CRISIL revises fair value to Rs 270 for Omnitech

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CRISIL revises fair value to Rs 270 for Omnitech

CRISIL Research has come out with its report on Omnitech Infosolutions. The research firm has maintained the fundamental grade of 3/5 and retained a valuation grade of 5/5 to the company in its August 19, 2011 report.

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CRISIL Research has come out with its report on Omnitech Infosolutions . The research firm has maintained the fundamental grade of 3/5 and retained a valuation grade of 5/5 to the company in its August 19, 2011 report.

While Omnitech Infosolutions Ltd's (Omnitech's) Q1FY12 consolidated revenues exceeded CRISIL Research's expectations, EBITDA and PAT were lower than expected. Revenue growth was driven by strong growth in the domestic business and full-quarter consolidation (compared to ~1.5 months in the previous quarter) of Avensus. Consolidated EBITDA margin declined on account of losses at Avensus, which was a surprise. This was due to postmerger integration expenses and higher revenues from the low-margin system integration business. Consolidated PAT margin was below our expectation primarily due to higher-than-expected interest cost. We have maintained our revenue and EBITDA estimates on the back of expected growth in the domestic business but have lowered our PAT estimates to factor in higher interest cost. We are confident of Omnitech's growth given its focus on the domestic SME segment and so maintain the fundamental grade of 3/5.

Q1FY12 consolidated result analysis
• Omnitech's Q1FY12 consolidated revenues grew by ~16% q-o-q (~58% yo- y) to Rs 1,181 mn. Managed services (infrastructure management and application management services) grew 16% q-o-q and application services (performance management and software testing) grew 29% q-o-q.

• Although standalone EBITDA margin improved 176 bps to 33.4%, consolidated EBITDA margin declined 128 bps q-o-q (557 bps y-o-y) to 26.4% mainly due to EBITDA loss at Avensus. The decline in consolidated EBITDA margin would have been higher but for the improved EBITDA margin of the India business, which was better than our expectations.

• Consolidated PAT improved by ~58% q-o-q (declined 2.4% y-o-y) to Rs 133 mn mainly due to lower tax rate of ~33% in Q1FY12 compared to ~58% in Q4FY11, which included tax adjustments for FY11. However, there was a significant increase in the interest cost on a q-o-q basis. PAT margin improved by 303 bps q-o-q (declined by 701 bps y-o-y) to 11.3%.

• The company reported an EPS of Rs 9.0 (post 6.2% increase in the share capital on conversion of share warrants) compared to Rs 6.1 in Q4FY11 (Rs 9.8 in Q1FY11).

Valuations: Current market price has strong upside
Omnitech's stock has declined by 10% in the past one month and is trading at a PER of 2.8x FY13 and P/BV 0.5x FY13, which is low given an average of 21% RoE over FY12-13. We continue to use the discounted cash flow method to value Omnitech and are revising the fair value to Rs 270 per share, as we have lowered our earnings estimate, from Rs 282 per share earlier (6.6x FY12E EPS and 5.6x FY13E EPS). We retain the valuation grade of 5/5, says CRISIL Research report.

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

© CRISIL Limited . All Rights Reserved. Published under permission from CRISIL"

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