Infotech Enterprises

Investors can book profits in shares of Infotech Enterprises (Infotech), an engineering and geospatial services provider, given the margin concerns that the company is likely to witness and challenges in the form of declining contribution from key verticals.



At Rs 166, the stock trades at 12 times its likely FY11 earnings, which is at a premium to mid-cap IT players such as Rolta India, KPIT Cummins, and Geometric.

The June quarter earnings have been much lower than market expectations and with margin headwinds still there, the stock price seems to have captured much of the growth potential over the next year or so.

From the March 2009 lows, the stock has gained manifold. Yet, even as top-rung IT companies have seen reviving fortunes, Infotech's latest quarter numbers show deterioration in performance.

In the June quarter, the company saw revenues grow 8.7 per cent over the same period last year to Rs 252.9 crore, while net profits fell over 28 per cent to Rs 32.8 crore.

The company saw a substantial increase in wage costs, which was at the upper end of the industry levels, as well as escalation in selling and administrative expenses.

Though volume growth has been strong for its key vertical of EMI (engineering, manufacturing and industrial products) at 10.8 per cent, billing rates have still not stabilised and seem to have a downward bias. With income-tax rates set to climb from to 22-23 per cent for FY11, margins may come under increasing strain.

The other vertical UTG (utilities, telecom and government), which contributed to over 36 per cent of revenues, has declined over the last several quarters and is down to 30 per cent levels. Volumes growth even in the recent quarter was not too visible, suggesting that this segment may not be out of the woods yet.

The slowdown in Europe also has taken its toll on the company, with revenue contributions falling steadily over the past year and dramatically by over four percentage points in the June quarter to 38.4 per cent of revenues.

A weaker euro, against both the dollar and the rupee, has meant lower realisations for the company. The ramp-up in its Top 5 clients, a key factor to volumes and realisations for mid-tier companies, is yet to be witnessed. The key positives for the company are a growing US geography (over 50 per cent of revenues) and volume ramp-up in the EMI vertical. But with the US geography in particular being in favour for IT companies, large and mid-tier, increasing competition may limit pricing power.