3i Infotech Ltd - Rs 78.00

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 1500 clients in more than 50 countries through 50+ offices in 14 countries. It provides software products, IT services and Operations Outsourcing (BPO) solutions for a variety of industry verticals including Insurance, Banking, Capital Markets, Mutual Funds & Asset Management, Wealth Management, Government, Manufacturing and Retail. With substantial increase in revenue from transaction services, 3i now classifies its business operation into following three segments

· Technology Services (33%): Under this, 3i offers services including application development and maintenance, IT infrastructure services, e-governance services, retail e-commerce, business intelligence, electronic tax filing, digital signature etc.

· Software products (35%): 3i has emerged as the fourth largest Indian software products company offering a comprehensive range of software products & solutions primarily for Banking(12%), Capital Markets(11%), Insurance(9%) and ERP(3%). Premia, Kastle, Amlock, Awacs, Tradis, Quantis, Mfund, Xroadz etc are few of its popular software products. It also offers unique software for payment solutions and document management.

· Transaction services (32%): With the recent acquisition of USA based Regulus group, this segment has gained prominence and is expected to grow at a healthy pace in coming years. This includes a host of services like remittance service, cheque truncation & clearing, HR & payroll services, record management services, finance and accounting services, registrar & transfer agent, securitization services & contact centre.

Thus, 3i has significantly de-risked its business model with each segment contributing equally in the ratio of 1:1:1. Even geographically, company derives 50% revenues from North America, 28% from South Asia, 10% from MEARC, 7% from Western Eurpore & the rest 5% from Asia Pacific. Apart from ICICI group being its largest customer (contributing 8% revenue), 3i boast of serving international biggies like Prudential Assurance, Citibank, Finansa, First Express, AIG, Emirates Bank, RAK Bank, Chinatrust Commerical Bank, HP, GSK, Al Ansari, Solidarity Islamic Insurance, Commercial America Insurance, Standard Chartered, Deutsche Bank, Pidilite Industries, Oriental Insurance etc. However company’s growth is largely dependent on BFSI space as more than 70% of its revenues comes from this sector. In order to beat the competition and grow at a rapid pace, company has been 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 60~70 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.

Recently, 3i has ventured into Media & Broadcasting Industry as a System Integrator to provide services related to consulting, systems integration and remote infrastructure management to companies in broadcasting media. On the other hand company has tapped the retail business by launching Taxsmile, an online tax filing portal, and e-Mudhra, an online service for enabling common citizens to use digital signatures. To provide other B2C services, company has formed a brand “I-SERVE” which has bagged a huge contract from Central govt for setting up over 12,000 kiosks, spread across various states in India, for bringing various services to common citizens in rural India. The pricing model for this e-governance project is based on the frequency of each service transactions taking place across kiosks. Besides, 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. Interestingly, company 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, insurance applications, contact point verification, soft collections, cheque clearing services, reconciliations, etc. Meanwhile, to consolidate its fast growing BPO business, company has just now formed a subsidiary to control the BPO business under one company efficiently.
Most importantly, 3i business has been affected to a very limited extent because of US turmoil and bankruptcy. However it has put most of the developed economies into recession which has slowed down the pace of current & future growth of global IT industry. In line with world economic situation, 3i has also toned down its strategy and is now looking for modest organic growth in the short term. Hence it won’t be making any major acquisition in current fiscal although it targets aggressive growth in the long run. Despite challenging times , company is having a healthy order book position to the tune of 1400 cr to be implemented in next 12~15 months. In the past, to fund its various acquisitions, company had raised nearly Rs 575 cr thru FCCB route. As the conversion price is at substantial premium to CMP no bond is expected to come for conversion in the near future. Meantime, taking the benefit of recent notification from RBI, 3i went ahead & bought back nearly Rs 150 cr of FCCB at 50% discount. It may further buy back more FCCB’s in the current fiscal. With no additional funds required for new acquisition, company can easily manage its growth from internal accruals and minimum additional debt.
Fundamentally, on a consolidated basis 3i has recorded 88% growth (37% organic + 51% inorganic) in topline to Rs 2305 cr and 45% growth in net profit to Rs 266 cr. It also recorded an extraordinary profit of Rs 26 cr (due to FCCB buyback) which led to reported PAT of Rs 292 cr. After deducting minority interest and dividend for preference share it reported an EPS of Rs 19 & Rs 21 (incl EO profit) on current equity of 130.75 cr. Although company looks cheap at P/E ratio of 4x times, but due to high debt (debt equity ratio of 2.1x times) its EV/EBITDA is around 6.6x times. With moderate growth expectation it may end FY10 with topline of Rs 2650 cr and bottomline of Rs 260 cr i.e. EPS of Rs 20 on current equity. As the scrip has run up too much in the short term investors advised to buy only at sharp declines for a price target of Rs 95 in 12~15 months.

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