The Hindu Business Line : 3i Infotech: Hold

SHAREHOLDERS who had invested in the recent public offering by 3i Infotech at Rs 100 can retain their exposure. Since the stock has appreciated sharply over the past fortnight, investors can step up or take fresh exposure on weakness linked to the broad markets. As a product-cum-services play focussed on the banking, financial services and insurance (BFSI) segment, it is a good candidate for investors seeking to diversify their IT portfolio.

Post-IPO status and first quarter

Of Rs 207 crore (net of issue expenses) raised through the public offer, the company has utilised Rs 50 crore towards redeeming preference share capital and Rs 150 crore for repayment of part of its debt (Rs 40 crore of which is still pending and to be repaid soon). With the completion of this exercise, 3i Infotech will have an equity base of Rs 52.8 crore, preference capital of Rs 100 crore and short-term debt of Rs 15-20 crore.

3i Infotech has turned in a strong performance in the first quarter-ended June 30, 2005. On a sequential (quarter-on-quarter) basis, its revenues have grown 10 per cent to Rs 90 crore and post-tax earnings 36 per cent to Rs 10.3 crore. The gross margins improved by 1.2 percentage points to 44.2 per cent, attributed to higher product licence fee contributions and increased annual maintenance contracts. The operating margins have also perked up by two percentage points to 20.5 per cent, driven by a reduction in the SG&A expense.

Guidance and outlook

For 2005-06, the company projected a revenue growth of 25-30 per cent and per share earnings of Rs 8.5-9.5. The post-tax earnings margin is expected to be in the 13-15 per cent range, up from 11 per cent in FY 2004-05.

Considering the expansion in operating margin in the first quarter of FY-06 and the expected savings in interest cost, the revenue and post-tax earnings growth appear achievable.

At the current price, the price-earnings multiple works out to 13-14 times the projected FY-06 earnings.

Though the PEM appears quite attractive, we remain conservative in our recommendation, primarily as consolidation in the banking products space is gathering momentum.

The competitive impact of consolidation may be felt not only on 3i Infotech's core banking product suite, but across its niche product offerings such as treasury management, asset liability and risk management solutions in different geographies.

The pending order-book for product-cum-services portfolio of 3i Infotech at about Rs 200 crore, is encouraging.

However, over the next couple of quarters, we will track the sustainability of contribution from the top 5/10 customers (excluding ICICI group, its promoter), order flows in the insurance and ERP space, and reduction in selling, general and administrative (SG &A) expense percentage.

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