infotech enterprises result updated

8/2/2019 Infotech Enterprises Result Updated

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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

[email protected]

Infotech Enterprises

Analyst Meet Update

Company Update | IT

February 27, 2012



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


Exhibit 2: Industry wise revenue – N&CE


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




February 27, 2012 3

Exhibit 3: Geography wise revenue – ENGG


Exhibit 4: Industry wise revenue – ENGG (ex. aerospace)


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


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




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


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




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




February 27, 2012 6

Profit and Loss statement


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




February 27, 2012 7

Balance sheet


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




February 27, 2012 8

Cash flow statement


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




February 27, 2012 9

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




February 27, 2012 10

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




February 27, 2012 11

6th Floor, Ackruti Star, Central Road, MIDC, Andheri (E), Mumbai - 400 093. Tel: (022) 39357800

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]

CSO & Registered Office: G-1, Ackruti Trade Centre, Rd. No. 7, MIDC, Andheri (E), Mumbai - 400 093.Tel.: (022) 3083 7700. Angel Broking Ltd: BSE Sebi Regn No: INB010996539 / PMS Regd Code: PM/INP000001546 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / NSE Sebi Regn Nos: Cash: INB231279838 / NSEF&O: INF231279838 / Currency: INE231279838 / MCX Currency Sebi Regn No: INE261279838 / Member ID: 10500 / Angel Commodities Broking Pvt. Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

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