The Hindu Business Line : 3i Infotech: Buy

As a products-cum-services player catering to the banking, financial services and insurance space, 3i Infotech has focussed on expanding its range of offerings through acquisitions.

Growing order book
Acquisitions to fill portfolio gaps
Diversified geographic mix
Intense competition in banking space

MR V. SRINIVASAN, MD and CEO... Using acquisitions to fill strategic gaps in product portfolio.

Investors with a penchant for risk can consider the 3i Infotech stock with a medium-term perspective. The stock is trading at a price earnings multiple of 13 times its expected FY-07 consolidated earnings.

The stock ran up by about 10 per cent during the past week. Investors can buy the stock in small lots and use any price weakness linked to the broad markets to step up exposures.

A series of acquisitions intended at broad basing its range of product/service offerings, robust order book, a diversified revenue mix from geographies, and good earnings performance in the first quarter lend confidence in the stock.

The risks to the recommendation remain the slowdown in discretionary spends by clients in the banking or insurance space, the stiff competition keeping a check on growth in operating margins, and the impairment of product intangibles leading to write-offs in the books.

Acquisition binge

As a products-cum-services player catering to the banking, financial services and insurance space, 3i Infotech has focussed on expanding its range of offerings. Last year, the company made four acquisitions — Bangalore-based Datacons, Hyderabad-based SDG Software Technologies, US-based FormulaWare and Innovative Business Solutions.

Of the four, two acquisitions — Datacons and SDG Software, specialising in mutual fund products and anti-money laundering software respectively — are expected to create new avenues for growth and strengthen the overall product profile. The acquired entities are expected to contribute about 10 per cent of the consolidated revenues of FY-07. The company recently made a strategic investment in Delta Services, a BPO company servicing the banking space, and remains open to acquisitions to fill up strategic gaps in its products portfolio.

Order book

The pending order book position of the company is growing at a brisk pace. For the first quarter ended June 30, 2006, the company had an order book of Rs 293 crore, up by about 10 per cent on a sequential basis.

The order book is neatly split between products and services at Rs 146 crore each. 3i Infotech, which derives 53 per cent of its revenue from services and 47 per cent from products, is targeting a 50:50 mix for FY-07.

The company has projected a revenue growth of 25-30 per cent for FY-07 and an EPS of Rs 13-13.5, working out to a growth of 37-42 per cent. This appears achievable in the light of the good first quarter performance. Though the revenue growth fell short of expectations, the operating profit margins have expanded by about 1.5 percentage points to 22.8 per cent.

Encouraging variables

Other encouraging variables are the increase in the contribution of the top five clients (excluding the ICICI group accounting for 18 per cent of the revenue) to 21 per cent from eight per cent in the fourth quarter of FY-06 and an increase in the number of one million dollar clients to 21 from 17 over the same period.

The increasing deal size, higher margins from products and lower selling and general expenses are expected to improve its operating margin in the coming quarters.

To improve the overall brand recall for the products, the company has consolidated its banking products under a single brand, "Kastle."

While 3i Infotech has banking products that span the entire gamut — core banking, treasury, asset liability management, factoring, wealth management and anti-money laundering — its focus across geographies will continue to be on the retail banking front.

Unlike banking, where the company is expected to face intense competition from global and domestic players, in insurance, its product `Premia' is likely to enjoy a good run. The company has secured about half-a-dozen clients in this space and aims to target aggressively the US market.

Risks

The intense competition in the banking space from established global players, such as Temenos or Misys, and domestic players, such as i-flex, Infosys or TCS, is likely to force the company to operate in niches. This may slow the overall revenue growth in coming years.

As a relatively smaller company, 3i Infotech will be far more vulnerable to a slowdown in IT spending in the global economy.

ICICI Bank, with ICICI Strategic Investment Funds, which held a 53.9 per cent equity stake as the company's promoters as of June 30, 2006 are likely to reduce its equity stake to 30 per cent to fall in line with banking regulatory norms. The impact of this move will have to be watched closely.

More Stories on : Stocks | Recommendation | Stocks

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page