Infotech Enterprises - Outperformer - Cholamandalam Securities

Engineered to steer through rough weather

Infotech Enterprises is a niche player with a strong focus in the engineering services outsourcing segment and has rapidly gained prominence as one of the top 100 outsourcing companies in the world. The strong cash flows, rich domain experience, good management team and the opportunity to capitalize on the immense potential in the engineering services will help bolster sustainable long term growth.

Market opportunity in engineering outsourcing services to propel long term growth

The engineering services segment contributes ~70% of the revenues and has consistently outpaced the company's growth rate in the last six years. NASSCOM has projected that engineering services outsourcing will reach $50bn in revenues by 2020. Infotech is well positioned to capitalize on this opportunity as it has rich domain experience coupled with proven track record.

Strong client relationships and healthy client additions provide better revenue visibility

Most of the client relationships are long term in nature, typically ranging from five to ten years and ~80% of the revenues are annuity based. The contracts also mention that price increases would happen on a yearly basis.

Healthy cash pile offers more scope for acquisitions

Infotech is currently pursuing acquisition opportunities in the utilities & aviation segment with ticket size between $40-50 mn as it intends to put the cash in its books to good use. The company enjoys a healthy cash balance of INR 4.56bn as on FY12, which is close to 21% of the market capitalization of the company.

Margins to improve on efficient onsite-offshore mix and resizing employee pyramid

The key drivers for operating margins going ahead include higher utilization rates, broadening the employee pyramid by adding more fresher's and efficient onsite offshore mix. The management remains confident of delivering a flat margin for FY13.

Valuation:

At CMP of INR 192, the stock trades at P/E of 9.5x FY13 EPS and 8.4x FY14 EPS. We initiate coverage with an Outperformer rating and target price of INR 217 based on target P/E of 9.5x FY14 EPS. Risks: Adverse cross currency movement can have a material impact on the company's revenue growth and profitability in the near term. High exposure to North America & Europe and high client concentration as compared to some of its peers.

Source : Equity Bulls

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