Sell 3i Infotech; target of Rs 16: Arihant capital markets

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Sell 3i Infotech; target of Rs 16: Arihant capital markets

Arihant capital markets is bearish on 3i Infotech and has recommended sell rating on the stock with a target of Rs 16 in its February 1, 2012 research report.

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Arihant capital markets is bearish on 3i Infotech and has recommended sell rating on the stock with a target of Rs 16 in its February 1, 2012 research report.

"3i Infotech reported Q3FY12 result which was a major disappointment on all counts. Its topline was down by 29.7% QoQ at Rs.350.2cr. Both its division namely, IT solutions and Transaction services saw sharp sequential de-growth of 29.4% and 33.5% in Q3FY12. For the quarter, it reported a net loss of Rs.137.5cr compared to a net profit of Rs.25.2cr in Q2FY12. The company's interest charges increased by more than 50% while depreciation almost doubled on a sequential basis during the quarter and was one of the main reason that resulted in a negative bottomline."

"The company has approached certain leasing companies to reassess the existing leases to ones now bearing the characteristics of finance leases, in order to enable the Group's continued utility of the assets covered. Accordingly, these leases are treated as finance leases effective from 1st October, 2011. Consequently, the assets are capitalised at their respective fair values so assessed as at 1st October, 2011 aggregating to Rs.207.26cr and corresponding liability recognised. As a result, the depreciation for the quarter and for the nine months' period ended 31st Dec., 2011 stands increased by Rs.32.4cr, the interest and financial charges stands increased by Rs.4.1cr and the hire charges is lower by that extent. The Group is also exploring possibilities of bringing the above said finance lease liability at par with the terms as proposed in the CDR."

"The company saw a sharp dip in both its division's gross margins. Its IT Solutions segment saw gross margin nose dive to 28.3% from 42.7% in the previous quarter. The Transaction service division also saw gross margin dip sequentially to 23.6% from 28.3%. We believe lack of volume as well as discount given by the company must have resulted in the sharp decline. A sharp increase in interest, depreciation and miscellaneous expenses resulted in the company reporting a negative PBT of Rs.113.5cr vis-à-vis Rs.55.4cr in Q2FY12. Inspite of a negative PBT, the company's tax outflow was higher at Rs.24.3cr v/s Rs.3.5cr in Q2FY12."

"During the quarter, the company faced severe liquidity challenges due to significant dependence on short-term financing to match its short-term loan maturities. What compounded matters worse for the company was the downgrade of the company's debt by Crisil to 'D' (Junk status) from 'A minus' which almost totally dried up all the channels for financial assistance. As a result of all these problems, the parent company decided to approach Corporate Debt Restructuring or CDR to recast its debt obligations. In the CDR application, it has, interalia, requested for a moratorium on its interest and principal payments and conversion of a portion of interest/ principal dues into equity. It thus can be anticipated that if the CDR is approved, it will alter the equity share capital, debt composition and cash flows of the parent company."

"We believe that the continuous engagement of the management's bandwidth with debt-related issues is making it difficult for them to concentrate on their core business whose bad effects have started to show on the company's growth. Further taking into account a challenging macro environment, we believe the future currently looks very bleak for 3i Infotech. We therefore reduce our estimate and target price to Rs.16 per share from Rs.30 earlier and downgrade it to 'SELL' from 'ACCUMULATE' earlier," says Arihant capital markets research report. 

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