Spark Capital - Infotech Enterprises 3QFY14 result review:Strong numbers with robust deal pipeline, Change from Buy to Add
Spark Capital Advisors(India) Private Limited
17 Jan 2014
Available for Immediate Download
Infotech Enterprises 3QFY14 result review:Strong numbers with robust deal pipeline, Change from Buy to Add Infotech (INFTC) reported strong 3QFY14 numbers, way ahead than our expectations. US$ revenues growth of 6.5% qoq was driven by strong growth in HTH & DA. EBITDA margins came in at 19.6% vs. 19.8% in 2QFY14 with currency headwinds & investments offsetting operational efficiencies. Management commentary indicated strong revenue outlook led by healthy deal pipeline across all verticals (especially the recent wins in Aero & HTH). Gross hiring continues to be strong with 801 people added this quarter. Overall, it is heartening to see growth come back after four soft quarters. We believe Infotech would exit FY14E with ~5% US$ revenue growth and the momentum would continue in FY15E on the back of new logo wins, large deal closures in existing clients & strengthening macro environment. Additionally, incessant efforts by management to improve balance sheet in the past few quarters have increased FCFF/EBITDA to 62% (26% in 2QFY14) & reduced DSO by 4 days. We expect these improvements to continue especially with cash collections and tax rate reductions. Though, we continue to maintain our positive stance on Infotech, the recent price appreciation (54% in last 3 months), gives limited upside. Therefore, we change our rating from BUY to ADD with increased target price of Rs.360. Constant currency growth of 5.7% qoq: Aero improved 3% qoq, HTH improved 11.4% qoq, UT improved 5.7% qoq and D&A improved 9.5% qoq. Growth was driven by stronger Europe and growth in top 20 clients, which grew 7.1% qoq. 7 clients were added in ENGG and 4 in UT and D&A during the quarter. We are modeling strong growth of 13.8% and 14.6% for FY145 and FY16E respectively. Our optimism stems from strong hiring and healthy deal pipeline. Margins continue to remain strong: EBITDA margins declined by 20 bps vs. our estimate of 60 bps decline with headwinds of employee additions, currency and S,G&A investments offsetting operational efficiencies. Though currently margins are holding up, with appreciating currency, we expect margins to remain around 18-18.5% in FY14E and FY15E respectively. Maintain positive stance: We continue to like the business model of Infotech Enterprises and believe in the growth potential of the Engineering services outsourcing theme. The company has been making laudable improvements to its balance sheet and has cash of Rs. 6.5 bn, highest ever in Infotech’s history. Though, we continue to maintain our positive stance on Infotech, the recent price appreciation (54% in last 3 months), gives limited upside. Therefore, we change our rating from BUY to ADD with increased target price of Rs.360, arrived by attaching 10x to our Dec-15 EPS.