3i Infotech (earlier ICICI Infotech) has transformed itself from the back office of ICICI Bank to a software products-cum-services company focused on the banking, financial services and insurance field. Over the last two years, the company’s consolidated revenue has fallen from Rs 260.25 crore in FY 2002 to Rs 229.17 crore in FY 2004. After a profit before tax (PBT) and extraordinary (EO) items of Rs 14 crore in FY 2002, there was a loss of Rs 6.74 crore in FY 2003, which increased to Rs 7.8 crore in FY 2004. However, deferred tax credits and extraordinary items helped it to show profit throughout on restated (as per same accounting policies) basis.
3i Infotech's share of product revenue to the total revenue is increasing. From 5% in FY 2002 to 42.6% in the nine months ended December 2004, the product revenue share is set to increase further. However, this will bring more volatility to the company’s revenue and profit.
3i Infotech derives around half of its revenue from the domestic market, which is generally a low- margin business and not fancied on the bourses. Moreover, the ICICI Bank group accounts for around 30% of the total revenue, which ties its fortunes to the changing business plans of ICICI Bank. For example, when ICICI Bank terminated the contract to provide IT-related services for retail finance and card operations in FY 2003, 3i Infotech’s revenue and profit fell drastically. In fact, PBT before EO of Rs 14 crore turned into a loss of Rs 7 crore.
The latest nine months ended December 2004 proved to be very profitable for 3i Infotech. Sales on a consolidated basis stood at Rs 208.30 crore and profit before EO items and deferred tax credit zoomed to Rs 12.81 crore (it was loss of Rs 7.8 crore in FY 2004). After deferred tax credits and other adjustments, the net profit stood at Rs 16.26 crore.
Its not proper to treat deferred tax credits as recurring items. Annualising PBT gives an EPS of Rs 3.2. Moreover, 3i Infotech has a preference capital of Rs 150 crore funded by ICICI Bank (the current IPO funds will be used to redeem it). After deducting the dividend on preference capital, one gets a paltry EPS of Rs 1.4.on post-issue fully diluted equity.
The price band is Rs 90 to Rs 100, gives a P/E of 64 to 71. Even if one does not consider preference dividend on the assumption that the issue proceeds will be used to fully redeem preference capital, P/E works out to 28 to 31. One can get Infosys and TCS at P/Es of 30-35. Certainly 3i Infotech’s scale, business model and expected sustainable growth rates are nowhere near Infosys’s and TCS’s.
| 3i Infotech: Issue Highlights | |
| Sector | Computer Software: Med/Sml |
| Sector P/E TTM | 17.7 |
| No. of shares on offer | 20000000 |
| GS size (no of shares) | 3000000 |
| Post-issue Equity | |
| after GS (Rs cr) | 54 |
| Offer price band (Rs) | 100 / 90 |
| Post issue promoters | |
| stake (%) after GS option | 53.08 |
| IPO Open / Close | 30.03.05/04.04.05 |
| Listing | BSE and NSE |
| Rating | 40 / 100 |
| GS-green shoe | |
Source : Moneypore.com
There seems be conflicting reports on the EPS of 3i Infotech. Please verify at multiple sources. The above report may be inaccurate.