CRISIL lowers Omnitech Infosolutions` fair value to Rs 132

CRISIL Research's report on Omnitech Infosolutions

Omnitech Infosolutions' (Omnitech's) Q4FY13 results were below CRISIL Research's expectations. Revenues grew by 4.3 percent q-o-q and 8.8 percent y-o-y to Rs 1,435 mn. Standalone revenues (domestic business) increased by 2.2 percent q-o-q to Rs 1,187 mn. Sharp decline in operating profit along with an increase in interest cost owing to delayed payment from customers led to losses at the standalone level. The sharp decline in operating profitability was due to weak product mix and delayed booking of higher-margin business. The uptick in margins and improving asset turnover are key monitorables. For now, we maintain our fundamental grade of 3/5.

EBITDA margin contracted significantly by 1367 bps q-o-q and 1546 bps y-o-y Omnitech's EBITDA margin contracted significantly leading to losses in Q4FY13. Due to a tough operating environment, Omnitech's revenue mix changed. Cost of goods sold as  percent of net sales increased by 1110 bps q-o-q to 61.4 percent because of higher share of the low-margin system integration (SI) business and delay in booking of high-margin revenues. The component of hardware business also increased during the quarter. The company indicated that the business mix is expected to gradually improve in the coming quarters.

Subsidiaries on slow path to recovery
The subsidiaries' revenues grew by 15.5 percent q-o-q and 28 percent y-o-y to Rs 248.4 mn. Loss at the EBITDA level narrowed to Rs 4.3 mn in Q4FY13 from Rs 13.6 mn in Q3FY13. The company indicated that Avensus, its European subsidiary, is performing well and off-shoring of about €1 mn has been achieved. The business won two customers since Q4FY13. However, higher interest cost dented PAT margin. Omnitech's Asian subsidiary is also performing well and could achieve breakeven in Q2FY14. The company indicated that its Asian business has won deals worth $6.5 mn in the past three years.

Debtor days at 123, much higher than industry average of ~70
Omnitech's debtor days have increased from average of 90 days over the past three years to 123 days in FY13. The company attributed the increase to tight liquidity faced by its customers. The company expects this scenario to gradually improve in FY14. Additionally, interest cost jumped by 81 percent in FY13 and the company could borrow more to infuse money in loss-making subsidiaries. The company has to repay about Rs 200 mn in debt in FY14 and we expect this situation to increase the working capital requirements.

Earnings estimates lowered; fair value revised to Rs 132 from Rs 205
We have used the DCF method to value Omnitech. Following a revision in our assumptions, the fair value is lowered to Rs 132 per share. At the current market price of Rs 118, our valuation grade is 4/5.

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