Spark Capital - Infotech Enterprises: Key takeaways from road show - Retain BUY
Spark Capital Advisors(India) Private Limited
25 Jun 2013
Available for Immediate Download
We hosted Infotech Enterprises, in a non deal road show. The key takeaways are: The company expects FY14E US$ Revenue growth to be better than FY13 (6.7% YoY and 9.2% in constant currency basis) backed by revival of spending in key verticals. However,1QFY14E is expected to be soft due to the final leg of ramp downs in select clients, continuation of the decline experienced in 4QFY13. During FY13, Infotech had client specific issues in Aero, Hi-tech and Rail verticals. Coming out of a low base, Aero is expected to do well with improved traction in top clients and gains from vendor consolidation in Top 10 Aero OEMs. Rail, which was sluggish during FY13 due to London Olympics, is expected to grow better than company average in FY14E. Transportation would also show strong growth on the back ramp-ups in new and existing customer. In N&CE segment, Infotech is working on new service offerings to capture the opex of client budgets along with the capex portion the company is targeting currently. Management is weighing options to tackle the immigration bill, though the impact on Infotech would be lower than other firms as Infotech has high number of non-visa employees and local delivery infrastructure. Wage hikes (onsite ~2% and offshore ~8%) announced, effective April, could have a negative impact of 300 bps in 1QFY14E EBITDA margins. However with improved revenue growth, the company expects to maintain FY13 EBITDA margins (18.2%) at CC basis. Current rupee depreciation could also give significant upside to current margins. PAT margins could also come in better than last year with higher other income, led by forex gains and improved cash flows, and lower tax rates. Infotech has been putting incessant efforts to strengthen balance sheet metrics. Notably, FCF has increased to Rs. 1,120mn in FY13 from Rs. 510mn in FY12, translating to FCF/EBITDA of 30% from 18% during the same period. DSO have been brought down to 95 days from 99 days in FY13 & expected to be lower in FY14E. Capex is also expected to taper down from FY14E. Dividend payout is expected to continue in the range of 25-30% of profits. Retain Buy: We continue to like the business model of Infotech Enterprises and believe in the growth potential of the Engineering services outsourcing theme. We maintain our estimates, and expect revenues and EPS to grow at a CAGR of 9% YoY and 9.7% YoY during FY13-FY15E respectively. Retain Buy with a price target of Rs. 220.