Broking house, Emkay Share and Stock Brokers is bullish on 3i Infotech. It has reiterated buy rating on the stock with a target price of Rs 232.

The Emkay Share and Stock Brokers report on 3i Infotech:

Acquisition of Professional Access

“3i Infotech has acquired 51% stake in US based Professional Access for USD 12 million and would acquire the balance stake in over 2 years. Professional Access specializes in the area of e-commerce for BFSI and retail segment. It has close to 500 employees with offshore development centre in India. It is a profitable company with PAT margin of 10% and annual revenue of USD 24 million.”

“We believe this acquisition would benefit 3i Infotech in following ways:

• Enter and penetrate US market,
• Tap large base of marquee clients such as Citibank, JP Morgan, Goldman Sachs and Duke Energy,
• Access to global delivery centres and
• Increase deal ticket size in the range of USDD 5 million.”

Acquisition of Rhyme Systems

“3i Infotech has acquired UK based asset management software product company, Rhyme Systems. We believe the strategic acquisition of Rhyme Systems would complement the company’s foray into UK’s lucrative BFSI market. Rhyme Systems is a profitable company with revenue of over 15 million pounds (equivalent to USD 28 million) with EBITDA margin of close to 20%. The cost of acquisition is believed to be 1.25x revenue or 6.3x EBITDA.”

“It has 125 employees and 30-35 clients. It has eight of the top eleven UK private wealth asset management companies as its clients. Some of the prestigious clients are Brewin Dolphin, Coutts RBS, Jupiter, M&G, Barclays and LCH Clearnet. Rhyme has two products for the asset management industry, namely, rhymeSIGHT & Quasar and three products for broking industry namely, Altimis, Fiscal and Arrow. These products operate in the operations elements of the asset management process, including portfolio management, investment administration, clearing, settlement, order management and accounting. Rhyme Systems is expected to contribute Rs 500 million for FY07E and Rs 1400 million in FY08E.”

Q2FY07 Results in Line with expectations

“Revenues from operation posted 12.9% sequential growth, in line with our expectation to Rs 1.45 billion. Product revenues posted sequential growth of 11.3%, while services revenues posted higher 14.4% sequential growth. EBITDA margin expanded by 66 bps contributed largely by 250 bps gross margin expansion in products revenues. EBITDA increased by 16.2% from Rs 293 million in Q1FY07 to Rs 341 million in Q2FY07. However due to lower other income and higher minority interest, PAT grew only by 5.5% sequentially to Rs 225 million. Net margins dip 109 bps to 15.5%, which is slightly below our expectation.Basic EPS increased to Rs 3.9 from Rs 3.7 in Q1FY07.”

Revision in guidance

“Post the acquisition of Rhyme Systems, the management has upgraded its annual revenue growth guidance from 25-30% to 45-50%, which translates into revenues in the range of Rs 6.2-6.4 billion (excluding Professional Access acquisitions). Similarly basic EPS guidance is revised from Rs 13-13.5 to Rs 16-17 (excluding Professional Access acquisitions).”

Other Key Highlights

• Order book positions have grown sequentially by 10% to Rs 3.22 billion.
• No. of  >USD 1 million clients have increased from 21 to 25.
• No. of  >USD 5 million clients have increased from 2 to 3.
• Repeat business contributed 83% of the revenues as against 77% in Q1FY07.
• Bagged E-governance project Nemmadi from the state government of Karnataka.
• Bagged IT automation contract from UK based Liverpool Victoria to deploy ‘PREMIA’.

Future Outlook and valuations

“We expect Rhyme’s acquisition to be EPS accretive for 3i Infotech right from Q3FY07 and Professional Access acquisition to be EPS accretive from Q4FY07. With strong growth continuing, we are revising our estimates for FY07E and FY08E. We now expect the company to post CAGR of 60% in revenues and 60% in profits over FY06-08E. We expect FDEPS of Rs 14.3 and Rs 21 for FY07E and FY08E respectively. At CMP of Rs 187, the stock is trading at 13.1x and 8.9x FY07E and FY08E EPS respectively. We reiterate Buy on the stock with a price target of Rs 232.”