Infotech Enterprises Ltd –Buy- Kotak
An improving macro-environment, differentiated business offerings and a revival in outlook of key business segments will lead volume growth back in FY11E for Infotech Enterprises (IEL).
Revenues for IEL showed an improving trend in Q2FY10 (up 2% q-o-q), after two quarters of flat performance. While business volumes were flattish q-o-q; cross currency benefits impacted revenues positively by 2.1%, and contributed to all of the growth seen in the quarter.
Going forward, we opine that the macro environment for IT spends after having stabilized is now showing incipient signs of a broad-based recovery. We concur with the management on this count and opine that spends are likely to pick up1QCY10 onwards and, have built in higher volume growth rates in FY11E and the explicit forecast period in our discounted-cash-flow.
We modify earnings to factor in more optimism on the volume trajectory starting Q4FY10E; expect an FY10E EPS of Rs26.2 (Rs26.1 earlier). We note this includes Rs.209.5 million of a reversal of previous MTM provision (Q1FY10) – approximately Rs3.7 of the full year EPS.
In FY11E, we expect revenues to grow 14% y-o-y; margins are likely to taper from FY10E levels given our assumptions on the INR, likely peak utilizations and increasing S&M investments, given an improving demand environment. We estimate an FY11E EPS of Rs29.1 (Rs28 earlier), 11% higher than FY10E EPS. While incrementally optimistic volumes, we note that IEL has significant amount of project based revenues (in UTG) that likely make it more vulnerable to any contraction in spends. Client concentration for IEL (Top 5 makes 45% of revenues) also remains high. These remain variables to monitor for IEL, in an improving macro environment.
Retain BUY rating on the stock with a price target of Rs350 (Rs310 earlier); reflecting revised higher near term earnings. Exit multiple works out 12.5x FY11E. EPS, a 35% discount to sector leaders. We note that for last three quarters IEL has been a top mid-cap pick for us, given its differentiated business focus and favourable risk reward. Relatively inexpensive valuations and high proportion of cash (Rs65 per share) are likely to provide support, in our opinion.
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