Infotech Enterprises has come up with mixed if not disappointing earnings for the March 2013 quarter. Yet, it is in line with Edelweiss forecast and the latter has retained the company as a Buy!

Domestic brokerage firm Edelweiss has retained its ‘Buy‘ recommendation on Infotech Enterprises even though the latter’s results were muted, and has fixed a target price of Rs220. In a report to its clients, Edelweiss pressing for its case for buying Infotech said, “While operational performance has seen an improvement, in terms of higher offshoring and better free cash flow (FCF) generation, we believe growth remains the biggest lever for further operational efficiencies and margin sustenance”. However, the management remains optimistic and expects the upcoming fiscal to be better.
 

According to Edelweiss, growth is one of the keys for operational improvement, and that lies in the order backlog. Infotech has $290 million worth of orders due next year and a pipeline of $210 million. Edelweiss report states: “Better FCF generation (30% of EBITDA against 18% in FY12) and improving margin in a tough scenario, we believe growth remains the biggest lever for any operational improvement hereon.”
 

According to their interaction with management, the brokerage says, “The management has stated that it expects 250-350bps and 80bps impact to margins due to wage hikes and branding costs respectively in FY14E. It expects to offset these by improving utilisation, higher offshoring and pyramid rationalization.”
 

Infotech Enterprises saw its revenue increase 11.3% year-on-year (y-o-y), in rupee terms, at Rs464 crore, while it was up 3.6% y-o-y in dollar terms. Its operating margin stood at 17% while operating profit was down 4.3% y-o-y, at Rs79 crore when compared to the corresponding period last year. Its net profit sustained a much further 22.4% downfall, in rupee terms, to round off the quarter at Rs54.2 crore. Overall  rupee revenue growth was -2.2% and $ was at -1.8%. It consists of pricing improvement of 0.1% and an exchange rate impact of -0.4%.
 

Top five clients reported sequential decline of 6.8% whereas Top 10 clients declined by 8.9%. Revenue from beyond top 10 clients grew 4.8% QoQ (flat in previous quarter).

During the quarter, 19 customers were added, 11 in ENGG and 8 in UT&C divisions. It also opened a Silicon Valley office in Santa Clara, California (USA). Furthermore, a new SEZ facility was inaugurated at Kakinada, Andhra Pradesh. The new development center is Infotech’s seventh in India and currently employs 850 people. The capex for the quarter was Rs36 crore while debtors turnover ratio has mildy improved by three days on a sequential basis.
 

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