Infotech Enterprises Ltd - Express Idea

India Infoline News Service | Mumbai |

The acceleration in revenue growth would enable Infotech to deliver operating margin at higher levels in spite of strategic investments in front-end, business capabilities and organizational restructuring aimed at longer term sustainability of growth.

CMP Rs330, Target Rs370, Upside 12.0%

Revenue growth trajectory to remain strong

Infotech’s revenue growth, after having picked up sharply in Q3 FY14 (6.5% qoq), is expected to remain strong in coming quarters underpinned by substantial order backlog (~US$170mn), deal pipeline (~US$375mn) and improving client spending across business units. In Aerospace engineering (~33% of revenues) growth visibility has recovered significantly on the back of several deal wins from existing and new customers. In HTH engineering business (~30% of revenues), robust traction is expected to continue driven by substantial orders/pipeline in hi-tech and rail verticals. In the business segment of D&A (~12% of revenues), the medium-term growth outlook within the Top 5 customers is pretty strong. In UT segment (~24% of revenues), order wins has been strong in North America while business traction is improving in Europe and APAC. The company is confident about a strong Q4 FY14 (our expectation is 4.5%+ qoq revenue growth) and surpassing the NASSCOM growth guidance (13-15%) in FY15.  


Margin settling at elevated level; earnings delivery to be robust   

The acceleration in revenue growth would enable Infotech to deliver operating margin at higher levels in spite of strategic investments in front-end, business capabilities and organizational restructuring aimed at longer term sustainability of growth. The operational levers available to the company are material headroom for utilization improvement, some scope for offshore shift and optimization of employee mix. Company intends to sustain operating margin near 20% (18.8% in 9m FY14). Margin improvement along with lower forex losses (depleting lower rate cover) and improving tax efficiencies (through increasing SEZ delivery) will drive robust earnings CAGR of 24% over FY14-16. 


Impressive progress in cash generation; valuation attractive

Cash generation at Infotech has significantly improved in recent quarters aided by reduction in debtor days (result of intense focus on collections), capex optimization and improving tax rate. During Q3 FY14, FCF more than doubled qoq and stood at 62% of operating profit. Cash from operations stood at 120% of PAT; quarter-ending cash + liquid inv were equivalent to 18% of market cap. At the lower end of our mid-cap coverage, Infotech’s valuation at 8.7x FY16 P/E is attractive especially in context of improved earnings growth and cash flow.   


Financial summary
Y/e 31 Mar (Rs m)
FY13
FY14E
FY15E
FY16E
Revenues
18,731
22,163
26,197
30,619
yoy growth (%)
20.6
18.3
18.2
16.9
Operating profit
3,416
4,223
5,074
6,008
OPM (%)
18.2
19.1
19.4
19.6
Reported PAT
2,329
2,743
3,564
4,241
yoy growth (%)
42.9
17.8
29.9
19.0

 
 
 
 
EPS (Rs)
20.9
24.7
32.0
38.1
P/E (x)
15.8
13.4
10.3
8.7
Price/Book (x)
2.8
2.4
2.0
1.7
EV/EBITDA (x)
9.3
7.3
5.8
4.7
RoE (%)
18.8
19.2
21.3
21.4
Source: Company, India Infoline Research
BSE 572.50 [7.20] ([1.24]%)
NSE 568.20 [10.50] ([1.81]%)

***Note: This is a NSE Chart

 

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