Omnitech Infosolutions Ltd – BUY (Target Rs250, Upside 21%)

CMP Rs207, Target Rs250, Upside 21.0%

Robust revenue growth to continue; revenue mix to improve

Omintech Infosolutions is a technology service provider specializing in Business Availability Services (BAS – IMS & Application Management) and Business Continuity Services (BCS – Disaster Recovery, etc). Revenues from these services are estimated to witness a CAGR of 32% and 41% respectively over FY10-12 and drive the overall company growth. Within BAS and BCS, we see Remote Infra Management (RIM) services, Disaster Recovery and Workplace Recovery services to record robust growth making the revenue mix sweeter in terms of profitability. Management also targets to increase the international revenue share from 20% currently to 50% by 2013. Company has guided for a strong revenue growth of 30-35% for FY11. The Q1 FY11 performance (7.7% qoq growth) instills confidence that Omnitech would comfortably achieve its guidance. 

Superior margin; to remain resilient going ahead

With the current bouquet of services, Omnitech earns one of the best margins (32%) amongst mid and small IT services companies. Even factoring intensifying competition and resulting pricing pressure, the margin is likely to sustain near current levels aided by increasing revenue contribution from IMS (margin at 43%)  and BCP services (margin at 44%) and also due to higher share of international clients. We expect Omnitech margin to be resilient in the medium term improving by ~50-100bps over FY10-12E. 

Growth to be self-funded; balance sheet to remain healthy

With headroom for significant utilization improvement of Remote IMS facility (NOC) and Disaster Recovery Centers (DRCs; in Mahape and Hyderabad), revenue scalability would not be an issue for next couple of years. However, company may invest heavily in H2 FY12 towards building capacity to serve growth beyond FY12. Capex is estimated to be Rs1bn over FY10-12 and which would be mainly funded by internal accruals. So the risk of equity dilution and leverage is minimal. 

Valuation cheap at 4.6x FY12 P/E despite strong earnings CAGR

We expect Omnitech to deliver 28% earnings CAGR over FY10-12 on the back of 31% revenue CAGR and marginal improvement in margin. At 4.6x FY12 P/E, valuation is at more than 50% discount to the median for mid-cap IT companies. We expect a significant re-rating of the stock in the near term.