praveen
18-11-2007, 11:32 AM
3i Infotech is a global Information Technology company which provides technology solutions to over 500 customers in more than 50 countries across 5 continents, spanning a range of verticals - Banking, Insurance, Manufacturing, Contracting, Retail & Distribution and Government. 3i Infotech being one of the top five players in product space in India having a comprehensive suite of products is well placed to tap the opportunities in this space. The ability to integrate and execute acquisitions smoothly gives 3i the potential to command a competitive position in the BFSI market, which would bring in increased benefits of scale and margins stability going forward. This would translate in improved valuations metrics for the company amongst its peers in the coming quarters. Over the years 3i Infotech has successfully implemented various strategies, enabling it grow from 200 employees and revenues of Rs. 40cr in FY2000 to a size of 5000 employees and consolidated revenues of Rs. 655.3cr in FY07.
Industry
IT Software products
The Indian software products landscape is dotted by 3 types of players, having different set of reasons behind getting into this area:
a) For larger services firms like TCS and Infosys, products are means to satisfy twin objectives of improving margins and getting deeper into client relationship. IT Services has a direct relationship with the number of people employed. Products on the other hand are Integrated platform (IP) - led and hence revenues are not a simple multiple of manpower cost. With margins under pressure due to rising wages and a stronger rupee, top tier IT companies are looking at products as an effective way of improving the margins.
b) The second tier companies and new players see products as their differentiation from the labor-intensive services arena, which already has established big names. Companies like 3i Infotech and Ramco are examples in this category.
c) Then there are the vertical-focused players who see products as a very natural extension of their services, or vice versa. This segment accounts for some of the most well known product names such as iflex, Polaris, and Subex Azure.
At present, there are more than 350 companies (Source: NASSCOM) in India involved in product development, out of which most companies are focused on banking followed by telecom. Within banking, as per CRIS INFAC’s report, retail and wholesale banking is the focus area for most companies for e.g. I-Flex, TCS, Infosys, etc. Software products, as a business segment is slated to grow from $2 bn in FY06 to $7 bn in FY10 in India translating into a CAGR of 36.8%.
IT Services
As per CRIS INFAC, Indian IT services are expected to grow at the rate of 26.3% during FY06-FY10E. Among all the service lines, consulting segment is expected to grow at the fastest rate i.e. around 38% whereas system integration, information system (IS) outsourcing and network consulting & integration are expected to grow at the rate of 31%, 34% and 31% respectively. Application Development & Maintenance (ADM) segment, which constitutes almost 75% of IT services exports is expected to have the slowest growth among all service lines of approx. 25% over FY06- FY10E. The main growth drivers in the domestic IT industry have been Banking, Financial Services & Insurance (BFSI), Telecom, and Consumer Durables sectors. An increased level of competition in these sectors has propelled the players to adopt cost effective IT solutions. These sectors are the early adopters of ITeS in the domestic market and currently account for nearly 3/4th of the business in this space.
Company
3i Infotech Limited is a mid-sized IT company, promoted by ICICI Bank. It provides integrated solutions i.e. both software products and IT services to the BFSI sector and ERP (Enterprise Resource Planning) solutions to manufacturing and retail & distribution companies. In addition, it offers a broad range of software services such as IS and IT Security Consulting, Enterprise Application Integration (EAI), and specialized services such as Product re-engineering, Compliance Consultancy, Application Rehabilitation and e-Governance, among others. Through 17 offices across five continents, 10 offshore development centers and onsite delivery & support facilities in New Jersey, Dubai and Kuala Lumpur, the company serves more than 500 customers. The Company's list of global customers includes Prudential Assurance, Finansa, AIG, Emirates Bank, RAK Bank, Hong Leong Bank, SBI Factors, Oriental Insurance Company Limited, National Health Insurance Fund, Solidarity Islamic Insurance & Assurance Co., Commercial America Insurance Company, National Takaful Insurance, Hirsch International Corporation and Pidilite Industries, among others. 3i is presently focusing on the domestic market and the strategy of acquiring small companies providing niche capabilities helped it to an 86% increase in consolidated net profit at Rs. 43cr for Q2FY08 as compared to Rs. 23.1cr in Q2FY07. The company has revised its guidance for financial year 2008, and now expects to end the year with revenues of Rs. 1,150-1,250cr and profit of Rs. 165-175cr. 3i Infotech is India’s fourth-largest software products company. Of the Rs. 655cr it earned in FY07, products to services mix was almost equal. It is focused on the BFSI space with the US accounting for less than 30% of its total revenues.
Key Investment Arguments
3i Infotech has a market cap of Rs. 1656cr, average daily volume of 262921 shares and net sales of Rs. 413.5cr for the trailing twelve months ended 30th Sept 2007.
It’s EBITDA and Net profit margins were at 30.7% and 19.3% resp. in FY07.
The company has achieved a 3-year CAGR of 19.9% in net sales, 38.4% in EBITDA and 75.5% in net profits.
3i Infotech trades at a PE multiple of 24.3, Price to Book ratio of 3.0 and Price to Sales ratio of 4.0.
Debt-equity ratio of 3i Infotech was at 1.03 in FY07 having risen significantly from 0.34 in FY04 as the company raised funds through FCCBs to finance its expansion plans.
While most IT companies entered into and expanded their business in mature markets like the US and Europe, 3i chose to focus on emerging markets in addition to the mature ones. This not only helped it in minimizing its geographical concentration risks but also in growing rapidly by riding on the strong growth potential in emerging markets.
The company’s products enjoy high credibility in the Banking, Insurance, Capital Market and Mutual Fund (new products) segment with a strong client base for products like Kastle, Pinnacle, Premia, Amlock, Mfund, etc. Presently, 3i Infotech has over 300 clients from the BFSI segment including leading Indian Banks like SBI, ICICI Bank, UTI Bank etc. Its Anti-Money laundering (AML) product has been quite popular in the banking space and has gained a market share of around 60% in India in a very short span of time.
3i’s SG&A (Selling, general and administrative expenses) and manpower costs are non linear to the growth in operations of the company unlike in the case of full software services companies like Infosys, TCS, Wipro etc., wherein the business operations are driven mainly by manpower. This saves a lot on operating costs. With robust expansion plans lined up in the near future, the increase in scale of operations coupled with a non-linear rise in operational costs would lead to improvement in its EBIDTA margins.
3i Infotech is building necessary capabilities in high growth areas of e-governance, domestic ITES and Infrastructure outsourcing, through acquisitions and by entering into tie-ups. Going forward, this will help the company to maintain a growth rate higher than that of the IT industry as a whole.
3i Infotech had a pending order book of Rs.655cr at the end of Q1 FY08 which was executable over a period of 9 months. This current order book is almost equivalent to 3i Infotech’s FY07 total consolidated revenues.
Key Concerns
Since the market for IT services is rapidly evolving and highly competitive, inability of the company to cross-sell services, attract and retain new clients could negatively impact company’s business in future.
The Indian IT industry has been plagued by a rising rupee and high wage inflation which have impacted the margins adversely. 3i’s business mix has equal contributions from products as well as services. Since the products business is likely to be less affected by the above factors, it is likely to offset the hit taken by the services business.
Though there won’t be any major impact on the company’s margins due to Rupee appreciation (as its business model is not based on cost arbitrage unlike that of other software services companies like Infosys, Wipro, TCS etc.) during FY08, the time taken for successful integration of acquired companies in future might be a caveat to some extent.
The company derives most of its business from the banking, financial services and insurance sector part of which also comes from the US. The US economy has recently been hit by the subprime crisis which has adversely affected its banking and financial sector. In case this crisis deepens, business from the US BFSI sector might slow down resulting in a slower volume growth for the company.
Latest Developments
3i Infotech has acquired US-based J&B Software and its subsidiaries for $25.25 million in October 2007 with plans to tap its blue-chip BFSI customer base in the US, and extend J&B’s payment processing solutions to the global markets. This acquisition is expected to be earnings-accretive for 3i Infotech. J&B has over 30 Fortune 500 customers and has robust and highly scalable payment processing software products which 3i intends to take global, including the high growth Asian markets. 3i Infotech is expected to utilize the proceeds of its $100 million FCCB (foreign currency convertible bond) issue to fund the acquisition.
Conclusion
On the basis of our research, we feel that this is a good stock to buy at the current market price of Rs. 127.15. If everything goes well, the price is likely to appreciate to Rs. 197.0, within 12 months translating a gain of nearly 55 %
Industry
IT Software products
The Indian software products landscape is dotted by 3 types of players, having different set of reasons behind getting into this area:
a) For larger services firms like TCS and Infosys, products are means to satisfy twin objectives of improving margins and getting deeper into client relationship. IT Services has a direct relationship with the number of people employed. Products on the other hand are Integrated platform (IP) - led and hence revenues are not a simple multiple of manpower cost. With margins under pressure due to rising wages and a stronger rupee, top tier IT companies are looking at products as an effective way of improving the margins.
b) The second tier companies and new players see products as their differentiation from the labor-intensive services arena, which already has established big names. Companies like 3i Infotech and Ramco are examples in this category.
c) Then there are the vertical-focused players who see products as a very natural extension of their services, or vice versa. This segment accounts for some of the most well known product names such as iflex, Polaris, and Subex Azure.
At present, there are more than 350 companies (Source: NASSCOM) in India involved in product development, out of which most companies are focused on banking followed by telecom. Within banking, as per CRIS INFAC’s report, retail and wholesale banking is the focus area for most companies for e.g. I-Flex, TCS, Infosys, etc. Software products, as a business segment is slated to grow from $2 bn in FY06 to $7 bn in FY10 in India translating into a CAGR of 36.8%.
IT Services
As per CRIS INFAC, Indian IT services are expected to grow at the rate of 26.3% during FY06-FY10E. Among all the service lines, consulting segment is expected to grow at the fastest rate i.e. around 38% whereas system integration, information system (IS) outsourcing and network consulting & integration are expected to grow at the rate of 31%, 34% and 31% respectively. Application Development & Maintenance (ADM) segment, which constitutes almost 75% of IT services exports is expected to have the slowest growth among all service lines of approx. 25% over FY06- FY10E. The main growth drivers in the domestic IT industry have been Banking, Financial Services & Insurance (BFSI), Telecom, and Consumer Durables sectors. An increased level of competition in these sectors has propelled the players to adopt cost effective IT solutions. These sectors are the early adopters of ITeS in the domestic market and currently account for nearly 3/4th of the business in this space.
Company
3i Infotech Limited is a mid-sized IT company, promoted by ICICI Bank. It provides integrated solutions i.e. both software products and IT services to the BFSI sector and ERP (Enterprise Resource Planning) solutions to manufacturing and retail & distribution companies. In addition, it offers a broad range of software services such as IS and IT Security Consulting, Enterprise Application Integration (EAI), and specialized services such as Product re-engineering, Compliance Consultancy, Application Rehabilitation and e-Governance, among others. Through 17 offices across five continents, 10 offshore development centers and onsite delivery & support facilities in New Jersey, Dubai and Kuala Lumpur, the company serves more than 500 customers. The Company's list of global customers includes Prudential Assurance, Finansa, AIG, Emirates Bank, RAK Bank, Hong Leong Bank, SBI Factors, Oriental Insurance Company Limited, National Health Insurance Fund, Solidarity Islamic Insurance & Assurance Co., Commercial America Insurance Company, National Takaful Insurance, Hirsch International Corporation and Pidilite Industries, among others. 3i is presently focusing on the domestic market and the strategy of acquiring small companies providing niche capabilities helped it to an 86% increase in consolidated net profit at Rs. 43cr for Q2FY08 as compared to Rs. 23.1cr in Q2FY07. The company has revised its guidance for financial year 2008, and now expects to end the year with revenues of Rs. 1,150-1,250cr and profit of Rs. 165-175cr. 3i Infotech is India’s fourth-largest software products company. Of the Rs. 655cr it earned in FY07, products to services mix was almost equal. It is focused on the BFSI space with the US accounting for less than 30% of its total revenues.
Key Investment Arguments
3i Infotech has a market cap of Rs. 1656cr, average daily volume of 262921 shares and net sales of Rs. 413.5cr for the trailing twelve months ended 30th Sept 2007.
It’s EBITDA and Net profit margins were at 30.7% and 19.3% resp. in FY07.
The company has achieved a 3-year CAGR of 19.9% in net sales, 38.4% in EBITDA and 75.5% in net profits.
3i Infotech trades at a PE multiple of 24.3, Price to Book ratio of 3.0 and Price to Sales ratio of 4.0.
Debt-equity ratio of 3i Infotech was at 1.03 in FY07 having risen significantly from 0.34 in FY04 as the company raised funds through FCCBs to finance its expansion plans.
While most IT companies entered into and expanded their business in mature markets like the US and Europe, 3i chose to focus on emerging markets in addition to the mature ones. This not only helped it in minimizing its geographical concentration risks but also in growing rapidly by riding on the strong growth potential in emerging markets.
The company’s products enjoy high credibility in the Banking, Insurance, Capital Market and Mutual Fund (new products) segment with a strong client base for products like Kastle, Pinnacle, Premia, Amlock, Mfund, etc. Presently, 3i Infotech has over 300 clients from the BFSI segment including leading Indian Banks like SBI, ICICI Bank, UTI Bank etc. Its Anti-Money laundering (AML) product has been quite popular in the banking space and has gained a market share of around 60% in India in a very short span of time.
3i’s SG&A (Selling, general and administrative expenses) and manpower costs are non linear to the growth in operations of the company unlike in the case of full software services companies like Infosys, TCS, Wipro etc., wherein the business operations are driven mainly by manpower. This saves a lot on operating costs. With robust expansion plans lined up in the near future, the increase in scale of operations coupled with a non-linear rise in operational costs would lead to improvement in its EBIDTA margins.
3i Infotech is building necessary capabilities in high growth areas of e-governance, domestic ITES and Infrastructure outsourcing, through acquisitions and by entering into tie-ups. Going forward, this will help the company to maintain a growth rate higher than that of the IT industry as a whole.
3i Infotech had a pending order book of Rs.655cr at the end of Q1 FY08 which was executable over a period of 9 months. This current order book is almost equivalent to 3i Infotech’s FY07 total consolidated revenues.
Key Concerns
Since the market for IT services is rapidly evolving and highly competitive, inability of the company to cross-sell services, attract and retain new clients could negatively impact company’s business in future.
The Indian IT industry has been plagued by a rising rupee and high wage inflation which have impacted the margins adversely. 3i’s business mix has equal contributions from products as well as services. Since the products business is likely to be less affected by the above factors, it is likely to offset the hit taken by the services business.
Though there won’t be any major impact on the company’s margins due to Rupee appreciation (as its business model is not based on cost arbitrage unlike that of other software services companies like Infosys, Wipro, TCS etc.) during FY08, the time taken for successful integration of acquired companies in future might be a caveat to some extent.
The company derives most of its business from the banking, financial services and insurance sector part of which also comes from the US. The US economy has recently been hit by the subprime crisis which has adversely affected its banking and financial sector. In case this crisis deepens, business from the US BFSI sector might slow down resulting in a slower volume growth for the company.
Latest Developments
3i Infotech has acquired US-based J&B Software and its subsidiaries for $25.25 million in October 2007 with plans to tap its blue-chip BFSI customer base in the US, and extend J&B’s payment processing solutions to the global markets. This acquisition is expected to be earnings-accretive for 3i Infotech. J&B has over 30 Fortune 500 customers and has robust and highly scalable payment processing software products which 3i intends to take global, including the high growth Asian markets. 3i Infotech is expected to utilize the proceeds of its $100 million FCCB (foreign currency convertible bond) issue to fund the acquisition.
Conclusion
On the basis of our research, we feel that this is a good stock to buy at the current market price of Rs. 127.15. If everything goes well, the price is likely to appreciate to Rs. 197.0, within 12 months translating a gain of nearly 55 %