3i Infotech –Buy- Sharekhan
3i Infotech’s Q4FY2010 net income of Rs56.4 crore adjusted for a depreciation write-back of Rs28 crore related to the kiosk business was largely in line with our estimate of Rs55.4 crore.
The net sales grew by 5.4% quarter-on-quarter (q-o-q) to Rs628.3 crore. In terms of the segment, the net sales from the software products segment increased by 5% q-o-q to Rs202.7 crore and that from the information technology (IT) services segment grew by 9.9% qoq Rs181 crore. The revenues from transaction services increased by 2.6% qoq to Rs244.6 crore.
The operating profit margin (OPM) declined marginally by 34 basis points qoq to 19.7%. The decline in the OPM was on account of the higher proportion of revenue from the low-margin services business (28.8% in Q4FY2010 vs 27.6% in Q3FY2010.
The company reported a net loss of Rs165.2 crore as against a profit of Rs61 crore in Q3FY2010. Adjusting for the extraordinary items of Rs249.6 crore (mainly related to the discontinued operations of the kiosk business), the net profit stood at Rs84.4 crore. The depreciation expenses decline to Rs0.5 crore in Q4FY2010 from Rs21.9 crore in Q3FY2010. Adjusting for the depreciation write-back of Rs28 crore related to the kiosk business, the net income of Rs56.4 was largely in line with our estimate of Rs55.4 crore.
The company has provided a decent guidance for FY2011 with a revenue growth of 10-14% and a net profit margin (NPM) of 10-10.5% in FY2011. In our view, the guidance is achievable on the back of the improvement in the business conditions for the banking, financial services and insurance (BFSI) vertical (around 30% of the revenues in FY2010) and its strong order book position of Rs1654 crore. Further, the debt repayment is also a positive for the company as it is likely to allay the concern of a high debt-to-equity ratio.
Taking into consideration the closure of the kiosk business we have lowered our revenue estimates. We have also factored in our estimates the lower depreciation charge for FY2011 and FY2012 due to the discontinuance of the kiosk business. We have lowered the interest expense as we have factored in the debt repayment guidance of the company. We have also factored the higher income tax rate of 14% in FY2012 and the fully diluted equity shares of 22 crore in our estimates.
Consequently, our revised earnings per share estimate (EPS) estimates for FY2011 and FY2012 stand at Rs13.4 and Rs15 respectively.
We maintain our BUY recommendation and price target of Rs105 on the stock. At the current market price, the stock is trading at attractive valuation of 5.5x FY2011 earnings estimate and 5x FY2012 earnings estimate.
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