Omnitech Infosolutions on firm ground: CRISIL

CRISIL Research has come out with its report on Omnitech Infosolutions. The research firm, expects company’s loss-making subsidiaries to break even in H1FY14, which would improve its consolidated profitability and the growth rate is expected to moderate as Omnitech has started pitching for larger deals (average ticket size of Rs 50 mn) and is competing with larger IT players.

Omnitech Infosolutions Ltd (Omnitech) is an IT services company with a focus on managed services. The company is firmly entrenched in the domestic market (75% of overall revenues), where it has grown at a four-year CAGR of 39% based on niche small ticket size deals and strong client relationships. We expect Omnitech’s loss-making subsidiaries to break even in H1FY14, which would improve its consolidated profitability. We maintain our fundamental grade of 3/5, indicating that its fundamentals are good relative to other listed securities in India.

Retains foothold in the domestic market with high growth rate
The small ticket size segment (~Rs 1 mn) accounts for 55% of Omnitech’s revenues. This segment, characterised by high volume, gives Omnitech better negotiating power and higher margins. Historically, it has recorded 30-40% revenue growth rate and 31% EBITDA margin. Further, strong client relationships have enabled it to clock a renewal rate of 90% in FY12. Going forward, we expect the growth rate to moderate as Omnitech has started pitching for larger deals (average ticket size of Rs 50 mn) and is competing with larger IT players.

Consistently maintained better margins than peers
Omnitech has been able to maintain better margins than its peers as its cost per employee is relatively lower. The company enters into fixed price contracts which do not require it to maintain a dedicated servicing team at the client’s office and, thereby, enable it to manage its work force effectively resulting in lower costs. Also, Omnitech provides infrastructure-based solutions that do not require high skill labour which lowers employee cost further.

Monitorables: Loss-making subsidiaries, better utilisation of disaster recovery assets
A) Omnitech’s Asia Pacific subsidiary and Avensus were loss making in FY12. We expect these subsidiaries to break even in H1FY14, which will help improve consolidated profitability. B) The company’s disaster recovery centres are currently underutilised. It is facing challenges to increase the acceptability of its business continuity products in the market.

Revenues to grow at a two-year CAGR of 14%, EBITDA margin to decline
We expect consolidated revenues to grow at two-year CAGR of 14% to Rs 6,576 mn, driven by growth in domestic and Asia Pacific revenues. EBITDA margin is expected to decline to 24% in FY14 due to increased competition in the domestic market and delayed break-even of subsidiaries. PAT margin is expected to decline to 7.5% in FY14.

Valuations: Current market price has upside
We have used the discounted cash flow (DCF) method to value Omnitech and maintain our fair value of Rs 182 per share. At this fair value, the implied P/E multiples are 7.1x FY13E and 5.5x FY14E earnings. At the current market price of Rs 161, our valuation grade is 4/5.

To read the full report click on the attachment

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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