The Journey of 3i Infotech began in 1997 as a back office processing unit of the erstwhile ICICI. The company was renamed in 1999 as ICICI Infotech with the outlook of servicing companies beyond the ICICI Group.
The support of its erstwhile parent group has helped the company immensely to progress and become a solutions provider today. 3i Infotech offers a mixed bag of products and services in areas like banking, insurance, capital markets, e-governance, mutual funds, application development & maintenance, business process outsourcing and managed services.
Over the years, 3i Infotech has grown from a Rs 42 crore and a strength of 200-employee to a Rs 671 crore company in FY07. Its employee strength has gone over 4,000 by FY07. 3i Infotech serves clients primarily in the BFSI (banking, financial services and insurance) segments spread across 50 countries which covers five continents.
Investment Rationale
Fruitful Acquisition-driven Strategy
3i Infotech has evolved into a niche player of products and services for the BFSI segment by adopting the acquisition-driven strategy. Since 2000-01, the company has made over 20 acquisitions and built its entire product portfolio through them. The company is now in the process of ramping up its geographical reach as well. 3i Infotech's acquisition strategy has seen it post a 51 per cent CAGR in revenues over FY05-07.
Services Supporting Products
At present, 3i Infotech derives revenues in the ratio of 1:1 between products and services. This is one of the biggest differentiator that is working in the company's favour as compared to its competitors. The company has a large bouquet of offerings, which enables it to garner a larger wallet share of customers. Furthermore, 3i Infotech has a huge opportunity to cross-sell its products and services across customers and geographies. Its entire suite of products and services are currently available in Asia, and need to be leveraged across other geographies as well. This would set the stage for the next phase of growth for the company.
Healthy Growth in Order Book
The company's products order book has risen at a CQGR (cumulative quarterly growth rate) of 17 per cent between Q1FY07 and Q2F08, while services increased at a CQGR of 22 per cent during the same period. A CAGR of 54.3 per cent in revenues is expected over the next two years. 3i Infotech's products have demonstrated leadership in various geographies, which would translate into referrals that would give a fillip to its business.
Evolving Back-ended Revenue Model
3i Infotech's services business, which derives transaction- and device-based revenues, is set to grow multi-fold in the coming years. This would create a back-ended earnings model where profit growth would outpace revenue growth. For instance, incremental revenue of Rs 1 crore in FY09E would entail Rs 0.7 crore flowing directly to the company's bottom line. This is because incremental costs need not move in line with incremental revenues.
Huge Opportunities in BPO
At present, 14 per cent of 3i Infotech's revenues are derived from its BPO services. There are immense opportunities in this space for the company to tap in. 3i Infotech takes up entire processes from banks on its platform and provides services on a transaction-based model. While bringing the process onto its platform ensures a high degree of automation, transaction-based revenues create a back-ended earnings model.
Bright Future for Managed Services
The company's managed services business is yet to achieve critical mass. The current growth in this horizontal is driven by existing clients. The company has historically initiated a major roll out across clients and geographies only once. But since the horizontal has achieved high levels of process and skill maturity, it is expected to grow at a CAGR of 40 per cent over the next two years.
Risks & Concerns
The risks and concerns associated with 3i Infotech encompass:
A significant scale-up or scale-down by select customers could pose a risk.
The company has had no integration issues with acquisitions so far. However, emergence of any such issues going forward would pose a risk to its valuations.
The company has a history of raising FCCBs from time to time. Continuous dilution through FCCBs could cap the upsides on the stock. The company has outstanding FCCBs worth Dollar 120 million and Euro 30 million. The conversion price for the same is in the range of Rs 115-Rs 166, with maturity latest by July 2012. Given the recent slump in the stock price, this could act as a drag on the future profitability of the company.
Valuations
3i Infotech's management has raised its full year revenue target to Rs 2,200-2,300 crore from the earlier estimate of Rs 1,600-1,700 crore. This includes Rs 500 crore from the Regulus acquisition. On the EPS front, the management has increased its full year guidance from Rs 13-13.5 to Rs 14-14.5. The company has an outstanding order book worth Rs 1,372 crore executable over the next 12 months. Although the recent stock underperformance has made valuations fairly attractive, the high debt exposure of the company (including FCCBs) would cap the upside. Hence, at the moment, its best to hold the stock with an eye on the future.
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Source: ICICI Direct
This article was originally published on January 06, 2009.
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