Infotech Enterprises - Rating: HOLD; Target Price: Rs 390 - Centrum

During the quarter, we expect INFTC to report fairly strong growth (+2.4% QoQ) supported by broad-based growth on the lines of what we saw over 1QFY14, though we think the Aero business could still see some headwinds for a couple more quarters with furloughs this quarter being a possible drag on Engineering overall.

While we expect traveling expenses to go up marginally as a percentage of sales, we expect employee costs to be slightly down QoQ as the pyramid broadens. We expect EBITDA margins to improve 92 bps/219bps QoQ/YoY to 20.7%.

We expect that over FY15, within Engineering, Transportation will start gaining momentum while Aero will also start improving. We have reduced our FY14E revenue estimates for Engineering as we expect that furloughs and the US government shutdown would have had some effect on both the billing over 3QFY14 as well as the timelines for ramp-ups that would have happened over 4QFY14. We increase our USD revenue growth estimates for FY15 to 12.8% (from 10.8% earlier) and for FY16 to 11.1% (from 8.6% earlier) and assume higher utilization for Engineering (below historic peak of 75%, but at an average of 70.8% for FY15E and 72.3% for FY16E).

Earnings and target price revised upwards: We expect that Engineering utilizations have bottomed out and will gradually increase from the current levels of 68% that are close to the historic lows of 66%. Considering better utilization and rupee realizations, we increase our EBITDA margin estimates for FY15E by 114bps to 22.8% and for FY16E to 24.3%. With RoE for FY14E to be over 20%, and growth returning, we also increase our target multiple to 10x (from earlier 9x), roll over our estimates and introduce a new Dec'14 TP of Rs390 (based on 10x 1-Year Fwd EPS at Dec'14). But with implied upside at only 15.7% after the recent sharp run-up (23.8% in the last one month alone) we downgrade our recommendation to HOLD (from BUY).

Source : Equity Bulls

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