Infotech Enterprises (Q2 FY13)

CMP Rs195, Target Rs211, Upside 8.2%

• The Q2 FY13 dollar revenues for Infotech enterprises (IEL) were impressive coming in ahead of estimates at US$87.2mn (+ 3.6% qoq). Volumes grew 3.9% qoq with pricing having a negative impact of 0.3%. In rupee terms, the revenues grew 4.5% sequentially supported by rupee depreciation.
  

• Growth remained decent across sub-verticals with Utilities, Content and HTH growing above company average at 8.3%, 5.4% and 5.1% qoq in volume terms. While pricing remained flat for Aerospace and Content sub-verticals, it corrected by 1% and 0.3% respectively for HTH and Utilities sub-verticals.
  

• Customer additions during the quarter were decent with eight additions in UTC and seven in Engineering. Most of the growth in Q2 FY13 was driven by non Top-10 clients which grew 11.4% qoq in dollar terms. Top 5/Top10 clients de-grew sequentially by 2.6%/2.8% respectively in dollar terms. Within geographies, growth was led by Asia/Australia and Europe which grew 9.7%/6.4% qoq respectively in dollar terms. As alluded by the management, workload improvement in the rail signaling business in UK was one the key reason for the strong growth in Europe.
  

• OPM performance for Q2 FY13 was largely in-line with our estimates. Strong onsite ramp-ups were the key reason for the tepid margin performance despite the improved volumes and currency depreciation advantage. Utilization improved across Engineering (+200bps qoq) and UTC vertical (+100bps qoq) on the back of strong volume growth. Going forward higher offshoring, decent volumes, improving employee pyramid and SG&A leverage are expected to support the OPM. Better than expected dollar revenues, in-line OPM and lower IASI profit (associate company) resulted in PAT coming in marginally ahead of estimates at Rs503mn. Due to improved SEZ presence, company expects partial benefits (lower tax exposure) of the same to accrue in H2 FY13. 
  

• Employee additions continued to be good with Q2 FY13 net employee additions growing ~3% qoq. Total additions of ~760 employees in H2 FY13 was the highest half yearly addition till date for the company. It expects to hire additional 600 employees on net basis in H2 FY13. Strong employee additions suggests sustained volumes in coming quarters which is also validated management commentary which expects H2 FY13 to be stronger than H1. Employee attrition inched up marginally to 15.2% (versus 14.3% last quarter).
  

• IEL’s better than expected dollar revenue growth and in-line OPM indicates decent volume momentum and operational execution.  Management too exudes confidence in near-medium term demand with expectation of ‘better H2 than H1’ and strong deal pipeline. Robust employee additions further validate the same. Consequently, we expect dollar revenues to witness a CAGR of 11% over FY12-14E. At 8.4x FY14E earnings, upside remains capped. Assign MP.