Recommendations » India

Infotech Enterprises review and analysis

Contributed by Nirmal Bang

Infotech Enterprises’ (IEL) stock has shed 20% since November 2012. We believe this provides a good buying opportunity on likely acceleration in revenue growth in 2HFY14/FY15, stable-to-higher margins, FY15E cash/share of Rs63 and attractive valuation at 6.3x FY15E EPS (5.7x FY15E EPS after adjusting for cash and interest income). We expect revenue growth to accelerate in 2HFY14/FY15 and forecast 10.9% growth in US dollar terms in 2HFY14E (6.7% in 1HFY14E), and 14.3% in FY15E (8.9% in FY14E). Healthy client adds and long-term relationships with key clients like United Technologies lend confidence to revenue recovery. We expect IEL’s cash and liquid investments to top Rs7bn in FY15E (Rs63/share, 38% of current market capitalisation), which provides valuation support to the stock and could also boost dividend payout. We have assigned a Buy rating to IEL with a target price of Rs242, implying a PE of 9x FY15E EPS.

Valuation attractive post stock decline: IEL’s stock has shed 20% since November 2012, with disappointing 3QFY13 revenue growth being the key driver for the fall. We believe this provides a good buying opportunity on likely acceleration in revenue growth in 2HFY14/FY15, stable-to-higher margins, FY15E cash/share of Rs63 (38% of market capitalisation) and attractive valuation at 6.3x FY15E EPS (5.7x FY15E EPS after adjusting for cash and interest income).

Acceleration likely in ENGG segment in 2HFY14/FY15 to drive revenue: IEL witnessed a ramp-down from a hi-tech (semiconductor) client in its engineering (ENGG) segment in 3QFY13, with an impact expected in 4QFY13 also. We expect a bounce back in growth in 2HFY14/FY15, with a 9.2% YoY revenue growth in US dollar terms in 2HFY14E (2.5% in 1HFY14E), and FY15E growth of 13.5% (5.9% in FY14E). Healthy client addition (23 in 9MFY13 versus 24 in FY12) and strong long-term relationships with clients like United Technologies and Bombardier lend confidence to revenue recovery in 2HFY14. CY13 client prospects also appear decent, with stable-to-growing revenue, EPS and R&D likely. Given that ENGG contributes 66.1% to IEL’s revenue, recovery in growth is key for overall revenue acceleration. We expect the utilities, telecommunication and content engineering (UT&C) segment to continue to grow at a healthy pace, with 15%- 16% growth likely in FY14E/FY15E. Thus, we expect 10.9% YoY total revenue growth in US dollar terms in 2HFY14E (6.7% in 1HFY14E) and 14.3% in FY15E (8.9% in FY14E).

FY15E cash at 38% of market capitalisation, higher dividend likely: We expect IEL’s cash and liquid investments to top Rs7bn in FY15E, which amounts to Rs63/share, or 38% of current market capitalisation. This, we expect, will provide valuation support to the stock. This could also boost the dividend payout ratio, which rose to 17.3% in FY12 from 10.0% in FY11 and in the wake of strong cash flow, a further rise is likely; we expect the payout ratio to cross 22.0% in FY15E, with FY15E dividend yield at 3.5%.

Valuation: IEL’s stock trades at 6.3x FY15E EPS. We have assigned a Buy rating to the stock with a target price of Rs242, implying a P/E of 9x FY15E EPS.