Sell 3i Infotech; target Rs 15.9: KRChoksey

"CRISIL has downgraded ratings on 3i Infotech’s debt to Junk status because of its inability to refinance maturing debt obligations (especially shorter maturity loans). As per the management, they are in discussions with all its lenders to clear its over-dues and overcome cash flow mismatches, largely by way of converting its short-term loans into loans with longer tenure. Moreover, they are in final stage of discussion with Dena Bank for raising around Rs.100 crore short-term loan. Further, its promoter i.e. ICICI Bank is working on loan syndication for a long-term loan of Rs 300 crore. At current market price level it will be difficult for the company to raise huge amount without substantially diluting equities in the company. Moreover, any dilution at the current level will be EPS dilutive for shareholders of the company."

"The company is witnessing severe liquidity crunch which is impacting its day-to-day operations. As per media reports, there was delay in salary payments in subsidaries. Moreover, there were delays in payment of statutory obligations by the company. We believe that liquidity crunch will make it tougher for the company in current challenging macro environment to win new business or renew existing contracts due to stringent norms observed by the clients (especially in BFSI space) in vendor selection process. Moreover, delay in salary payment will lead to disgruntlement among employees and in-turn will increase attrition rate, going forward. We believe, cost of re-financing for the company will increase drastically, going forward, due to downgrade in its rating to junk status. This in turn will adversely impact its ability to service debt in coming years."

"Taking into account, significant deterioration in financial position of the company and resultant adverse impact on its overall business, we downgrade our recommendation on the stock from “HOLD” to “SELL”. We assign the company multiple of 5x to its FY13E EBITDA (around 20% discount to target multiple assigned to its peer group) and arrive at a target price of Rs 15.9," says KRChoksey research report.

Promoters who have pledged maximum shares in their company

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.