3i Infotech Ltd - 145.00 Rs

Established in 1993 by ICICI Bank, 3i Infotech (3i) has progressed over the years from a back office processing unit of the ICICI group to a technology company providing IT services and solutions to over 500 clients in more than 50 countries through 10 offices worldwide and 10 development centres in India. Infact it has emerged as the fourth largest Indian software products company offering a comprehensive range of software products & solutions primarily for banking, insurance, capital markets, mutual funds, telecom, manufacturing, retail & distribution industries. In addition, it offers a broad range of software services such as custom software development, IT consulting, enterprise application integration (EAI), business process outsourcing (BPO), managed IT Services, and specialized services such as product re-engineering, compliance consultancy, data warehousing, business intelligence etc. Besides, 3i is recognized as one of the major national players in the e- Governance consultancy space in India. Importantly, 3i derives revenues from products and services in a 1:1 ratio which differentiates it from other IT companies. Premia, Kastle, Amlock, iBoss, Data Scan, Awacs, Mfund, Veda, Xroadz etc are few of its popular software products for core banking, insurance, stock exchange surveillance, treasury, risk & wealth management, mutual funds etc. It also has an ERP product suite, providing solutions for the retail, manufacturing, distribution, trading, fashion, and automotive, pharmaceutical and chemical industries. Interestingly, 3i provides complete end-to-end outsourcing solutions to various industries mainly in the domestic market and specializes in non-voice based BPO services. This division is doing extremely well with nearly 15% of the total revenue coming from it. 3i’s quality certifications include SEI CMMI Level 5 for software business and ISO 9001:2000 for infrastructure services and BPO operations.

Geographically, 3i derives around 30% revenue from India, 25% from USA, 20% from Western Europe, 15% from Middle East & Africa and the balance 10% from Asia Pacific region. Apart from ICICI group being its largest customer, 3i boast of serving international biggies like Prudential Assurance, Finansa, AIG, Emirates Bank, RAK Bank, Hong Leong Bank, SBI Factors, Oriental Insurance, HP, GSK, Al Ansari, Solidarity Islamic Insurance, Commercial America Insurance, Standard Chartered, Deutsche Bank, Pidilite Industries etc. In order to beat the competition and grow at a rapid pace, company is betting high on inorganic route and has adopted an acquisition-led strategy to acquire new capabilities and foray into new geographies in the BFSI space. Ironically, it has made over 20 acquisitions globally in last few years and is further looking for acquisition opportunities in China, North America (Brazil and Spain) market. At the same time it is also growing organically and has launched its first International Data Centre in Chennai which will offer managed hosting services for application and disaster recovery solutions. Additionally, it has introduced its remote IT infrastructure management services through its global network and security operations center. Meanwhile, it also setting up mini centres of excellence for operating systems (Microsoft, Red Hat Linux, AIX, Solaris), databases (Oracle, MS SQL, MySQL, DB2), messaging solutions and IT security labs for ethical hacking and vulnerability assessments and niche application infrastructure solutions.

And most importantly, with net dollar inflow of less than 10%, 3i is hardly affected by the rupee appreciation compare to its peers. In short, company has a well diversified and a de-risked business model in terms of offerings (products/services nearly 1:1 with coverage of entire BFSI spectrum), geography (no region >30% of revenues) and customers (ICICI Bank and other Top 10 clients’ concentration has been on a decline). To fund its various acquisitions, company raised nearly Rs 175 cr and Rs 400 cr in April’07 & July’07 respectively thru FCCB route. These are convertible into equity shares @ Rs 154 & Rs 166 respectively leading to an equity dilution of approx 30% going forward. On the back of excellent H1FY08 nos and considering the strong order book position, company is expected to report total revenue of Rs 1200 cr and net profit of Rs 175 cr. This translates into an EPS of Rs 13.50 on current equity of Rs 130 cr. But on a fully diluted equity of around Rs 175 cr, EPS works out to Rs 10. Due to strong economic growth in India & acquisition led strategy; 3i has the potential to post an EPS of about 13 Rs for FY09. Hence at a reasonable discounting by 18x against FY09 earnings, scrip can move up to Rs 230 (i.e. 60% appreciation) in 12~15 months.

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