3I INFOTECH

3I INFOTECH

3i-Infotech (3i) is a mid-size IT company focusing mainly on the banking, financial services and insurance (BFSI) vertical. The company was incorporated in 1993 as a back-office IT services provider to the ICICI Group and has since evolved  into a technology company providing IT services and solutions . 3i earns revenues from products, IT services and BPO operations.. During the 5-year period of FY05 to FY10, 3i grew its sales and operating profits at average annual rates of 53% and 59% respectively, though duly helped by several acquisitions.

Despite being a mid-sized company, 3i-Infotech (3i) has a scalable business model given that the company has a fair share of revenues coming from both the IT services and IT products segments. During FY10, the mix stood at around 65:35 between services and products .  3i enjoys a lot of operational leverage, which means that higher revenues leads to even higher earnings.

BALANCE SHEET RESTRUCTURING:

In order to fund its several acquisitions of the past 2 years, and especially the acquisition of Regulus in early FY09, 3i took over large amounts of debt on its books. Also, large parts of this debt were funds that the company had raised through FCCBs (foreign currency convertible bonds) in FY08. While the company bought back and cancelled FCCB loan worth Rs 824 m (at a discount of 52%) in 1QFY10, the outstanding amount still stands at around 24% of outstanding debt.

3i has currently stopped its inorganic foray and is now focusing on bringing its debt levels lower.

It aims to achieve a 1:1 debt to equity ratio by the end of FY11 and seems to be on its way to do so after two successful rounds of QIPs, and subsequent debt repayment.

CLEANING UP OPERATIONS IN FY 10

3i Infotech's net profits fell by 88% YoY during FY10. This was due to a huge loss of Rs 260 crores  on discontinuing certain government operations. 3i exited 'Master Service Agreement'  that it signed with several Indian state governments.  The management’s rationale in exiting this business was that it had become unviable on account of lack of data as well as unfavorable regulatory environment in terms of banking and insurance distribution norms. Plus there  were constant penalties and hassles with the government. This resulted in a one-time loss of Rs 260 crores which affected  3i’s net profits  for FY10 in an adverse manner. 

FOR FY 10 THE COMPANY CLOCKED REVENUES OF 2449 CRORES AND NET PROFITS OF 33 CRORES.  IT RECORDED FULLY DILUTED EPS OF AROUND 1.7.

BACK ON TRACK

FOR Q1 FY 11, SALES STOOD AT 637 CRORES AND NET PROFITS AT 61 CRORES. LOOKING AT THESE RESULTS THINGS SEEM TO BE FALLING IN PLACE ONCE AGAIN. 3I IS EXPECTED TO POST EPS OF AROUND 11-13 FOR FY 11.

LOOKING AT THE ABOVE FACTORS, 3I SEEMS TO BE A GOOD BUY AT CURRENT LEVELS OF 61-62

ANOTHER POTENTIAL TRIGGER IS STAKE SALE TO SOME INTERESTED SUITORS BY ICICI GROUP WHICH COULD BE AT A HIGHER PRICE.

LOOKING AT THE APATHY SURROUNDING THE STOCK, THIS COULD MAKE A GOOD CONTRARION BET AT CURRENT LEVELS WITH LOW LEVEL OF RISK.