The Hindu Business Line : Infotech Enterprises: Hold

SHAREHOLDERS can retain exposure in the Infotech Enterprises stock. At the current price, the stock trades at a price earnings multiple of 16 times its annualised per share earnings of Rs 27.5. The strong second quarter performance, robust addition of clientele, especially the two recent multi-million dollar contracts, and the scale and spread of business across its two key verticals — utilities and engineering — are encouraging. On the flip side, high client concentration and managing execution remain key risks to growth.

Second quarter highlights

The consolidated revenues rose 5.3 per cent sequentially in the second quarter of 2005-06. Since this follows a 20 per cent sequential growth in the first quarter, the momentum remains quite strong. As Infotech has a robust order pipeline, it is expected to log two quarters of at least 10 per cent sequential growth.

The operating profit margin moved up by over 2 percentage points to 19.5 per cent. The improvement is attributed to higher margins accruing from its strategic relationship with Bombardier, whose revenue contribution expanded in the latest quarter, and Alstom Transportation, with which it signed a five-year engineering design in the latest quarter. Second, improved employee utilisation (78 per cent in the engineering division and 73 per cent in utilities) also added to the margin.

The Infotech management expects operating margins of 18.5-19 per cent in the next couple of quarters.

The post-tax earnings improved by 11.7 per cent, higher than the growth in the previous quarter. The net profit margin also moved up by 0.5 percentage points to 13.1 per cent.

Growth drivers and risks

In the latest quarter, the significant revenue growth driver was the engineering, manufacturing and industrial products division. Not only did this division record an impressive 10 per cent growth in revenues to Rs 44.12 crore, it also executed and bagged strategic contracts. Of the six clients signed on by this division, the strategic win was a five-year engineering design agreement with Alstom Transport, which is expected to generate $50-55 million over this period.

In this quarter, Infotech enhanced the revenue contribution from Bombardier and delivered a web solution for Boeing, among other projects. The company also completed five years of strategic relationship with Pratt and Whitney, its biggest customer.

Since the potential of engineering outsourcing is growing, this division with a strong pipeline is likely to be a strong performer in the coming quarters. Following a 40 per cent rise in revenues from the utilities, transportation and government division in the first quarter, the contribution from this division remained flat in the second quarter at Rs 38.37 crore.

One of its clients, British Telecom, ramped down its business on account of budget constraints. The management expects this account to scale-up again in April 2006, after fresh budgets are allocated.

The division offers geo-spatial data and technical services to clients worldwide. Among the five clients added by this division is a major GIS contract with Dutch telecom services provider, KPN Telecom, at several million euros executable over the next 18 months.

Over the past year, the company has also managed to broadbase its revenue streams from different geographies. In the latest quarter, the contributions from North America, Europe and Asia were 52.7, 41.5 and 5.9 per cent respectively. In tune with this trend, it has also strengthened its front-end sales infrastructure in the US.

The high client concentration remains a significant risk. The top five and ten clients accounted for 55.7 per cent and 64.8 per cent of revenues in the latest quarter.

Though this is inline with most mid-size companies, the risk stems from ramp-down, delay or start in contracts by any of the existing clients.

According to the Infotech management, three of the top five clients are expected to increase their revenues, one will remain stable and the other will witness de-growth (British Telecom).

As Infotech starts executing the Atlas and KPN contracts in the quarter, they will enter the top ten client list (and possibly top five by the end of the year).

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

More Stories on : Stocks | Recommendation | Stocks