Buy iGATE Global Solutions: Edelweiss

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Buy iGATE Global Solutions: Edelweiss

iGATE Solutions has declared their Q3FY07 results which are very much in line with the expectations of Edelweiss research. The broking house has recommended buy rating on the stock.

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iGATE Solutions has declared their Q3FY07 results which are very much in line with the expectations of Edelweiss research. The broking house has recommended buy rating on the stock. 

Edelweiss report on iGATE Solutions

"iGATE's Q3FY07 results were impressive and ahead of our expectations. While the rupee appreciation during the quarter curtailed revenue growth to 4.0% Q-o-Q, the expected improvement in gross and EBITDA margins propelled PAT growth to 57.5% Q-o-Q. Gross margin improved by 190bps owing to improvement in billing rates, increase in the proportion of business from high-margin clients, and improvement in the services mix. Deploying cost control measures, SG&A expenses were leveraged, pushing the EBITDA margin up by 280bps Q-o-Q. As guided earlier, the company expects to meet its guidance of 15% EBITDA margin by Q4FY07E."

i"GATE has now firmly demonstrated a turnaround, which we see lasting through the FY09-10 period. After growing at an anemic pace through FY03-06 period, FY06-08E CAGR of revenue is estimated at 27.5%. The growth in EBITDA margin from FY06 levels of 9.6% to 16.2% estimated in FY08E will drive the EPS CAGR of 141.7%. Despite iGATE's recent stock spurt, we see value at P/E of 26.8x and 12.3x for FY07E and FY08E, respectively. The company's valuation on EV/EBITDA and EV/revenue for
FY08E continues to be attractive at 6.3x and 1.0x, respectively. We see potential for the margin expansion story to continue in FY09E and FY10E as well. We maintain our buy recommendation."

Key highlights

• Revenue stood at INR 2.1 bn and net profit at INR 159.5 mn (INR 104.4 mn last quarter). While revenue was up 4.0% Q-o-Q and 27.6% Y-o-Y, net profit was up 57.5% Q-o-Q, compared to a loss in Q3F06.
• Revenue from IT services was up 4.7% sequentially on the back of 8.9% growth in overall volumes and 10.5% growth in offshore volumes.
• Gross profit stood at INR 658 mn, up 10.7% Q-o-Q. EBITDA stood at INR 266.7 mn compared to our expectations of INR 264.0 mn. perating margins improved by 280bps during the quarter to 12.7%. The ongoing cost rationalisation initiatives, improvement in billing rates, and increase in the proportion of revenues from high-margin clients helped the margins improve.
• Offshore revenue grew by a strong 8.0% Q-o-Q and its contribution to the total revenue further increased to 46.3%.