3I INFOTECH LIMITED

Financial Statement Analysis

Agenda

Industry OverviewCompany OverviewFinancial HighlightsFinancial Ratio AnalysisThe Road Ahead

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Industry Overview

IT Industry Structure

IT industry is highly fragmented and there are several players operating from different parts of the world

There are players who focus on one or 2 lines of business and operate globally as well as very small players focusing on one business line or one geography

Due to this there is no player who can be categorized as one dominating player across the globe for all services put together

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IT Industry Structure

Since it’s a knowledge based industry and the entry level barriers are low, several new players mushroom with niche services and solutions

When the business cycles are favorable, some grow in size and become dominant players

With established client relationship’s and longer engagement time, business grows with more and more services offered

When the customer grows, business to the vendor also grows provided relationship

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Global IT Market Outlook

Global purchases of IT goods and services grew by 6% in 2008 after a 12% increase in 2007

Though overall IT spend growth will be 6%, Software Products and IT Services / Outsourcing spending increased by 8-9%

US economy in or near recession will be the main cause of slower 2009 growth, pulling down growth in IT purchases both in the US and with major trading partners in Europe and the Americas

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Global IT Market Outlook

While the increase in US and Western Europe is projected at 5-6%, the increase in Eastern Europe and MEA is projected at 14% and increase in the rest of Asia is projected at 18%

The growth in India and China is projected at 18% and 20% respectively

Over the years, IT spending in Asia and Eastern Europe at 33% is almost equal to Western Europe and is quickly catching up with US spend

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India IT Market Outlook

Traditionally, Indian software companies have been providing software offshore IT services. This business model is seeing strains some of which are the following: US software companies have expanded aggressively in

India and can now compete with Indian companies on price

Strain on the availability of skilled manpower as the industry has now to compete for talent with large MNCs who pay higher salaries than domestic companies

Language constraints and some countries’ deep routed reservations against outsourcing

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Factors Affecting

Outsourcing from western countriesSet up of SEZs and STPITax holidaysLarge talent pool availableGlobal recession and reduced IT spending

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Company Overview

3i InfoTech Positioning

3i InfoTech has over the years consciously built a business model which creates differentiators vis-à-vis competition to achieve client penetration and growth.

A balanced mix of Revenues from software products and services (1:1)

Revenues spread across various geographies thereby not concentrating on any single geography

A wide range of services in IT & Transaction Services, Managed Services & e-Governance

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3i InfoTech Today

Revenue Run-rate of US$ 300 million, Net Margin 15%

World Wide Presence- North America, Europe, Middle East, Asia Pacific, India and Africa

600+ Customers in 50 countries20 software product IPRsFocused BFSI player with 75% revenue from BFSI6000+ professionalsSoftware development in Mumbai, Chennai,

Bangalore and Hyderabad in IndiaCAGR of 61% in revenue in last four years, out of

which 41% is Organic and 20% InorganicPlatform ready to take off for a major growth

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Financial Highlights

Balance Sheet - Highlights

(Rs. Crores) 2008 2007

Total Share Capital 230.54 156.3

Equity Share Capital 130.54 56.3

Reserves 414.45 305.35

Premium Payable FCCB Redemption

36.237 0

Total Debt 1225.866 546.01

Total Liabilities+Networth 1907.093 1007.66

Sources Of Funds

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Balance Sheet - Highlights

(Rs. Crores) 2008 2007

Gross Block 290.51 195.69

Capital Work in Progress

64.87 12.99

Investments 1204.36 591.72

Unbilled Revenues 117.687 99.9

Cash and Bank Balance 37.06 65.17

Total Current Assets 309.477 275.202

Loans and Advances 267.92 100.18

Current Liabilities 92.3 81.28

Net Current Assets 428.637 254.862

Total Assets 1907.087 1007.67

Application Of Funds

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Income Statement - Highlights

(Rs. Crores) 2008 2007

Total Income 463.74 347.91

Cost of revenues 183.96 153.40

Software Development cost 26.30 23.18

Selling, General & Admin expenses 86.39 88.09

Total Expenses 296.65 264.67

Profit before Int, Dep & Amortizations 167.09 83.24

Interest 37.89 18.43

PBDT 129.21 64.81

Depreciation & Amortization 25.06 13.77

Profit Before Tax 104.15 51.04

Profit after tax and before exceptional items

100.93 49.44

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Cash Flow - Highlights

(Rs. Crores) 2008 2007 Profit before tax and exceptional items

104.14 51.05

Net cash from operating activities (A)

199.67 111.26

Net cash used in Investing activities (B)

-764.80 -418.79

Net Cash for Financing Activities – C

537.35 121.78

Net increase/(decrease) in cash and cash equivalents (A+B+C)

-27.79 -185.75

Cash and Cash Equivalents at the beginning

60.45 246.21

Cash and Cash Equivalents at the end

32.66 60.45

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Financial Ratio Analysis

Profitability Ratios - I

ROTA ROTA is an indicator of how well assets are utilized to maximize profits ROTA does not show major difference despite increase in PAT. Increase in total assets

on the back of heavy investments and fixed assets cause the ratio not to change much ROCE

ROCE is an indicator of how well a capital is utilized to maximize profits It is important from the prospect of management as they get better picture of how well the

funds are being utilized Lenders and Investor also look at the ratio very keenly as it gives indication of how well their

money will be utilized ROCE does not show major difference despite increase in PAT. Increase in total assets

on the back of heavy investments and fixed assets cause the ratio not to change much ROE

An increase in ROE shows how well a company uses investments to generate earnings growth. Important from investors point of view as he knows how well his money is getting utilized The increase is mainly due to higher increase in PAT (104%) as compared to increase

in net worth (40%)

Ratio ROTA ROCE ROE Net Prof Margin

Op Prof Margin

2007 0.0689 0.0783 0.10 0.14 0.20

2008 0.0745 0.0808 0.16 0.22 0.31

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Profitability Ratios - II

Net Profit Margin Measure of profitability and overall efficiency in production, administration, selling etc Important for management for measurement of operational efficiency Lenders and investors can derive growth prospects comparing historical data Net Profit Margin has increased substantially from 0.14 to 0.22 on the back of

robust sales and increase in profits due to control on expenses Operating Profit Margin

Indicator of operating efficiency Important for managers to have better control over decision making Important to investors and lenders to decide health of the company over given time

span Has grown from 0.20 to 0.31 on the back of robust growth in sales and control

on expenses

Ratio ROTA ROCE ROE Net Prof Margin

Op Prof Margin

2007 0.01 0.01 0.10 0.14 0.20

2008 0.10 0.11 0.16 0.22 0.31

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Efficiency Ratios

Capital Turnover Ratio Indicator of efficiency of capital employed to generate sales Important for management for measurement of operational efficiency Important for lenders and investors to asses utilization of their money Ratio has gone down despite increase in sales. Causes are huge increase in

capital and indicates expansion plans of company Receivables Turnover Ratio

Indicates how quickly sales are realized and hence measure of liquidity Important from management point of view to review liquidity position Has grown to indicate better collection of money by company despite increase

in sales Average Collection Period

Another Measure of liquidity position. It indicates an average number of days sales are realized

Important from management point of view to review liquidity position Has gone down to indicate better collection by company

Ratio Capital Turnover Ratio

Receivables Turnover Ratio

Average Collection Period

2007 0.39 3.17 115

2008 0.26 3.57 102

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Leverage Ratios

Debt Equity Ratioo The ratio indicates how much of the company is financed by debt. o Important from investor and Lender point of viewo The total debt is Rs. 12.65 bn as against 6.4 bn in the previous year, which

majorly includes FCCBs.o If these FCCBs are considered as Equity the Debt/Equity= 0.42:1(gross debt).

Debt Ratio Proportion of debt a company has relative to its assets. The debt ratio can help investors determine Company's level of risk. Increase of 60% in debt Ratio. Increase in Long Term Debt (131%) is higher than increase in Total Asset(45%).

Interest Coverage Ratio The Interest Coverage Ratio measures the ability of a firm to meet its interest payments. Larger the ratio, the more likely the firm can meet its payments. The lower the ratio, the

greater the risk that the company may default on its loans. Lender typically require minimum ratios of 4 to qualify for strong credit ratings. The Interest Coverage Ratio shows a decline of 2% from 2007 to 2008.

Ratio Debt Equity Ratio Debt Ratio Interest Coverage Ratio

2007 1.18 0.54 4.52

2008 1.96 0.87 4.41

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Liquidity and Cash Flow Ratios

Current Ratio Indicator of ability of firm to meet its current liabilities Important for management for measurement of short term solvency. Ratio is already high and has gone up. This is due to high amount of “Unbilled

Revenues” as well as lower cash position from last year. Cash Flow/Net Profit Ratio

Reflects extent to which accrual accounting have been included in computing net profit The ratio has decreased to 1.98 due to the fact The decline suggests that there

could be a cash flow problem as the profit has increased to a greater extent than the cash flow from operations. The company will have to further improve its cash position.

Cash Flow Adequacy Ratio Indicates whether a business is generating enough cash from operations to pay for plant

and equipment. The ratio is negative suggesting that there has been heavy cash outflow from

investing activities which means that company has used cash from operations and financing activities to put into investment.

From a lender perspective, this could be a bit alarming since though the company is on a high growth spree, the cash position should not be found wanting.

Management should take adequate steps to improve cash position further.

Ratio Current Ratio Cash Flow/Net Profit

Cash Flow Adequacy

2007 3.11 2.25 (0.27)

2008 3.88 1.98 (0.26)

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Valuation Ratios

EPS Measure of profitability of company Important from investor point of view EPS has decreased slightly in 2008 as compared to 2007 Even though the net profit has grown over more than 100%, company declared

bonus shares 1:1 in Apr 2007. No of outstanding shares increased which caused EPS to go down

PE PE is indicator of investor confidence in company and should be in moderate level Excessively lower or excessively higher PE indicate undervaluation or overvaluation of

stock respectively EPS has reduced in 2008 on account of Market price. Though EPS reduced

slightly, market price got bitten during stock market crash in early 2008 Dividend Payout

Ratio shows slight decline on account of more than 100% increase in PAT, however, dividend paid is not the tune of same

Book Value Book value is important from the investor and lender point of view as it indicates,

liquidation capability of the company Book value for year 2008 seems decreased substantially, however this is on

account of bonus share allotment during FY08

Ratio EPS PE Dividend Payout Book Value

2007 7.65 15.42 0.23 0.82

2008 7.24 13.82 0.21 0.49

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Comparison - Financial Ratios

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The Road Ahead

The Road Ahead….

Investors ROE and ROCE has increased indicating better operational efficiency and growth

prospects Debt ratio of 1.9 can be a cause of concern, however, debt is mainly increased because of

FCCB Even though FCCBs are convertible, Investor needs to have cautious approach especially

during downturn times and consider investment as long term

Lenders Debt ratio of 1.9 can be cause of concern More over, the money raised is utilized in investments and increasing fixed assets Low value for capital turnover ratio may dissuade lender, as lender is not fully convinced

whether his money is contributing to increase in sales instead of asset buying Reduction in Interest Coverage Ratio – Lender need to be more cautious

Management Increase in receivables and unbilled revenues is a cause of concern. Reduction is cash balance can lead to liquidity crunch if not address properly. Management

needs to ensure enough cash is at hand Even though average collection period is reduced, it is still a very high figure. Management

should try and reduce more Company has huge potential for growth, however, management needs to control above

factors and effectively use debts27

The Road Ahead….

Healthy increase in profit and sales backed by great control on expenses (Profitability perspective)

Company has borrowed heavily in the form of FCCBs and long term debt and should be cautious to ensure adequate liquidity – Company should not outgrow itself (Leverage perspective)

Receivables should be reduced as well as “Unbilled Revenues” which could otherwise create a problem in the future; cash position will have to be bettered (Liquidity perspective)

Shareholders have high expectations and since over time the FCCBs will be converted to equity, company will be under pressure to perform, given the lowering of share price and given the high amount of assets it has amassed (Valuation perspective)

Huge investment in assets is a bit of cause for concern regarding capital turnover into sales, also receivables need to be kept in check (Efficiency perspective)

In short..The present is good backed up by a great past but a tough road

lasts ahead and 3i InfoTech should be able to cruise ahead provided it utilizes assets to good use!!

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Thank You

Appendix

Financial Statement

Annual Report

References http://www.moneycontrol.com http://www.myiris.com http://www.3i-infotech.com/ http://www.rediff.com http://www.reuters.com

Microsoft Office Excel 97-2003 Worksheet

Adobe Acrobat Document

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