The Hindu Business Line : 3i Infotech: Hold

A products focussed business, lower dependence on the US and select acquisitions to cater to critical functions of the BFSI industry make 3i Infotech better placed to weather the slowdown.

Mr V. Srinivasan, MD.

K. Venkatasubramanian

Lowered IT spends by clients on the back of credit crisis-related write-downs and slowing economic growth in the US have created a turbulent environment for Indian software developers. In this context, a very select band of IT companies may be well-placed to weather this turbulence.

The top-tier and select mid-tier IT companies that have offerings focussed away from pressure points may fit the bill. Investors with a one-two year horizon can continue to hold the shares of 3i Infotech, considering its reasonable valuation and extensive domestic presence.

At Rs 116, the stock trades at nine times its likely 2008-09 earnings, which is a reasonable valuation level for a mid-tier IT services company.

3i’s deal wins in the e-governance space and acquisitions that are focussed on the core operations of banks lend revenue visibility. A lower dependence on the US and a presence in the critical functions of the BFSI industry will make 3i Infotech better placed than its peers to weather the sub-prime crisis.

Business drivers

Products focussed: 3i Infotech has products and services making an almost equal contribution to its revenue mix. The company offers products and services spanning the entire gamut of IT requirements for financial services companies and caters to banks, insurance companies, mutual funds and capital markets. This end-to-end offering for the BFSI segment gives 3i Infotech an edge over other Tier-2 IT services companies in terms of offerings. The products business offers scope for sustainable revenues in the form of installation, customisation, upgradation and maintenance operations for clients.

Increasing presence in domestic e-governance: In domestic markets, 3i Infotech has been able to increase its presence in Government-initiated projects. It has won a Haryana Government project for the establishment of e-Disha Ekal Seva Kendra Project. This deal follows a similar one from the Goa Government that entails the setting up of 208 citizen service centres by the company. The nature and scale of these projects mean that 3i Infotech can be expected to generate a stable revenue stream over a multi-year period.

Considering that government spend on providing IT and IT-enabled services is on the rise, with sizeable budget allocations, scaling up of operations in these service centres can provide the company with additional revenues. 3i has also won deals with domestic banks such as Bank of India and United Bank of India for deploying its products.

Geographic spread and acquisitions: The company has a wide geographic spread in its revenue mix. It generates 50 per cent of its revenues from India, Asia-Pacific and West Asia. The US contributes to about 40 per cent of its revenues, which is significantly lower than peers in this space.

Overall, this spread may to some extent protect 3i Infotech from the volatility against the dollar. West Asia and the Asia Pacific regions are also fast growing ones in terms of IT infrastructure spending and offer opportunities that 3i Infotech may be well-placed to tap.

Acquisitions to enhance growth: 3i Infotech’s acquisition of the US-based J&B Software (J&B) Inc signals its move to expand inorganically and augment its software products offering. The deal is valued at $25.2 million and 3i has indicated that the acquisition would be immediately EPS-accretive. The other big-ticket acquisition of Regulus group for $80 million is in the transaction processing (cheque and remittance processing) segment. These acquisitions in the important operations of banks means that it is less exposed to credit crisis-related operations and clients.

Risks

Though the company’s direct exposure to the US loan market is limited, vulnerability to the sub-prime crisis could arise from an indirect exposure, what with global banking players across the US and Europe continuing to announce huge write-offs. Deals won in the Asian region, especially India, could lead to deal sizes and margins being lower compared to other geographies such as the US.

With the acquisition of Regulus, transaction processing will gain momentum, but these are volume-based services and command lower billing rates compared to traditional IT services and might lower realisations.

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