Infotech Enterprises (Q1 FY13)

CMP Rs181, Target Rs211, Upside 16.5% 

• The dollar revenues for Infotech enterprises came in slightly below our expectation, at US$84.2mn, up 1.5% qoq (versus expectation of 2.5% sequential growth). Volume growth during the quarter was 2% qoq while pricing was up 0.1% sequentially. The growth in EMI business was flat due to delay in ramp- ups in two clients in Europe. UTG (now renamed as UTC) grew at a brisk pace of 5% qoq in dollar revenue terms. In rupee terms, the revenues jumped 9.4% on a sequential basis.
  
• Within UTC, Utilities and Content Engineering sub-segments led the surge with 9.7% and 5.5% qoq dollar revenue growth, respectively. Management commented that the ramp-down at British Telecom has bottomed out and is now not a headwind. Within EMI, 3% sequential growth in Aero sub-segment was offset by 3.2% de-growth in HTH.  
  
• Customer adds during the quarter were decent at twelve in UTC and five in Engineering. Amongst the clients, Top-5 grew above the company average, at 2.3% qoq in dollar terms. Within geographies, growth was led by US, which grew 6.3% qoq. On the flip side, Europe de-grew materially (8.5% qoq) on the back of delayed ramp-ups in key rail signaling clients (as described earlier).
  
• OPM for Q1 FY13 was better than expected, correcting only 110bps against an estimated drop of 200+bps. The company-wide salary impact of 370bps was offset by 290bps gain on account of rupee depreciation. Deferred efforts in the EMI business led to correction of its utilization by 200bps, thus negatively impacting the operating margin. Going forward, decent utilization headroom, strong volume expectation and SG&A leverage are expected to help OPM to expand in FY13. Higher than expected profits for IASI (associate company), higher other income and lower tax rate more than offset one-off exceptional item (i.e. the interest provision against a service tax litigation), resulting in a higher than expected profit of Rs647mn. The Company continues to guide 1-2% fall in tax rates in FY13 on the back of higher SEZ contribution.
  
• One of the highlights of Q1 FY13 was the strong employee addition, suggesting probable higher volume traction in the coming quarters. The gross employee additions stood at 915 while the net additions were 464 (highest in past several quarters). The company continues to guide for 1500 net additions during FY13, out of which 250 freshers are expected join in Q2 FY13.   
  
• The lower than expected Q1 FY13 revenue performance was largely due to stalled operations in one of its rail signaling clients on the eve of London Olympics (a temporary impact). While there were some push-outs in certain other clients, management does not see this secular in nature. Also, the end of ramp-downs at BT should bode well for UTC vertical going ahead. Management continues to guide for above-industry growth rate for FY13 (11-14%), which implies a Q2-Q4 CQGR of 6-7%. We reckon it is a tough ask even in a normal demand environment. We expect the company to register 12.7% dollar revenue CAGR over FY12-14E. On the positive side, we believe various margin levers available with the company should help it to expand profitability in FY13. As a result, we expect 32% PAT CAGR (supported by rupee depreciation) over the same period. Recommend BUY with 9-month TP of Rs211.