For 4QFY2011, Infotech Enterprises (Infotech) reported disappointing results. The sluggish performance was because of lack of budget flush from two of its top five clients in the NCE vertical, i.e. British Telecom (BT) and Rural Payment Agency (RPA). However, the ENGG vertical witnessed strong traction for the company’s services. Infotech added 19 new clients – 12 in NCE and 7 in ENGG – during the quarter. The company plans to hire 1,000 freshers in FY2012 to control staff costs and rationalise the employee pyramid. We expect Infotech to post a 20% CAGR in USD revenue over FY2011–13E on the back of organic as well as inorganic growth (i.e. Daxcon and Wellsco integration). Valuing the company at 10x FY2013E EPS of `16.2, we recommend a Neutral rating on the stock.
Quarterly highlights: For 4QFY2011, Infotech reported revenue of US$71.9mn, merely 2.9% qoq growth, due to a 3.7% qoq decline in the NCE vertical’s volume; however, the ENGG vertical reported 5.7% qoq volume growth, leading to overall volume growth of 2.7% qoq. EBITDA margin declined by 77bp qoq to 14.4% due to an increase in salary cost (because of manpower addition and incentives), higher travel and administrative costs and provision in commissions.
Outlook and valuation: Management has now guided for lower revenue growth of 25% for FY2012 compared to 35–42% in 2QFY2011. Also, management’s initial operating margin guidance of achieving the 18% mark looks far-fetched after dismal performance in 4QFY2011 and awaiting margin headwinds like wage inflation in FY2012. Management has been time and again missing on its guidance by a wide margin both in terms of revenue growth as well as profitability metrics. Thus, we expect margins to bottom out in FY2012 at 15% and rebound to 16.3% in FY2013. Hence, with no near-term triggers, we recommend a Neutral rating on the stock.
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