StockMarket Update on Infotech Enterprises for 1QFY2012 with a Neutral recommendation.
For 1QFY2012, Infotech Enterprises (Infotech) reported good set of results with volume growth of 4.4% and 6.3% qoq in the network and content engineering (NCE) and engineering manufacturing and industrial products (ENGG) verticals, respectively. To control staff costs and rationalise the employee pyramid, the company plans to hire 1,300 freshers in FY2012, out of which ~270 were hired in 1QFY2012 and the remaining are expected to join in 2QFY2012. We expect Infotech to post a 21.5% CAGR in USD revenue over FY2011–13E. Valuing the company at 9x FY2013E EPS of `16.3, we recommend a Neutral rating.
Quarterly highlights: For 1QFY2012, Infotech reported revenue of US$77.5mn, up 7.8% qoq, on the back of 5.6% qoq volume growth. The company witnessed price increase of 0.1% qoq in this quarter. In rupee terms, revenue came in at `346.7cr, up 6.4% qoq. EBITDA and EBIT margin declined by 180bp and 136bp qoq to 12.5% and 9.2%, respectively, due to wage hikes given from April 1, 2011 (12% for offshore employees and 3–4% for onsite employees).
Outlook and valuation: Management has now guided for revenue growth of 23–30% for FY2012, and it expects to maintain the revenue growth rate of 5–7% CQGR. The company plans to hire 2,600 employees in FY2012 with ~1,300 freshers. Also, management expects the EBITDA margin exit rate to be at 16%. Management has been time and again missing on its guidance by a wide margin in terms of revenue growth as well as profitability metrics. Also, growth in NCE is primarily due to contribution from Wellsco. We expect margins to bottom out in FY2012 at 14.3% and rebound to 16.1% only in FY2013 as on the back of strong fresher additions, utilisation will not stand as a margin lever. Hence, with no near-term triggers, we recommend Neutral on the stock.
