Sep 13, 2013
CRISIL Research has come out with its report on Infinite Computer Solutions. The research firm has maintained the valuation grade of 4/5 and fundamental grade of 3/5 to the company in its report dated September 12, 2013.
Infinite Computer Solutions (India) Ltd’s (Infinite’s) Q1FY14 results were in line with CRISIL Research’s expectations. In dollar terms, consolidated revenues increased by 8.3% q-o-q to $72 mn and in rupee terms revenues increased by 11.7% q-o-q to Rs 4,024 mn. However, EBITDA margin fell by 273 bps q-o-q due to higher employee costs and PAT declined by 17.6% q-o-q to Rs 246 mn. Infinite added seven clients in Q1FY14, taking the total client count to 68. The company’s flagship messaging product, Rich Communication Suite (RCS), launched in Q4FY13, is under trials and is expected to be commercially launched by 2013- end. We maintain the fundamental grade of 3/5.
Revenues grew by 8.3% (in dollar terms) due to increase in blended billing rates- Infinite’s blended billing rates have increased by 4% q-o-q, indicating a volume growth of 4.3% in Q1FY14. Blended billing rates grew q-o-q as onsite billed resources increased by 85 and offshore billing resources decreased by 144. The offshore billing rate remained flat at $20 per hour while the onsite billing rate increased from $63 per hour to $64 per hour q-o-q.
EBITDA margin contracted by 273 bps q-o-q due to higher employee costs- Infinite’s margin contraction can be attributed to the 363 bps q-o-q increase in employee costs (as a % of sales). As a proportion of total billed resources, onsite billed resources increased from 36.2% to 38.7% q-o-q putting pressure on employee expenses. Additionally, Infinite plans to spend $12 mn in FY14 on building its sales team and products & platforms; to that extent Infinite expensed ~$3 mn in Q1FY14 which further affected its EBITDA margin.
Increase in client concentration and vendor rationalisation are concerns- Revenues from Infinite’s top client grew 19.7% q-o-q to $36.3 mn and accounted for 50.4% of total revenues compared to 45.6% in Q4FY13. High dependence on a single client is a key business risk as IT vendor consolidation from the client’s side can have a significant impact on revenues. One of Infinite’s top five clients has planned a vendor consolidation exercise due to which Infinite may lose project level association with the client. Though this may have short term impact, Infinite expects to sign an enterprise level deal that would benefit it over long term.
Higher employee costs to offset gains from rupee depreciation- We have increased Infinite’s revenue estimates following a downward revision in the average Rs-$ rate. We have revised our average rupee estimates for FY14 and FY15 to Rs 60/$ and Rs 58/$ from our earlier estimates of Rs 55/$ and Rs 53.5/$ respectively. Consequently, we have increased our FY14 and FY15 revenue estimates by 9.1% and 8.4% respectively. However, we maintain our EBITDA margin estimates as we expect higher employee costs and vendor consolidation exercise to offset gains from rupee depreciation.
Fair value maintained at Rs 140 per share. Our discounted cash flow-based fair value estimate for Infinite has been maintained at Rs 140 per share after incorporating effects from Rs depreciation and higher cost of equity. At the current market price of Rs 115, the valuation grade is 4/5.
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