Sunday, January 14, 2018

The Indian IT Sector and 3i Infotech Ltd (Rs.9)
Target: Rs.50-plus
Auditor's Take on its Subsidiaries
#According to a report in Business Today, CY17, was one of the most challenging years for the $154 billion Indian IT sector that employs about 4 million people.  IT exports soared 20-fold in the last 17 years to $108 billion but 2017 saw some difficult times for the industry and exports are projected to grow by a mere 7-8%. But, 3i Infotech Ltd could buck the trend because the Indian banking sector is slowly coming out of the blues and the BFSI sector is set do well as the economy picks up steam.
Headquartered in Mumbai, India, 3i Infotech is a trusted global Information Technology company that has been committed to driving business value across all industry verticals. 3i Infotech provides a comprehensive set of IP based software solutions coupled with a wide range of IT services, uniquely positions the company to address the dynamic requirements of a variety of industry verticals, predominantly Banking, Insurance, Capital Markets, and Asset & Wealth Management (BFSI). The company also provides solutions for other verticals such as Government, Manufacturing, Retail, Distribution, Telecom and Healthcare.
Recently 3i Infotech has been assessed at Level 5 of the Capability Maturity Model Integration (CMMI SE / SW version 1.1) for all of its development centers in Mumbai. In addition the company's Infrastructure Services is ISO 9001:2000 certified. Using its domain knowledge and through continuous investment in technologies, 3i Infotech Limited helps corporations in their businesses through its expertise in enterprise-class software solutions, software services, information security consulting, IT infrastructure and disaster recovery solutions. 
3i Infotech has been reported as one of the top 5 Indian Software Product Companies with a presence across 5 continents and servicing customers in 45 countries.

#While what exactly constitutes digital was still hotly contested, traditional IT services declined and new generation of offerings broadly under the SMAC (social, mobile, analytics and cloud) category grew. 3i Infotech’s has a cloud based offering known as ORION ERP which is tailor made to help asset management companies to integrate their businesses.

#Unlike some of the alarmist headlines, Indian IT was still a net hirer in 2017. The industry added about 1.7 lakh jobs among IT-BPM companies.  3i Infotech has envisioned major growth plans for itself, in the backdrop of strong tailwinds experienced over six successive quarters through the last two years. With a revenue of over Rs.1000 crores in the last 4 years, the Company has added 139 new customers in FY 17, growing its customer portfolio to more than 1000 customers across 50 countries in 4 continents. 

#When TCS recently bagged a $2.25 billion contract (albeit spread over 8 years), the average size of
contracts shrunk. This meant Indian IT companies, specially the large players, need to be more nimble to chase more number of contracts whose average ticket sizes would be considerably lesser. In comparison mid-sized companies like 3i Infotech Ltd is expected to do  better because of lower overheads and superior integration of its overseas operations.

#With US accounting for about 60 per cent of Indian IT export revenues, the new Trump administration moves to cut down on H1-B visas and insisting that locals be employed. This development coupled with Brexit meant Indian IT had to face newer set of challenges. Having perfected their offshore low cost destination centric delivery model, they are being forced to hire in high cost, near shore markets. This is likely to have an impact on their margins and competitiveness. However, the businesses of 3i Infotech Ltd is spread across 4-continents including Africa and Gulf. The Petro-dollar economies are set to do well in future, as the crude oil prices have started to spike  up in the international market. 

#Three of India's largest IT companies - TCS, Infosys and HCL - saw leadership changes at the very top in the last 12-15 months. While some of the transitions like in the case of TCS was smooth, it was turbulent in others like Infosys. As the industry faces newer set of challenges, it is clear that stable leadership with a clear vision and a will to execute would be required going forward. 
In contrast 3i Infotech Ltd is going great under the leadership of Padmanabhan Iyer, MD & Global CEO. The Company reported a net profit of Rs.100.65 crores in FY 2017, with an improved EBITDA over the past 5 years, while achieving an order-book balance of Rs.572 crores as on March 31, 2017. The cash flow from operations has been positive and the Company’s net worth as on March 31, 2017 was Rs.370.09 crores. The Company continues to be profitable and has reported a net profit in H1-FY2018 and in Q3FY18.

#Over the past couple of years, Indian IT has started investing in platforms and products; apart from stepping up of investment in innovation.  Inspite of the several challenges Indian IT faces, today it has the resources, industry and domain expertise to continue to remain highly profitable and a key global player with an unmatched talent pool. 
Speaking on this fresh phase of growth in 3i Infotech, and positioning it as a future ready IT enterprise of 2020, Padmanabhan Iyer, Managing Director & Global CEO, 3i Infotech said, “3i Infotech’s core strength lies in strategic engagement with customers offering comprehensive IT solutions, made effective by deep domain expertise. Digital transformation is the base of the Company’s end-to-end solution stack and consulting framework, comprising of IPR based solutions and IT Services. With the impetus to expand the impact of our product portfolio, we are focusing on disruptive technologies, such as - IoT, Blockchain, SMAC, Robotics, AI, Machine Learning, Telematics & Cybersecurity to facilitate expansion of market reach of our customers. The organization, driven by over 4800 talented technology specialists across products and services group, is also geared up culturally and operationally to collaborate and offer composite next generation solutions to its customers.” 

#After strong numbers on Consolidated basis, in Standalone basis too the figures are encouraging -- the net loss of 3i Infotech Ltd has come down from Rs.131.84 crore in Q2FY18 to mere Rs.2.53 crore in Q3FY18 -- the figures cannot be compared on Y-o-Y basis because of the twin shocks of demonetization and implementation of the GST. Hence, I have taken the sequential figures. Moreover, according to the management commentary, in Q3FY18, 3i Infotech Ltd has allotted 1,064,298 equity shares at a price of Rs.16.5 per share aggregating to Rs.175.61 lakhs against conversion of FCCBs. The stock is likely to cross Rs.50 in a very short time. 
I have seen some boarders of MMB (that internet BROTHEL sponsored by Money Control), speaking about fair valuation of Rs.16-18 for the share of 3i Infotech Ltd, but in share market there is nothing like that in strict sense of the term, especially in a BULL MARKET -- or else the shares like GVK Power and Infrastructure Ltd, with humongous debt and scant visibility of future earnings would not be trading at Rs.256 (on Rs.10, face value); only because a fund manager has given a buy on it. I have nothing against the fund manager who is a very good friend of mine --- irrational exuberance is a part of the stock market architecture and a scrip would continue to rise as long as the investors pour money in the same. There is no hide and seek -- a naked fact is also a fact. 
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