Infotech Enterprises - Revenue Growth Commendable; Upgrade To Buy - Nirmal Bang

Infotech Enterprises' (IEL) 3QFY14 US dollar revenue rose by an excellent 6.5% QoQ at US$93.3mn, the highest sequential growth since 1QFY12. Revenue in constant currency (CC) terms grew 5.7% QoQ. The utilities, telecommunications and data transformation & analytics (UT and D&A) segment grew 6.8% QoQ, while engineering (ENGG) grew 6.3% QoQ. Within UT and D&A, it was D&A that grew by an outstanding 9.5% QoQ. Within ENGG, it was heavy equipment, transportation and hi-tech (HTH) that witnessed revenue surging 11.4% QoQ. Rupee revenue rose 5.3% QoQ at Rs5.78bn, 3.7% above our estimate and 2.7% above consensus estimates. EBITDA margin fell 17bps QoQ, which was above our estimate by 35bps and above consensus estimates by 19bps. Forex loss led net profit to decline 4.4% QoQ at Rs694mn (11.1% below our estimate, but 0.2% above consensus). Given the improving growth outlook, we have upgraded IEL to Buy from Sell with a revised target price of Rs416 (Rs292 earlier), implying a P/E multiple of 11.5x FY16E EPS (9.5x earlier) as we also roll over to FY16 earnings.

Revenue broad-based: IEL posted a 6.5% QoQ rise in 3QFY14 revenue in US dollar terms (US$93.3mn, our estimate US$90mn). In rupee terms, revenue rose 5.3% QoQ at Rs5.78bn, 3.7% above our estimate and 2.7% above consensus estimates. UT and D&A revenue rose 6.8% QoQ, with D&A revenue up by a strong 9.5% QoQ. ENGG revenue, on the other hand, grew 6.3% QoQ, with HTH revenue surging 11.4% QoQ. A key positive for the quarter was the fact that all of IEL's sub-segments showed healthy revenue growth.

Margins flat on SG&A investments, forex loss reduces net profit: IEL posted a 17bps QoQ fall in EBITDA margin at 19.6% (35bps/19bps above our/consensus estimates, respectively), as the company made SG&A investments for future growth. Owing to forex translation loss, net profit declined 4.4% QoQ at Rs694mn (11.1% below our estimate, 0.2% above consensus estimates, respectively).

Revenue outlook improving significantly, upgrade to Buy: 3QFY14 revenue growth was IEL's highest sequential growth since 1QFY12. We are encouraged by the fact that all four of IEL's sub-segments - AERO, HTH, UT and D&A - have shown healthy growth, which should enable the company to sustain improved revenue growth over the next few quarters and in FY15 as well. Client metrics were heartening, with revenue from top-10 clients growing by an excellent 10% QoQ in US dollar terms. The improving growth prospects are heartening and the management's outlook is also quite positive for 4QFY14 and for FY15. We have increased our FY14/FY15 US dollar revenue estimates by 2.3%/5.0%, respectively, owing to which we have increased our FY15E EPS by 4.4%. We have also introduced FY16 estimates, factoring in a 12% US dollar revenue growth, 22bps margin decline and 12% earnings growth. Cash per share, at Rs73/Rs95 in FY15E/FY16E, respectively (21%/28% of market capitalisation, respectively) also provides comfort. We have upgraded IEL to Buy from Sell with a revised target price of Rs416 (Rs292 earlier), implying a P/E multiple of 11.5x FY16E EPS (9.5x earlier) as we also roll over to FY16 earnings.

Source : Equity Bulls

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