3i Infotech

Investors with a one/two-year horizon can buy the shares of 3i Infotech.

The stock trades at a modest valuation despite a blended business model, a favourable geographic-mix and strong deal wins in recent times.

The current price of Rs 71 discounts the company’s likely 2009-10 per share earnings by four times, leaving ample scope for capital appreciation.
Service-mix

3i Infotech has three different kinds of offerings — software products, regular IT services and transaction processing. IT products contribute 31 per cent of the revenues, while services and transaction processing contribute 36 per cent and 33 per cent respectively. This model, with a blend of margins- and volume-based services, makes for a holistic service-mix.

Such a service-mix may also insulate the company from cuts in IT discretionary spends, as services and transaction processing address critical operations such as payment processing, mutual funds transactions, insurance payments and basic banking operations.

A more integrated offering becomes necessary in the current environment where clients are engaged in vendor consolidation and may look for vendors with end-to-end offerings in a given vertical. Despite the move away from software products to lower-margin services, 3i Infotech’s operating profit margin continues to sustain at 20 per cent levels.
Geographic mix

Geographically, the company’s footprint in the US has improved to contribute 53 per cent of revenues, largely due to the acquisition of Regulus Group, with much of the rest contributed from India, West Asiant and Asian countries (Europe contributes only six per cent of revenues). Most Indian IT players have experienced an increase in contribution from the US geography over the past year. The National Association of Software and Services Companies (Nasscom) has indicated that the US market and the financial services vertical are stabilising; this makes for a favourable geographic mix for 3i Infotech.

In the recent June quarter, the revenues grew 27.7 per cent over the June 2008 quarter, to Rs 602 crore while net profits grew 8.3 per cent to Rs 63 crore. A slower growth in net profits may be attributable to the steep increase in interest and depreciation. The company may take up a QIP offering to reduce its debt burden; it has already bought back a significant portion of outstanding FCCBs. Valuations appear modest even after factoring in possible equity dilution.

Recent large deal wins span a range of offerings - with orders for anti-money laundering solutions for State Bank of India, banking and treasury products for primary dealers in India and West Asia and domestic e-governance solutions. The company has an order book of Rs 1,450 crore as of June 2009 -about 63 per cent of 2008-09 revenues.

3i Infotech has an equal split between fixed-price and time & material billing modes, which ensures optimal resource planning and realisations.

The company maintains a negligible bench at any point in time

via BL