Angel Broking neutral on 3i Infotech

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Angel Broking neutral on 3i Infotech

Angel Broking has maintained neutral rating on 3i Infotech, in its May 18, 2011 research report.

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Angel Broking has maintained neutral rating on 3i Infotech , in its May 18, 2011 research report.

"3i Infotech Financial Software, Inc., a subsidiary of 3i Infotech Ltd., has signed an agreement to sell its US-based global billing and payments unit consisting of Regulus Group, J&B Software and JP Morgan BPO to an affiliate of Cerberus Capital Management, L.P. for US$137mn (~`614cr) in an all-cash deal. The transaction is expected to close within the next 60 days, subject to customary closing conditions and any regulatory approvals."

"3i Infotech acquired Regulus Group in 2008 for a consideration of US$80mn with an additional payment of up to US$20mn based on an earn outs linked to certain performance parameters. This deal was valued at 0.7x Regulus's CY2007 sales (US$148mn). Though, 3i Infotech has not paid US$20mn linked to earn outs. J&B Software was acquired by 3i Infotech in 2007 for US$25.25mn; this deal was valued at 1x J&B's CY2006 sales (US$25mn). The deal with JP Morgan was valued at 0.25x sales and 3i Infotech paid US$10mn as the cost for this deal. Thus, for all the three firms, 3i Infotech in total paid US$115mn. 3i Infotech also incurred restructuring costs of ~US$33mn for these acquired companies. However, these companies generated cash of US$45mn since their acquisitions. Thus, total effective cost for 3i Infotech incurred on these companies stands at ~US$103mn. 3i Infotech divested these companies for a consideration of US$137mn, of which US$7mn is the transaction fees, which the company has to bear."

"The company intends to use the proceedings from this deal to reduce the debt position in its books and strengthen its balance sheet. Out of these proceeds worth US$130mn, US$66mn will be used to repay debt related to acquisition of Regulus. The firms, divested, are in the transaction processing business, majorly in the US, which is witnessing heavy ramp down since 1QFY2011 mainly due to a decline in volumes of cheques and bills issued. For the company, revenue from the transaction services business declined by 10.2% yoy to `822.3cr in FY2011 from `906cr in FY2010. Gross margin of this segment also declined by 170bp yoy to 30% in FY2011. We believe disinvestment was the only way out for the company, considering the deteriorating business environment for these entities, however the IRR obtained through this transaction was poor at ~8%."

"The IT solution business grew by 14% yoy in FY2011. We expect this business to continue its growth momentum with revenue CAGR of 11% over FY2011-13E. However, with the transaction services business getting divested (~30% to revenue), we expect the company's revenue for FY2012 to drop by 14.3% in FY2012 and record marginal growth of 2.7% in FY2013. On the operating front, with the impending wage hikes of 15% offshore and 3% onsite for its ~11,700 employees, margin movement due to improved business mix is expected to be only 100bp in FY2012; margin will further increase to 21.5% in FY2013 (from the current 19.6%). Since, the EPS for the company has been a very volatile parameter considering the time-and-again equity dilutions as well as disinvestments; we value the company on EV/EBITDA basis. At the CMP of Rs 46, the stock is trading at its fair valuations and hence we recommend a NEUTRAL rating on the stock," says Angel Broking research report.

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To read the full report click on the attachment