2020 from
US$10.4bn currently (led by industries such as aerospace, automotive, consumer
electronics and telecom). Infotech, being a leader in the aerospace and telecomengineering spaces, has strong relationships with clients in these areas and,
hence, can capitalize on this opportunity.
Focus on improving client mining: Infotech’s management is currently focusing on
adding and increasing its wallet share from ‘must have’ accounts across its target
verticals. The company is doing this by changing the incentive structure of
customer-facing roles and is investing considerably to improve client mining and
account management skills.
Outlook and valuation: At the CMP of ` 144, Infotech is trading at 8.4x FY2013E
EPS of ` 17.1. We maintain our Accumulate rating on the stock with a revised
target price of `162, valuing it at 9.5x FY2013E EPS.
Key financials (Consolidated)
Y/E March (` cr) FY2009 FY2010 FY2011 FY2012E FY2013E
Net sales 890 953 1,188 1,562 1,802
% chg 32.0 7.1 24.6 31.5 15.4
Net profit 92 171 140 139 190
% chg 6.5 85.0 (18.3) (0.3) 36.3
EBITDA margin (%) 20.1 21.9 15.2 17.4 16.9
EPS (`) 8.6 15.4 12.6 12.5 17.1
P/E (x) 16.7 9.3 11.4 11.5 8.4
P/BV (x) 2.0 1.8 1.5 1.4 1.2
RoE (%) 12.0 18.9 13.4 11.9 14.1
RoCE (%) 16.7 18.1 12.6 17.8 17.2
EV/Sales (x) 1.4 1.2 1.0 0.7 0.5
EV/EBITDA (x) 7.0 5.6 6.4 3.9 3.0
Source: Company, Angel Research
ACCUMULATECMP ` 144
Target Price ` 162
Investment Period 12 Months
Stock Info
Sector
Bloomberg Code
Shareholding Pattern (%)
Promoters 22.9
MF / Banks / Indian Fls 6.9
FII / NRIs / OCBs 25.4
Indian Public / Others 44.9
Abs. (%) 3m 1yr 3yr
Sensex 11.2 (6.6) 93.8
Infotech 22.9 (12.9) 238.8
INFTC@IN
17,4465,281
INFE.BO
21,839
BSE SensexNifty
Reuters Code
Face Value ( ` )
IT
Avg. Daily Volume
Market Cap ( ` cr)
Beta
52 Week High / Low
1,611
0.5
5
171/100
Ankita Somani
+91 22 39357800 Ext: 6819
Infotech Enterprises
Analyst Meet Update
Company Update | IT
February 27, 2012
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Infotech Enterprises | Company Update
February 27, 2012 2
Focus on systems and process to provide scalability
During the meet, Mr. BVR Mohan Reddy, Infotech’s Chairman and Managing
Director, highlighted that the company is now focusing on strengthening its
leadership along with improving its systems and processes and making them
scalable. Further, the company will take in SAP integration, as currently three of the
company’s subsidiaries are operating independently. Along with integrating
processes, Infotech is trying to expand its footprint in other addressable markets
with existing clients.
N&CE: Infotech derives ~33% of its revenue from the network and content
engineering (N&CE) business, with the base for most of its business being
geographic information system (GIS). Currently, the company is working with
clients in the telecom and utilities industry in this business and is trying to tap
clients in the oil and gas and mining industries. Market size of data processing in
the oil and gas industry grew by 10.8% yoy to US$9.7bn and that in the mining
industry grew by 52% yoy to US$408mn. These market sizes are massive and
present addressable opportunities to Infotech with its capabilities in GIS.
Exhibit 1: Geography wise revenue – N&CE
Source: Company, Angel Research
Exhibit 2: Industry wise revenue – N&CE
Source: Company, Angel Research
ENGG: Infotech derives ~67% of its revenue from the product and process
engineering (ENGG) business, with a major focus on industries such as aerospace,
industrial and telecom. The company is now focusing to tap clients in theautomotive, hi-tech and consumer electronics spaces. In addition, in services, the
company is trying to increase its focus on electronics from mechanical previously.
Along with its presence in the U.S. and European markets, Infotech is expanding its
presence in the Japanese market, as 22% of R&D spends, out of the overall spend
coming from the top 500 R&D spenders, come from Japan (Source: Zinnov
Consulting).
38.3%
37.9%
20.9%
2.9%
America
EMEA
APAC
India
41.4%
33.2%
25.4%
Telecom
Content
Utilities
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Infotech Enterprises | Company Update
February 27, 2012 3
Exhibit 3: Geography wise revenue – ENGG
Source: Company, Angel Research
Exhibit 4: Industry wise revenue – ENGG (ex. aerospace)
Source: Company, Angel Research
Healthy market opportunity
As per Zinnov Consulting, the engineering market is expected to reach US$40bn
by 2020 from US$10.4bn currently (led by industries such as aerospace,
automotive, consumer electronics and telecom). Infotech, being a leader in the
aerospace and telecom engineering spaces, has strong relationships with clients in
these areas and, hence, can capitalize on this opportunity.
Focus to improve client mining
Infotech’s management is currently focusing on adding and increasing its wallet
share from ‘must have’ accounts across its target verticals, which have a highoutsourcing potential. The company is doing this by changing the incentive
structure of customer-facing roles, investing considerably to improve client mining
and account management skills and offering integrated solutions from standalone
solutions being offered earlier.
Exhibit 5: Client concentration
Source: Company, Angel Research
66%
31%
3%
North America
Europe
APJ
35%
39%
26%
Home
Transportation
Hi-tech
48.850.7
36.4
67.170.6
52.3
20
30
40
50
60
70
80
N&CE ENGG Overall
( % )
Top 5 cl ients Top 10 cl ients
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Infotech Enterprises | Company Update
February 27, 2012 4
Outlook and valuation
Infotech has been witnessing a 5.2% CQGR in its USD revenue over
2QFY2011–3QFY2012 because of inorganic growth due to the acquisition of
Daxcon and Wellsco. Further, the company has witnessed price increases from
some of its selective clients, which instills confidence in the company’s performance
going ahead. Thus, over FY2011-13E, we expect the company to post a USD and
INR revenue CAGR of 17.6% and 23.2%, respectively.
Infotech has been consistently underperforming on the operating margin front,
which the company is now focused to address by levers such as improving
utilization level, rationalizing SG&A expenses and shifting more work offshore. This
year, management expects the company’s operating margin to exit at ~17%,
which can be easily achieved now, given the sharp INR depreciation. We expect
EBITDA and PAT CAGR to be at 30.0% and 16.6% (lower due to tax rate moving to
33% from 17% in FY2011), respectively, over FY2011-13E.
At the CMP of ` 144, Infotech is trading at 8.4x FY2013E EPS of ` 17.1.
We maintain our Accumulate recommendation on the stock with a revised target
price of `162.
Exhibit 6: One-year forward PE (x) chart
Source: Company, Angel Research
0
50
100
150
200
250
300
350
A p r - 0 7
O c t - 0 7
A p r - 0 8
O c t - 0 8
A p r - 0 9
O c t - 0 9
A p r - 1 0
O c t - 1 0
A p r - 1 1
O c t - 1 1
( ` )
Price 18x 14x 10x 6x 2x
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Infotech Enterprises | Company Update
February 27, 2012 5
Exhibit 7: Recommendation summary
Company Reco. CMP Tgt. price Upside Target FY2013 FY2013E FY2011-13E FY2013E FY2013E
(`) (`) (%) P/E (x) EBITDA (%) P/E (x) EPS CAGR (%) RoCE (%) RoE (%)
HCL Tech Accumulate 484 520 7.4 13.0 17.5 12.1 22.1 20.9 23.1Hexaware Neutral 107 - - 11.0 19.0 11.6 79.4 25.4 22.0
Infosys Accumulate 2,880 3,047 5.8 18.0 32.0 17.0 18.9 25.8 23.8
Infotech Entp. Accumulate 144 162 12.7 9.5 16.9 8.4 16.6 17.2 14.1
KPIT Cummins Neutral 160 - - 10.0 15.4 9.8 19.9 19.5 16.9
Mahindra Satyam Buy 68 87 28.4 11.0 16.0 8.4 38.4 12.6 14.4
MindTree Accumulate 450 502 11.6 10.0 14.7 9.0 42.1 20.3 17.4
Mphasis Accumulate 414 440 6.3 12.0 16.6 11.2 (3.1) 14.0 14.2
NIIT^ Buy 44 55 23.7 6.9 16.3 5.6 19.3 11.0 15.6
Persistent Accumulate 310 332 7.1 9.0 23.0 8.9 0.1 19.4 14.3
TCS Neutral 1,250 - - 19.5 29.9 19.3 20.6 32.1 33.3
Tech Mahindra Buy 591 693 17.2 8.0 17.1 6.8 32.3 15.0 21.1
Wipro Neutral 424 -- 15.3 19.7 15.3 13.1 15.3 20.5
Source: Company, Angel Research; Note: ^Valued on SOTP basis
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Infotech Enterprises | Company Update
February 27, 2012 6
Profit and Loss statement
Y/E March (` cr) FY2009 FY2010 FY2011 FY2012E FY2013E
Net sales 890 953 1,188 1,562 1,802
Cost of revenues 490 543 735 950 1,108Gross profit 400 410 453 612 694
% of net sales 45.0 43.1 38.1 39.2 38.5
Selling and mktg. expense 96 87 119 140 162
% of net sales 10.8 9.2 10.0 8.9 9.0
General and admin expense 126 115 154 200 227
% of net sales 14.1 12.0 12.9 12.8 12.6
EBITDA 179 208 180 272 305
% of net sales 20.1 21.9 15.2 17.4 16.9
Dep. and amortization 47 44 49 64 72
% of net sales 5.2 4.6 4.1 4.1 4.0
EBIT 132 165 132 208 232
% of net sales 14.8 17.3 11.1 13.3 12.9
Other income (30) 46 30 (13) 30
Interest expenses 4 3 2 - -
Profit before tax 98 208 160 196 262
Provision for tax 14 51 27 65 83
% of PBT 14.2 24.3 16.9 33.0 31.5
PAT 84 158 133 131 180
Minority interest (8) (13) (7) (8) (10)
Adj. PAT 92 171 140 139 190
Fully diluted EPS ( ` ) 8.6 15.4 12.6 12.5 17.1
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February 27, 2012 7
Balance sheet
Y/E March (` cr) FY2009 FY2010 FY2011 FY2012E FY2013E
Equity capital 28 28 56 56 56
Share premium account 360 363 334 334 334Reserves and surplus 383 516 655 782 958
Shareholders’ funds 770 906 1,046 1,172 1,348
Minority interest - - - - -
Borrowings 20 4 0.6 0.6 0.6
Total capital employed 790 911 1,046 1,172 1,349
Gross block 461 494 560 620 680
Accumulated depreciation 219 239 288 352 424
Net block 243 255 273 268 256
CWIP 58 61 65 65 65
Deferred tax asset 17 3 1.5 1.7 2.0
Investments 40 202 91 98 105
Sundry debtors 263 207 268 301 369
Cash and cash equivalents 333 234 350 426 564
Loans and advances 60 134 185 220 236
Prepaid and other current assets 33 34 12 10
Total current assets 656 606 929 1,056 1,283
Sundry creditors and others 82 66 79 92 113
Other current liabilities 103 50 25 77 94
Provisions 39 101 118 50 51
Total current liab. and provisions 224 216 222 219 258
Net current assets 433 390 707 837 1,026
Total capital deployed 790 911 1,046 1,172 1,349
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Infotech Enterprises | Company Update
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Cash flow statement
Y/E March (` cr) FY2009 FY2010 FY2011 FY2012E FY2013E
Pre-tax profit from oper. 128 162 130 208 232
Depreciation 47 44 49 64 72Exp. (deferred)/written off (8) (13) (7) (8) (10)
Pre tax cash from oper. 182 218 186 280 315
Other inc./prior period ad (30) 46 30 (13) 30
Net cash from operations 153 265 215 268 345
Tax 14 51 27 65 83
Cash profits 139 214 188 203 262
(Inc)/dec in
Sundry debtors (46) 56 (61) (34) (67)
Loans and advances (16) (73) (51) (35) (17)
Other current assets - (33) (2) 23 2
Sundry creditors 32 (16) 13 14 20
Others 70 9 (8) (16) 18
Net trade working capital 40 (57) (109) (48) (44)
Cash flow from oper. actv. 179 157 79 155 218
(Inc)/dec in fixed assets (118) (58) (71) (60) (60)
(Inc)/dec in investments 189 (162) 111 (7) (7)
(Inc)/dec in dfrd. tax asst. (18) 14 1 (0) (0)
Cash flow from invest. actv. 53 (207) 42 (67) (67)
Inc/(dec) in debt (23) (15) (4) - -
Inc/(dec) in equity/premium 16 (22) 16 (0) 0
Dividends (10) (13) (16) (13) (13)
Cash flow from fin. actv. (17) (50) (4) (13) (13)
Cash generated/(utilized) 214 (100) 117 75 138
Cash at start of the year 119 333 234 350 426
Cash at end of the year 333 234 350 426 564
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Key ratios
Y/E March FY2009 FY2010 FY2011 FY2012E FY2013E
Valuation ratio (x)
P/E 16.7 9.3 11.4 11.5 8.4P/CEPS 11.1 7.4 8.5 7.9 6.1
P/BVPS 2.0 1.8 1.5 1.4 1.2
Dividend yield (%) 0.6 0.7 0.9 0.9 0.9
EV/Sales 1.4 1.2 1.0 0.7 0.5
EV/EBITDA 7.0 5.6 6.4 3.9 3.0
EV/Total assets 1.6 1.3 1.1 0.9 0.7
Per share data (`)
EPS (Basic) 8.6 15.4 12.6 12.5 17.1
EPS (Fully diluted) 8.6 15.4 12.6 12.5 17.1
Cash EPS 13.0 19.3 17.0 18.3 23.6
Dividend 0.8 1.0 1.3 1.3 1.3
Book value 72.0 81.6 94.2 105.5 121.5
DuPont analysis
Tax retention ratio (PAT/PBT) 0.9 0.8 0.8 0.7 0.7
Cost of debt (PBT/EBIT) 0.7 1.3 1.2 0.9 1.1
EBIT margin (EBIT/Sales) 0.1 0.2 0.1 0.1 0.1
Asset turnover ratio (Sales/Assets) 1.1 1.0 1.1 1.3 1.3
Leverage ratio (Assets/Equity) 1.0 1.0 1.0 1.0 1.0
Operating ROE 11.0 17.4 12.7 11.2 13.3
Return ratios (%)
RoCE (pre-tax) 16.7 18.1 12.6 17.8 17.2
Angel RoIC 36.8 39.8 24.4 35.7 37.
RoE 12.0 18.9 13.4 11.9 14.1
Turnover ratios (x)
Asset turnover (gross block) 1.9 1.9 2.1 2.5 2.6
Receivables days 98 90 73 67 68
Payable days 50 50 36 33 34
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Research Team Tel: 022 - 3935 7800 E-mail: [email protected] Website: www.angelbroking.com
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Disclosure of Interest Statement Infotech Enterprises
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
Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to 15%) Sell (< -15%)
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
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February 27, 2012 11
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Research Team
Fundamental:
Sarabjit Kour Nangra VP-Research, Pharmaceutical [email protected]
Vaibhav Agrawal VP-Research, Banking [email protected]
Shailesh Kanani Infrastructure [email protected]
Bhavesh Chauhan Metals, Mining [email protected]
Sharan Lillaney Mid-cap [email protected]
V Srinivasan Research Associate (Cement, Power) [email protected]
Yaresh Kothari Research Associate (Automobile) [email protected]
Hemang Thaker Research Associate (Capital Goods) [email protected]
Nitin Arora Research Associate (Infra, Real Estate) [email protected]
Ankita Somani Research Associate (IT, Telecom) [email protected]
Varun Varma Research Associate (Banking) [email protected]
Sourabh Taparia Research Associate (Cement, Power) [email protected]
Technicals:
Shardul Kulkarni Sr. Technical Analyst [email protected]
Sameet Chavan Technical Analyst [email protected]
Sacchitanand Uttekar Technical Analyst [email protected]
Derivatives:
Siddarth Bhamre Head - Derivatives [email protected]
Institutional Sales Team:
Mayuresh Joshi VP - Institutional Sales [email protected]
Hiten Sampat Sr. A.V.P- Institution sales [email protected]
Meenakshi Chavan Dealer [email protected]
Gaurang Tisani Dealer [email protected]
Akshay Shah Sr. Executive [email protected]
Production Team:
Simran Kaur Research Editor [email protected]
Dilip Patel Production [email protected]
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