The Hindu Business Line : Infotech Enterprises: Hold

Shareholders can continue to hold the Infotech Enterprises stock with a 12-18 month horizon. Above-average valuations could limit upside from here, though. At Rs 277, the stock trades at 18 times its current earnings and 14 times its estimated FY-09 earnings. At these levels, the stock trades at a discount to KLG Systel and Rolta India but at a premium to most Tier-2 IT services players.

Infotech does not cater much to the BFSI (banking, financial services and Insurance) segment. It is, therefore, not directly impacted by fears of a slowing down of offshoring from banking clientele due to exposure to sub-prime and credit problems. This, along with a robust order-book, reasonable operating margins and sustainable business prospects may be the reasons why the stock commands a relatively better valuation.

Infotech offers mainly engineering and geospatial services, besides regular IT services. The company caters to clients in the utilities, telecom, automotive and government space on the one hand and engineering, manufacturing and industrial products on the other.

Business Drivers

New engagements hold promise: Infotech has been able to increase its focus on the telecom and government segments. These segments entail constant technological enhancement and upgrade to accommodate expanding IT services requirements. This is evidenced from deal wins that the company has managed. Infotech has won two multi-million dollar deals with telecom majors for migration and upgrade projects. Another deal with UK government’s procurement services organisation envisages delivering geospatial information solutions, mapping and data services. This paves the way for a sustainable revenue stream or annuity-based revenues.

Relationships and HAL JV holds promise: Engineering services, a category that is expected to grow strongly over the next few years, has generated sizeable revenues. Its business relationship with Pratt & Whitney has helped Infotech become a key player in the aerospace segment, contributing to consistent revenues. This has also enabled it to win some deals with companies such as Boeing, the most recent one being for ‘mood-lighting’ on the aircraft. The company has also formed a JV with Hindustan Aeronautics (HAL) and deployed personnel in the JV, which may enable the company to win Defence-related contracts.

Order pipeline and billing increase: The company has an order backlog of $60-70 million and perceives a strong pipeline of deals over the next few quarters. This gives Infotech some revenue visibility over the next few quarters. This apart, the company has managed a 7 per cent billing rate increase with its biggest customer, effective January this year. The company also hopes to achieve a billing increase across clientele, which may help margin expansion. The utilities-telecom-government vertical (39 per cent of revenues) has been growing at double-digit rates for several quarters, while the engineering-manufacturing and industrial products vertical (61 per cent of revenues) has maintained a healthy pace. Overall, the company expects to grow by 35 percent over the next year.

Risks: The company’s debtor receivables stand at 118 days, which is fairly high and suggests relatively higher working-capital requirements. The tax incidence for the company at over 22 per cent is high compared to peers. The top five clients account for nearly 42 per cent of Infotech’s revenues, giving rise to concentration risks.

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