CMp: 60.05 | tp: 84| duration: 6-9 months August 29, 2010
company
3i-Infotech (3i), was promoted by the NYSE-listed ICICI Bank, is an IT company, which provides software products, IT services and Business Process Outsourcing (BPO) for a variety of industry verticals including Insurance, Banking, Capital Markets, Mutual Funds & Asset Management, Wealth Management, Government, Manufacturing and Retail. These solutions and services include Managed IT Services, Application Software Development & Maintenance, Payment solutions, Business Intelligence, Document Imaging & Digitization, IT Consulting and various Transaction Processing services.
COMPANY DATA
Share Data
| Market Cap (Rs) | 1151.87 crores |
| Issued Shares | 191818095 |
| 52 wk High/Low (Rs) | 103/59.60 |
Valuation Ratios
| To 31 Mar | FY09 | FY10 | FY11E |
| Sales (Rs in Cr) | 527.24 | 519.99 | 582.38 |
| EPS (Rs) | 14.12 | -5.90 | 14.1 |
| P/E (x)
| - | -10.17 | 4.25 |
| P/B V (x) | 0.9 | 1.2 | 0.9 |
Shareholding Pattern (%) (Quarter ending June,2010)
| Promoters | 20.35 |
| FIIs | 8.22 |
| Others | 42.28 |
| Public | 29.15 |
positives
1. 3i is one of the cheapest IT stocks available in the market. It has just made a new 52 week low at Rs 59.60 and has formed a strong support around 60 levels.
2. 3i has a good order book in place with over Rs.1700 crores.
3. 3i has got rid of its non-core business, the CSC centers and started concentrating on its core business areas of products and services.
4. 3i has a nice geographic distribution of its client base and also a nice distribution of the solutions to verticals, effectively shielding it from any forex or sector wise disturbance.
5. 3i’s debt levels of more than Rs.2000 crores is high but has come down through effective placements of 2 QIPs and raised almost Rs.5bn
6. 3i has been consistently rewarding its share holders through dividends and had given a 15% dividend even for FY10 in testing times.
concerns
1. 3i’s promoter holdings are around 20.35% and would ideally like to have a bigger holding from the promoter groups
2. 3i made a 52 week low when the markets are at a 2 year high and there is a chance the value may go down in the short term as markets correct (expected).
3. 3i’s debt-equity ratio is high at 2.2 and needs to come down. Management has hinted at reducing it to 1 in 2 years time.
4. With CSC centers being discontinued, there is a onetime write off Rs.260 crores incurred on this operation.
valuations
3i-Infotech is a horse for the long run. It had scaled new heights in the last 4-5 years with its revenue multiplying by 6 times. But some poor project entries has become short term dampeners for this stock. 3i is trading at 4.25x FY11 PE and even if we consider a modest PE of 6 (industry PE for IT is usually above 20), we get a target of Rs.84.6. I recommend a BUY in this counter with a target of Rs.84 in duration of 6-9 months. In the short term, with an impending market correction, I would advice to buy 3i on every dip.
Patient investors can consider significant investment in this stock with a vision of greater than 3 years when the company’s debts would have come down and also would have made significant inroads into the emerging market opportunities.
disclaimer
I am a newbie into equity research. This blog is to start posting my research reports on various stocks. The information and views presented in this report are prepared by me. The information is based on my analysis and on sources available on the public domain. Investors are requested to use this report as guidance and the final decision to be made by the investors themselves. I will not be responsible for any loss incurred by the investor based on this report.
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