3i Infotech Ltd - Rs 35.00

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 600 clients in more than 50 countries through 24 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, company derives 50:50 revenues from products and services which differentiate it from other IT companies. However, now the revenue mix is getting skewed more towards services with major growth driver being BPO. 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. At the same time company provides complete end-to-end outsourcing solutions to various industries mainly in the domestic market and specializes in non-voice based BPO services. Due to its derisking business strategy company is not dependent on any one segment and has well diversified revenue model. Presently banking products constitutes 12%, Insurance products 9%, Capital Market products 11%, ERP 3%, technology services 33% and BPO/Transactions processing constitutes the rest 32%. 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 34% revenue from South Asia, 29% from USA, 15% from Western Europe, 14% from Middle East & Africa and the balance 8% 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, 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 last 2~3 years, 3i has made dozens of acquisitions globally as well as domestically. Ironically, it has more than 50 subsidiaries, step down subsidiaries and associates in total. While acquiring, the challenges are assimilation, integration and deriving benefits of synergies, in which 3i has been quite efficient.On the organic growth side, 3i has set up its first International Data Centre (IDC) in Chennai last year, which offers managed hosting services for applications and disaster recovery solutions. It is also in the midst of opening 255 new service centres in tier-II and tier-II cities to help banks and financial institutions in decreasing the processing time for various back office operations. These centre which will constitute a 'hub and spoke' model will be staffed by experts who will specialize in transactional services outsourcing related to processing credit cards, isurance applications, contact point verification, soft collections, cheque clearing services, reconciliations, etc. On the other hand company has bagged a huge contract from Central govt for setting up over 12,000 kiosks, spread across various states in India, for providing citizen services centers to be used for dispensing G2C(Government to Citizen) and B2C (Business to Customer) services. The pricing model for this e-governance project is based on the frequency of each service transactions taking place across kiosks. Recently, 3i has made a strategic tie up with ICICI Lombard, Airtel and Max Newyork Life to open 12,500 retail stores in rural areas to offer bouquet of retail services in general insurance, telecom and life insurance sector respectively. The company may invest Rs 200 crore for the complete project and would earn commission on per transaction basis.Currently, the order book for the company stands at about Rs 1300 crore comprising of about 40% from product business, 38% from IT and balances from transaction business. And most importantly, 3i business has been affected to a very limited extent because of US turmoil and bankruptcy. However if the world economy continues to be in recession, then it will slowdown company’s future growth rate. To summarize, 3i 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 country > 30% of revenues) and customers (ICICI Bank and other Top 10 clients’ concentration has been on a decline). To fund its various acquisitions, company has raised nearly Rs 175 cr and Rs 400 cr in April’07 & July’07 respectively thru FCCB route which are yet to be converted into equity. After reporting an EPS of Rs 14 for FY08 & encouraging performance for H109 on a consolidated basis, 3i is all poised to end FY09 with total revenue of Rs 2100 cr and bottomline of Rs 200 cr. This translates into EPS of Rs 15 on current equity of Rs 131 cr. Considering the CMP, the bond holder may not opt for conversion and the whole FCCB may come up for redemption in 2012. From the high of Rs 160 in Jan’08, the scrip has fallen almost 80% and the company is now available at decent valuation. Despite company having nearly Rs 2000 cr as debt (incl. FCCB) on its book, investors are recommended to buy at current levels as scrip can easily appreciate 50% within 9~12 months.

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