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ULJK Securities Pvt Ltd Institutional Research 3I‐Infotech Ltd. Initiating Coverage
Information Technology 18th Feb, 2009 Investment Rationale : Recommendation: Accumulate CMP: 33 Highly dependent on the BFSI segment Target : 52 Nearly 75% of the 3I‐Infotech’s revenues are dependent on the BFSI seg‐ Stock Return: 59% ment. The banking revenues and the insurance revenues are shared with a BSE code : 532628 ratio’s of 14% and 13%. These two segments’ have shown a growth rate NSE Symbol : 3IINFOTECH (CAGR) of 50% and 58% respectively from the last four years. Bloomberg : III:IN Reuters : TIIN.BO Maintaining a healthy Business Mix
Key Data : The company is maintaining a business mix of 1:1 through the products and Sensex : the services portfolio. The company is planning to change its strategies in 52 week H/L 160/30 tune with the changing environment by changing the business mix to the Outstanding Shares (mn) : 130.75 ratio of 1:1:1 through products, services and the transaction services which Avg. Daily Volumes (shrs) : 796, 945 maintain margins of 55%, 38% and 30% respectively. Market Cap (Rs Mn.) : 4314.75 Face Value : Rs.10 Increasing presence in the Technology Services, Capital Markets (Source : Prowess) and BPO Segments Technology services have shown a growth rate of 71% in the FY08 with a
Share Holding Pattern (%): CAGR of 53% from the past three years. The BPO segment has also shown a growth rate of 145% for the FY08 with a CAGR of 140% in the last three Promoters : 39.49 Public : 20.64 years. The new products of capital markets in the portfolio of 3I‐Infotech FII’s : 04.99 have shown a growth of 134% within a year. Others: 34.88 (Source : Company) Maintaining a CAGR of 80% for the past four years The company has grown with a growth rate of 80% from the last four years Price Volume Analysis: with revenues of Rs. 12, 052.62 mn for the FY08. The technology services have contributed with 40% of the revenues. The company is having a geo‐
200 25 graphical presence and exposure all over the world with highest market in
20 the South Asia and US with 34% and 30% of the total revenue respectively. 150 15 The company is increasing its presence in the western European countries. 100 10 50 5 Financial Summary 0 0 Rs. Million
Turnover
Research Desk: Praveen Kumar B [email protected] Tel: 022‐3028 4717 Email: [email protected] (Source : Company, ULJK research)
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Chennai IDC The company has opened its International Data Centre (IDC) – for hosting services for application and disaster recovery solutions. Global Network and Security Operations Center (GNSOC) –providing remote IT infrastructure management services with a strategic stake in Tax‐Smile, which is an Online Tax Filing Portal in Chennai.
Valuations
At the CMP (Rs.33) the stock discounts FY2009E & FY2010E earnings at 1.76 (x) & 1.43 (x) respectively. We believe that the company could be benefited from the new ventures and government projects and could maintain its margins. We value the company at INR. 52 per share. This price will discount FY2010E earnings by 2.28 (X) times.
Outlook The company is having an order book of Rs. 1200 Crores which is executa‐ ble through 18 months. The company has given the guidance of revenues varying between Rs. 22000 mn to Rs. 23000 mn and an EPS fully diluted for FCCB of between Rs.14 to Rs. 14.5. The Company has also won several deals for setting up of over 12,000 kiosks across various States in India for provid‐ ing Citizen Services which could be a major source of Revenue in future.
Financials Our price target methodology is based on the DCF valuation using the FCF methodology. Given its consistent performance during the last three years and the growth rate of 58% achieved in the last year ,the stock is trading at a very Low multiples when compared to peers in the industry .(PE multiple of 3.0, 3I‐Infotech is now operating with 34% of its revenues in the Products segment and 33% in the services segments. Our target price of Rs. 52 is at a PE of 2.28 (X)‐year earnings (FY09/10).
Risks Perceived risks for the company are: 1. Outlook on BFSI sector. 2. Highest operations in the BFSI segment.. 3. Cross currency fluctuation.
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Company Structure The company’s operations have been divided mainly into three segments namely Products, Services and Transaction Services. The company serves mainly in the BFSI segment contributing to the 75% of the revenues by providing solutions to Insurance, Banking, Mutual Funds, Capital Markets, Telecom, Media Broadcast and Government. Company has nearly 20 soft‐ ware products IPR’s.
Business Model: The business model constitutes the services offered in the company which varies with the verticals from Banking, Insurance, Capital Markets and Mu‐ tual Funds with wide horizontal offerings of AMLOCK (Anti money launder‐ ing), ADM (Application Development and Maintenance), TS (Transaction Services), Managed IT services, Business Intelligence and Enterprise Docu‐ ment Management System.
E-Governance
B2C Services
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Background
3i InfoTech Ltd is a global Information Technology company, which came into existence in 1993 by providing technology solutions to large companies across 12 countries and having a client spread over 50 countries across 5 continents. Their offering spans a range of vertical ‐ Banking, Insurance, and Mutual funds, Capital Markets, Manufacturing, Retail & Distribution and Government. It was promoted by the ICICI Bank for its back office work but now they have become a global technology company. Company has grown in revenues at a CAGR of 61% in the last four years, out of which 41% is Organic and 20% Inorganic.
3I‐Infotech offers a comprehensive range of software and IT solu‐ tions, including packaged applications for the Banking, Financial Services & Insurance (BFSI), Manufacturing, and Retail & Distribution industries. In addition to the above they offer a broad range of software services such as Custom Software Development, IT Consulting, IS and IT Security Con‐ sulting, Enterprise Application Integration (EAI), and specialized services such as Product Re‐engineering, Compliance Consultancy, Application Rehabilitation and e‐governance.
The company had gone through a number of acquisitions from its start as a part of its strategy for penetrating to different geographies with increasing wide no. of services offering in different verticals. 3i‐infotech clients in BFSI segment include the major leading banks like SBI, ICICI, Standard Charted, IDBI Bank, GlaxoSmithKline, ICICI Lombard, HP, etc.
Business Analysis:
3I‐Infotech, one of the India’s leading IT solutions and services providers with a proven track record in the specialized areas like BFSI, E‐ Governance, BPO and Application Development Management Services (ADM). Nearly 75% of the revenues are contributes from the BFSI seg‐ ment. We believe that the company’s decentralized business model of providing its services to large no. of clients in different geographies is helping to maintain its quality of services. The company gains its revenues nearly 40% from its services and the rest from the products and the BPO segments. The company is running with the project of 1200 Kiosks for the E‐governance Indian Government in different states.
Healthy Business Mix of Product and services in the portfolio: The company is maintaining its business model, with a 50:50 percent of‐ ferings from the product and the services portfolio. The company initiated its offering of services for ICICI bank and increased its scope of offerings in different verticals from the product side by having a large number of ac‐ quisitions in different verticals. The company’s ability to cross sell it’s products and services is helping to maintain a good business mix.
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The different set of solutions offered by the company are;
Technology Services: 3I‐Infotech provides Technology Services to enable enterprises to focus on their core competencies, lowering the cost of managing IT infrastruc‐ ture through improved productivity and operational efficiencies. Previ‐ ously the company use to provide the services only for the ICIC bank. But, increasing expertise for the company has expanded the bag of revenues from the technology services segments. It is a powerful combination that gives customers the most advanced IT capabilities while freeing up their resources for more strategic endeavors within their organizations. 3I‐ Infotech currently offers Managed IT Services in the areas of Datacenter Establishment, IT Facilities Management, Remote Management, Managed Security, System Integration, and Infrastructure Optimization. With the launch of IDC Chennai the scope of the technology services for the com‐ pany has increased. The revenue contribution from the Technological services have reached Rs. 4700 mn in the FY08 which has shown a growth rate of 53% from the previous four years.
Banking Solutions: The company’s high expertise and experience in the BFSI segment had established a proven track record in delivering the optimized value addi‐ tions for its clients across the globe. KASTLE, a banking solutions suite, comprises an extensive range of enterprise banking products that cater to the varied operations and departments of banks and other financial ser‐ vices organizations. This gives the clients a cost‐effective option to go for multiple solutions that can be integrated with each other from a single vendor. The products range all the services in the banking operations like KASTLE core Banking, KASTLE Treasury, KASTLE Asset Liability Manage‐ ment, KASTLE Risk Management, KASTLE Universal Lending, KASTLE Fac‐ toring , KASTLE Anti Money Laundering and KASTLE payments. AWACS‐ Advanced Warning and Control System, is designed to protect the integ‐ rity of capital markets from fraud, manipulation and abusive practices and to foster open, competitive, and financially sound markets. MFund, Mutual Funds products suite, encompasses operations such as fund accounting, valuation, investment management, lending operations, investor services, dealing, pre‐dealing, intent generation, order manage‐ ment, etc. The banking segment has shown a growth of 71% in the previous year with a CAGR of 50% in the last four years with gaining revenues of Rs.1687 mn in the FY08.
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Insurance Solutions: In synchronous to ever changing customer needs to offer improved ser‐ vices like consolidations, deregulations, merging of financial services, pro‐ viding sophisticated product line, constant revamp of the distribution of the channels, etc. at the lower rates the company is having a highly ac‐ cepted product named PREMIA which is providing a wide range of ser‐ vices in the insurance business. This product has a very high acceptance in the insurance business operations for the Middle East region. These insur‐ ance Products and services are giving the desired results to over 130 In‐ surance organizations across the world. The products range all the ser‐ vices in the Insurance business operations are PREMIA‐Insurance Manage‐ ment, PREMIA‐General Insurance, PREMIA‐Life, PREMIA‐Collaborator, PREMIA‐Broker and PREMIA‐Takaful. The Insurance vertical has shown a growth of 70% in the FY08 with a CAGR of 58% in the last four years with gaining revenues of Rs. 1566 mn in the FY08.
Capital Markets: 3I‐Infotech provides a wide range of products for the capital market enti‐ ties such as stockbrokers, traders, stock exchanges and regulators. The products cover market surveillance and monitoring, Internet trading, trade order and risk management, and clearing and settlement processes. The product offering include Tradis: a comprehensive solutions suite for stockbrokers and traders, giving them absolute control over the entire trading process from order to settlement; and AWACS, an advanced warn‐ ing and control system that handles all the critical elements of the surveil‐ lance process, and provides a robust monitoring and warning mechanism. The Capital Markets vertical has shown a growth of 134% within a year of the launch with gaining revenues of Rs. 1687 mn in the FY08.
BPO: 3I‐Infotech provides end‐to‐end outsourcing solutions for Banking, Finan‐ cial Services & Insurance (BFSI) and Telecom industries. Being the Regis‐ trar and Share Transfer Agent for one of the largest private banks in India for 15 years established their credentials in both voice and non‐voice based Operations Outsourcing (BPO) services. Operations Outsourcing (BPO) is a core business for the company, accounting for a very significant portion of their global turnover. 3I‐Infotech today has the most robust and vast Hub & Spoke delivery model that provides with the national reach required to efficiently deliver business benefits while managing cli‐ ent’s business processes. The expertise and technology established Op‐ erations Outsourcing competencies across retail banking, credit cards, insurance, capital markets, finance & accounting services, cheque trunca‐ tion, remittance processing services and telecommunication sector proc‐ esses. The BPO segment is continuously improving with a CAGR of 140% from the last three years and a growth of 145% in the FY08 with revenues of Rs.
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E‐Governance: The E‐governance segment of 3I is in the initial stage with the projects from the Government of India in different services like Managed IT ser‐ vices, Application Software Development & Maintenance, Payment Ser‐ vices, Business Intelligence, IT Consulting, Business Process Outsourcing/ Management, etc.
Revenue sharing from business segments: The revenues growth with a CAGR of 80% for the last four years is highly supported by the BPO and the Capital Markets with an YoY growth of 134% and 145%. The Technology Services, Banking and Insurance has shown a growth rate of 70% each and the ERP has shown a YoY growth of 63%. We understand that the business of Banking and Insurance may not continue their past performance in the near future because of the present financial turmoil in the global economy. But, as the insurance product and the services of the company are highly exposed to the Middle East the present situation might not affect highly on the company.
Total Revenue (Rs. Millions) 2070.28 4178.14 6553.17 12052.62 YoY (%) 102% 57% 84% 2005 2006 2007 2008 Technology Services 1189.55 2005.51 2752.33 4700.52 Banking 752.07 982.98 1687.37 Insurance 626.72 917.44 1566.84 Capital Markets 0.00 720.85 1687.37 ERP 543.16 589.79 964.21 BPO 880.73 250.69 589.79 1446.31
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Investment thesis: Maintaining a Business Mix of 1:1 in the Products and the Ser‐ vices:
The company is maintaining a revenues mix in the product portfolio with a ratio of 1:1 and planning to change the mix into 1:1:1 in the products, Tech‐ nology Services and the Transaction Services by maintaining a margin of 55%, 38% and 30% in these services. The company is holding an order book position of Rs. 1420 Cr having a sequential addition of 4% from the QoQ in the FY09. The break‐up of the order book position is in the ratio of 30%:35%:35% which is executable in the period of 18 months. Growth highly impacted through the Inorganic growth Aggressive acquisitions
The company adopted a strategy to acquire the companies across the globe in order to increase its presence all over the world across all the segments it serves. Post march the acquisition value of the company is Rs. 7489.78 mn and earned revenue of Rs. 5397.86 mn. The company is following a De‐ Centralize business models for all its subsidiaries operating in the foreign nations. Companies, this Business Model helps it to minimize its currency risks where the subsidiaries expenditures are done through the revenues of the company in the same currency. The below given are some of the recent acquisitions made by the company;
Recent acquisitions
29‐May‐07 A O K In‐House Factoring Services Pvt. Ltd. 29‐May‐07 A O K In‐House B P O Services Ltd. 26‐Nov‐07 S D G Software Technologies Ltd. 4‐Dec‐07 Linear Financial & Mngt. Systems Pvt. Ltd. 8‐May‐08 Locuz Enterprise Solutions Ltd. 11‐Jun‐08 Fineng Solutions Pvt. Ltd. Increasing the presence across all the geographies with an equal presence in all services
The company’s strategy to acquire the companies all over the world has helped the company to increase its presence across all the segments all over the world. In the last three years, the company has increased its pres‐ ence in Western Europe extensively with maintaining its presence in the geographies like US, MEARC, APAC and south Asia. The services presence for the company is very higher than the banking, insurance, BPO, capital markets, etc. which saves the company’s revenues.
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Geographical Presence
Geographical Presence FY06 FY07 FY08 USA 29% 28% 29% MEARC 25% 20% 14% APAC 7% 10% 8% W.Europe 6% 15% South Asia 39% 36% 34%
Services Presence
Services Presence FY06 FY07 FY08
Services 48% 42% 39% Banking 18% 15% 14% Insurance 15% 14% 13% Capital Markets 0% 11% 14% ERP 13% 9% 8% BPO 6% 9% 12%
Financials: Increasing the presence of the transaction services lead revenues
As the transaction services are compulsion servicers where the banks are need to have to run their day to day operations, we believe that the com‐ pany would get benefited from the transaction services. These services have shown a growth rate of 44% (CAGR) from the last three quarters which in‐ creased from Rs.1012 mn to Ra.2087 mn. The operating margins for the transactions services are at the levels of 30‐35% where the products and the IT services are maintaining at the levels of 55% and 35%. Sequentially depleting Margins
The company is showing continuous depletion in the EBITDA margins and showing a flat growth in the PAT levels. We believe that the margins are getting pressurized on the bank of global economic scenario and the crises occurred in the BFSI segment where the banks are decreasing there IT budg‐ ets. We believe that the company is going to face increased pressures on their margins as the macro economic scenario would take time get settled at least for next few quarters.
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Margins Chart
50000.00 25.00%
40000.00 20.00%
30000.00 15.00%
20000.00 10.00%
10000.00 5.00%
0.00 0.00% 2005(A)2006(A)2007(A)2008(A)2009(E) 2010(E) 2011(E)
Revenues PAT EBITDA Margins (%) PAT Margins (%)
(Source : Company, ULJK research) Valuation
At the CMP Rs. 33 the stock is trading at a P/E of 1.76(x) its FY’09 earnings of Rs. 18.7 and P/E of 1.43(x) its FY’10 earnings of Rs.23. We initiate cover‐ age on 3i_infotech on a one price target of Rs. 52. At this target price, the stock discounts FY’09(E) & FY’10(E) earnings at 2.81(X) & 2.28(X) respec‐ tively. We are initiating the coverage on 3I‐Infotech with a BUY recommen‐ dation with a target price of Rs. 52. Risks and concerns
Sluggishness in the BFSI segment The company’s operations are completely dependent on the BFSI segment. The transaction services are a compulsion services that the banks should avail for their day to day operations which contributes nearly 30% of the company’s revenues.
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Consolidated Financials : 3I‐Infotech
Earnings Statement INR Million Balance Sheet INR Million Particulars 2007(A) 2008(A) 2009(E) 2010(E) 2007((A) 2008(A) 2009(E) 2010(E) Revenues 6707.7 12235.7 23629.5 34749.5 SOURCES OF FUNDS : Net Sales (YoY ) 58.2% 82.4% 93.1% 47.1% Share Capital 1563.0 2307.5 2307.5 2307.5 EBITDA 1476.1 2732.3 4415.9 5733.7 Reserves Total 3397.4 5135.3 6932.3 8593.9 Depreciation 168.8 244.0 711.8 373.8 Total Shareholders Funds 4960.4 7442.8 9239.8 10901.4 EBIT 1307.3 2488.3 3704.1 5359.9 Total Debt 6474.9 12657.5 20312.1 23414.4 EBIT(YoY ) 98.2% 90.3% 48.9% 44.7% Total Liabilities 11454.4 20564.8 31203.0 35854.5 Interest 209.0 505.1 912.3 1661.9 EBT 1098.3 1983.2 2791.9 3698.0 APPLICATION OF FUNDS : 2007(A) 2008(A) 2009(E) 2010(E) Taxable Income 53.5 149.9 261.2 685.6 Gross Block 2298.0 3665.2 6526.6 7071.6 PAT 1037.5 1765.7 2448.1 3012.3 Net Block 1370.2 2139.9 4190.2 4361.5 EAT(YoY ) 80.6% 70.2% 38.6% 23.0% Total Current Assets 5779.7 10184.5 14980.8 21732.6 EPS 7.9 13.5 18.7 23.0 Total Current Liabilities 2037.2 3022.9 5416.3 8027.4 EPS(YoY ) 80.6% 70.2% 38.6% 23.0% Net Current Assets 3742.5 7161.6 9564.6 13705.2 Total Assets 11454.4 20562.7 31203.1 35854.5
Key Valuation Ratios 2007(A) 2008(A) 2009(E) 2010(E) Margins 2007(A) 2008(A) 2009(E) 2010(E) P/E 1.7 2.2 1.6 1.3 EBITDA 22.0% 22.3% 18.7% 16.5% EV/EBITDA NA 0.1 1.3 2.9 EBIT 19.5% 20.3% 15.7% 15.4% P/CEPS 2.64 7.07 2.58 2.43 PBT 16.4% 16.2% 11.8% 10.6% ROE 20.9% 23.7% 29.5% 35.7% PAT 15.5% 14.4% 10.4% 8.7% Debt‐Equity 130.5% 170.1% 219.5% 188.1%
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Disclaimer Appendix
ULJK Group investment rankings: (Time range– 12 months)
BUY (expected total return of 15% or more for Low-Risk stocks, 20% or more for Medium-Risk stocks and 30% or more for High-Risk stocks); ACCUMULATE (expected total return of 5%-15% for Low- Risk stocks, 10%-20% for Medium-Risk stocks and 15%-30% for High-Risk stocks, ); REDUCE ( expected total return of less than 5% for Low Risk stocks, less than 10% for Medium Risk stocks and less than 15% for High Risk stocks) and SELL (expected total return of -5% or less for Low-Risk stocks, -10% or less for Medium-Risk stocks, -15% or less for High-Risk stocks, and -20% or less for Speculative stocks).
Analyst (s) holding in the Stock : Nil Analyst Certification
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