STOCK WATCH

Once again Transformer & Rectifiers (290.00) has reported flat nos for the June’09 quarter. Sales as well as PAT remained very flat at Rs 86 cr and Rs 9 cr respectively, posting an EPS of Rs 7 for the quarter. For FY09 its sales were up 40% to Rs 425 cr whereas PAT had increased by 35% to Rs 44 cr translating into EPS of Rs 34 on equity of Rs 12.90 cr. Company is one of the few manufacturers in the country manufacturing the entire range of transformers namely power generation, transmission and distribution transformers, industrial transformers such as furnace transformers, and special transformers such as mobile substation, rectifiers, testing transformers etc. Infact, it is among the largest manufacturer of furnace transformers in India. Moreover in May’09 its Greenfield plant in Moraiya (Ahmedabad) with an installed capacity of 16000 MVA went on stream which tripled the company’s production capacity to 23200 from 7200 MVA currently. However in the current fiscal company is expected to make total production of 10,000 MVA which still leads to 50% rise in volume terms. Thus it estimated to clock a turnover of Rs 600~650 cr with a net profit of Rs 65 cr which works out to an EPS of Rs 50 on current equity. A solid bet even at current levels.

Because of forex gains, Hitachi Home & Life Solutions (70.00), was able to report decent set of nos for the June’09 quarter. Its sales improved by 15% to Rs 211 cr whereas net profit increased by 20% to Rs 18.70 cr posting an EPS of more than Rs 8 for the quarter. Traditionally, it is the important quarter for the company as it operates in a seasonal business. For FY09 ending March’09 it recorded 50% fall in PAT to Rs 21 cr (including forex loss of Rs 12 cr) despite 6% rise in topline to Rs 474 cr. Thus for entire FY09, it posted an EPS of Rs 9 on equity of Rs 23 cr. Being, a 68% subsidiary of Hitachi-Japan and proud owner of “HITACHI” brand company manufactures high technological home and commercial air conditioners like window AC, split AC, concealed splits, ductables, chillers and specific telecom cooling solutions. To reduce its dependence on air conditioners company has of late ventured into refrigerators/washing machines and is even planned Rs 45 cr capex to expand its line of business. For FY10 it may clock a turnover of Rs 525 cr and PAT of Rs 35 cr leading to an EPS of Rs 15 on current equity. Being almost a debt free company coupled with strong foreign promoter backing, scrip deserves a better valuation. Buy only at sharp declines as scrip has seen a smart rally in the recent past.

Retail investors are quite disappointed on seeing the June quarter performance of Numeric power (390.00) as company has reported 40% decline in PAT to Rs 8 cr. But the corresponding quarter of the last year includes exceptional profit income of Rs 6.50 cr on sale of stake in JV company. If we exclude that, then company has actually improved its bottomline. For FY09 company had recorded 5% growth in topline to Rs 409 cr and 15% fall in PAT to Rs 33.50 cr posting an EPS of Rs 66 on small equity of Rs 5.05 cr. Incidentally, on a consolidated basis its turnover stood at Rs 443 cr and profit at Rs 38 cr i.e. EPS of Rs 76. Thus company is currently trading at a P/E multiple of 5x times against its current consolidated earnings. Company has eight world class manufacturing facilities spread across Pondichery-TN, Chennai-TN, Parvanoo-HP and Colombo-Srilanka, thereby emerging as the biggest integrated manufacture of UPS in India. It also undertakes turnkey projects and offers end to end solution for SCADA/EMS package, large network of industrial process, power transmission support systems and distribution management. It has an enviable and high profile clientele including Infosys, Siemens, Intel, Philips, Microsoft, Veritas, HDFC, Citibank, ICICI, RBI, NIC, Reliance, ABB, BMW, NCR, Nokia, major stock exchanges etc. Recently, company ventured into solar power generation using Photo Voltaic Modules and initially intends to develop solar hybrid UPS systems. To become more efficient, it is backward integrating into batteries and is scouting for a technology partner to set up a battery manufacturing unit. Buy at declines.

Against the expectation of recording decent growth, Tera Software (35.00) has posted flat nos for the June quarter as sales and net profit stood at Rs 17 cr and Rs 2.50 cr respectively. For FY09 its net profit was down by 15% to Rs 10.50 cr, although its total revenue had increased by 40% to Rs 83 cr. Thus its EPS stood at Rs 8.50 on equity of Rs 12.50 cr. Company is expected to declare 20% dividend for FY09 which leads to a yield of 6% at CMP. Company is one of the leading e-governance solution providers, undertaking data entry/scanning works for digitization of information maintained under Right to Information Act. It also undertakes short-term projects like issue of photo ID cards, ration cards and election commission cards. Of late company successfully executed Maharashtra Vikri Kar Seva Project in Maharashtra State (VAT Implementation of Maharastra sales tax department) on BOOR (Build own operate and refresh) model as the scope of work was computerization of sales Tax department in the entire state of Maharashtra. Notably company has been able to procure additionally six new projects of the State Government of Andhra Pradesh, Karnataka, Rajasthan, West Bengal and Himachal Pradesh. It also ventured into imparting computer education in more than 225 schools in Goa and AP by establishing the computer labs with Computers and providing the teaching staff and maintenance of systems. For FY10, it is estimated to report total revenue of Rs 90 cr and profit of Rs 12 i.e. EPS of Rs 10 on current equity of Rs 12.50 cr.

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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