2QFY2013 Result Update | IT

October 17, 2012

Infotech Enterprises
Performance Highlights
Y/E March (` cr) Net sales EBITDA EBITDA margin (%) Net profit 2QFY13 477 89 18.7 50 1QFY13 456 85 18.7 67 % chg (qoq) 4.5 4.7 2bp (24.4) 2QFY12 373 59 15.7 31 % chg (yoy) 28.1 52.2 297bp 63.7

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 2,182 (470) 0.5 207/100 49,718 5 18,611 5,660 INFE.BO INFTC@IN

`195 -

Source: Company, Angel Research

For 2QFY2013, Infotech Enterprises (Infotech) reported a decent set of results, with an overall volume growth of 3.9% qoq. In the utilities, telecom and content (UT&C) vertical, utilities witnessed a volume growth of 8.2% qoq while content volumes grew by 5.2% qoq. In the engineering manufacturing and industrial products (ENGG) vertical, the aerospace segment witnessed a volume growth of 1.5% qoq and home, transportation and hi-tech (HTH) reported a volume growth of 2.8% qoq. The company added 17 new clients during the quarter. We maintain our Neutral view on the stock. Quarterly highlights: For 2QFY2013, Infotech reported revenue of US$87mn, up 3.5% qoq, on the back of 3.9% qoq volume growth and 0.3% qoq pricing decline. In INR terms, the revenue came in at `477cr, up 4.5% qoq. The companys EBITDA margin remained almost flat qoq at 18.7%. The operating margin of the company faced headwinds from the net addition of 301 employees and 400bp onsite effort shift which however was offset by tailwinds from increase in utilization level and INR depreciation against USD. Outlook and valuation: The management has cut its FY2013 USD revenue growth guidance to less than 11% from 11-14% earlier in constant currency terms. To achieve this, the company requires an ask rate of 5% in 3Q and 4QFY2013 which looks demanding and a bit stretched. The key reasons for the cut in guidance were that the company is witnessing delays in deal ramp ups and clients are holding back IT budgets. We expect an USD revenue growth of 9.6% yoy for FY2013. Over FY2012-14E, we expect the company to post a USD and INR revenue CAGR of 11.0% and 14.4%, respectively. We expect the EBITDA and PAT CAGR to be at 14.0% and 17.2%, respectively, over FY2012-14E. At the current market price of `195, the stock is trading at 9.7x FY2014E EPS. We value the company at 10x FY2014E EPS of `20.2, which gives us a target price of `202, and maintain our Neutral view on the stock. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 22.8 9.2 23.3 44.7

Abs. (%) Sensex Infotech

3m 8.8 8.5

1yr 9.3 65.5

3yr 7.4 60.7

FY2010 953 7.1 171 85.0 21.9 15.4 12.7 2.4 18.9 18.1 1.8 8.3

FY2011 1,188 24.6 140 (18.3) 15.2 12.6 15.5 2.1 13.4 12.6 1.4 9.5

FY2012E 1,553 30.7 163 16.7 17.4 14.5 13.4 1.8 13.6 18.5 1.1 6.1

FY2013E 1,886 21.4 207 27.1 17.9 18.7 10.4 1.6 14.9 20.1 0.8 4.4

FY2014E 2,032 7.7 224 8.1 17.3 20.2 9.7 1.4 14.0 18.0 0.7 3.8

Ankita Somani
+91 22 3935 7800 Ext: 6819 ankita.somani@angelbroking.com

Please refer to important disclosures at the end of this report

Infotech Enterprises | 2QFY2013 Result Update

Exhibit 1: 2QFY2013 Financial performance

Y/E March (` cr) Total revenue Salary cost Gross profit Gross margin (%) Travel expenditure Purchase of products Other operating costs EBITDA EBITDA margin (%) Dep. and amortization EBIT EBIT margin (%) Financial expenses Other income Profit before tax Exceptional item 2QFY13 477 279 198 41.6 25 22 63 89 18.7 14 75 15.7 0 (4) 70 23 47 3 50 10.6 4.5 1QFY13 456 276 180 39.5 25 15 55 85 18.7 13 72 15.7 0 18 90 2 29 59 6 67 14.0 5.8 (24.4) (339)bp (22.2) (22.6) (19.2) (51.5) (21.9) % chg (qoq) 4.5 0.9 10.1 208bp (0.4) 44.2 13.6 4.7 2bp 7.7 4.1 (6)bp 2QFY12 373 231 142 38.1 22 11 50 59 15.7 12 46 12.4 0 (1) 44 15 29 2 0 31 8.3 2.8 63.7 236bp 63.7 47.4 62.8 72.8 % chg (yoy) 28.1 21.0 39.6 343bp 10.7 100.8 24.2 52.2 297bp 17.5 61.5 324bp (6.1) 213.0 57.5 1HFY13 934 555 378 40.5 49 37 118 174 18.7 28 146 15.7 1 14 160 2 52 106 9 117 12.3 10.3 1HFY12 719 453 267 37.1 47 22 96 102 14.2 24 78 10.9 1 5 82 28 54 3 0 58 8.0 5.2 (100.0) 102.9 438bp 100.1 85.1 94.4 % chg (yoy) 29.8 22.6 41.9 347bp 4.8 72.0 22.5 70.8 449bp 16.9 87.3 482bp (30.1) 171.7 93.4

Tax
PAT

Share of profits of associates

Minority interest

Adj. PAT
PAT margin (%)

EPS(`)
Source: Company, Angel Research

Exhibit 2: 2QFY2013 Actual vs Angel estimates

(` cr) Net revenue EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 477 18.7 50

Estimate 479 18.5 69

% Var (0.4) 19bp (26.7)

In-line operating performance

For 2QFY2013, Infotech reported revenue of US$87.2mn, up 3.5% qoq, on the back of 3.9% qoq volume growth and 0.3% reduction in price realization. In INR terms, the revenue came in at `477cr, up 4.5% qoq, with 0.9% (qoq) of it coming on the back of INR depreciation.

October 17, 2012

Infotech Enterprises | 2QFY2013 Result Update

Exhibit 3: Revenue and volume growth trend (qoq)

88 87 86 85 5.0 84.2 83.0 2.1 1.6 0.4 2QFY12 3QFY12 4QFY12 qoq growth (%) 1QFY13 2QFY13 2.0 2 1.4 1 0 Volume growth qoq (%) 5.0 87.2 3.9 2.3 81.4 81.7 3.5 6 5 4

(US $mn)

84 83 82 81 80 79 78 Revenue (USD terms)

Source: Company, Angel Research

UT&C: During the quarter, the UT&C verticals USD revenue increased by 6.1% qoq to US$28.3mn. In INR terms, the revenue came in at `155cr, up 7.3% qoq. Utilities witnessed a revenue growth of 8.3% qoq, on the back of an 8.2% qoq volume growth, 1.0% price reduction and 1.1% gain from favorable currency movement. All geographies posted a sequential growth in utilities with Asia Pacific (APAC) posting the highest growth. The company added four new clients in utilities during the quarter. Content witnessed a revenue growth of 4.5% qoq, on the back of 3.9% qoq volume growth, 0.3% price reduction and 0.9% gain from favorable currency movement. The company added four new clients in this business segment and saw continued ramp up in its geospatial business.

Exhibit 4: UT&C vertical Revenue growth trend

30 28 26 5.4 25.4 1.6 5.1 26.7 25.1 25.0 28.3 6.1 7 6 5 4 3 2 1 (0.3) 2QFY12 3QFY12 4QFY12 1QFY13 qoq growth (%) 2QFY13 0 (1)

(US $mn)

22 20 18 16

Revenue (USD terms)

Source: Company, Angel Research

ENGG: The ENGG verticals revenue grew by 3.5% qoq to US$59.7mn. In INR terms, the revenue came in at `323cr, up 3.4% qoq. In this vertical, the aerospace business segment witnessed a revenue growth of 1.4% qoq, on the back of volume growth of 1.5% and exchange rate impact of -0.1% qoq. The deal pipeline in this segment continues to be robust. The company added two new clients in the aerospace business segment. The revenues from the HTH business segment grew by 5.1% qoq, on the back of a 2.8% volume growth, 0.3% price reduction and 2.6% gain from favorable exchange rate. Infotech added two new clients in this business segment during the quarter.
October 17, 2012

(%)

24

(%)

Infotech Enterprises | 2QFY2013 Result Update

Exhibit 5: ENGG vertical Revenue growth trend

65 4.9 60 59.7 3.5 6 5 57.6 57.7 4 3 50 45 0.7 40 2QFY12 3QFY12 4QFY12 Revenue (USD terms)
Source: Company, Angel Research

(US $mn)

1.6

2 1 0.1 1QFY13 qoq growth (%) 2QFY13 0

Hiring momentum continues

During 2QFY2013, Infotech added 295 net employees, taking its total employee base to 10,093. The ENGG and UT&C verticals witnessed an addition of 191 and 88 net employees respectively, taking their total employee base to 4,810 and 4,595, respectively. The companys attrition rate (annualized basis) declined to 18.1% in 2QFY2013 from 19.0% in 1QFY2013.

Exhibit 6: Trend in hiring

2QFY12 Net additions UT&C ENGG Support Total employees UT&C ENGG Support
Source: Company, Angel Research

3QFY12 179 (95) 4,131 4,415 651

4QFY12 54 93 (10) 4,185 4,508 641

1QFY13 322 111 31 4,507 4,619 672

2QFY13 88 191 16 4,595 4,810 688

259 (15) (6) 3,952 4,510 651

The utilization level for the UT&C vertical increased to 85% in 2QFY2013 from 84% in 1QFY2013 because of strong volume growth. The ENGG verticals utilization level also improved to 73% in 2QFY2013 from 71% in 1QFY2013.

October 17, 2012

(%)

55

56.3

56.7

Infotech Enterprises | 2QFY2013 Result Update

Exhibit 7: Trend in utilization (Segment wise)

95 90 85 90

88 82 84 85

(%)

80 75 70 65 2QFY12 3QFY12 UT&C 4QFY12 1QFY13 ENGG 2QFY13 73 72 73 71 73

Source: Company, Angel Research

Margins stable
For 2QFY2013, the EBITDA and EBIT margins of Infotech remained almost flat qoq at 18.7% and 15.7%, respectively. The companys operating margin faced headwinds from a strong net addition of 301 employees and 400bp onsite effort shift which although was offset by tailwinds from increase in utilization level and INR depreciation against the USD. Going ahead, with a healthy H1 margin, the management has revised its FY2013 margin outlook upwards to 18.7%. The management sounded quite confident of achieving the targeted margin of 18.7% on 1) anticipation of stronger growth in H2 over H1, 2) greater offshore shift in 2HFY2012 (as the contracts reach steady state), 3) right sizing of the employee pyramid and 4) improving utilization rate by a couple of percentage points.

Exhibit 8: Trend in margins

25 20.6 20 15.7 19.8 18.7 18.7

(%)

15 12.4

17.1

17.1

15.7

15.7

10

5 2QFY12 3QFY12 EBITDA margin

Source: Company, Angel Research

4QFY12

1QFY13 EBIT margin

2QFY13

October 17, 2012

Infotech Enterprises | 2QFY2013 Result Update

Outlook and valuation

The management has cut its FY2013 USD revenue growth guidance to less than 11% from 11-14% earlier in constant currency terms. To achieve this, the company requires an ask rate of 5% in 3Q and 4QFY2013 which looks demanding and a bit stretched. The key reasons for the cut in guidance were that that the company is witnessing delays in deal ramp ups and clients are holding back IT budgets. Infotech witnessed a 2.5% CQGR in its USD revenue over 1QFY20122QFY2013. The company is on the right track in terms of making investments to strengthen its product portfolio and is taking initiatives to improve its financial metrics. The company is now focusing on strengthening its leadership along with improving its systems and processes and making them scalable. Along with this, Infotech is trying to expand its footprint in other addressable markets with existing clients. We expect an USD revenue growth of 9.6% yoy for FY2013. Over FY2012-14E, we expect the company to post a USD and INR revenue CAGR of 11.0% and 14.4%, respectively. Infotech previously had been consistently underperforming on the operating margin front. The company is now focusing on addressing the same by levers such as improving the utilization level, rationalizing selling, general and administrative (SG&A) expenses and shifting more work offshore. The companys operating margin has now improved considerably in 2QFY2013 to 18.7% from 15.2% in FY2011 using the above mentioned levers. This year, the management expects operating margins to remain stable or increase further from now on, by using levers such as improving utilization level, rationalizing SG&A expenses and shifting more work offshore. We expect EBITDA and PAT CAGR to be at 14.0% and 17.2%, respectively, over FY2012-14E. At the current market price of `195, the stock is currently trading at 9.7x FY2014E EPS. We value the company at 10x FY2014E EPS of `20.2, which gives us a target price of `202; we maintain our Neutral view on the stock.

Exhibit 9: Key assumptions

FY2013 Revenue growth (USD) Revenue growth (INR) EBITDA margin (%) EBIT margin (%) Tax rate (%) PAT growth (%)
Source: Company, Angel Research

FY2014 12.4 7.7 17.3 14.2 34.0 8.1

9.6 21.4 17.9 14.8 34.0 27.1

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Infotech Enterprises | 2QFY2013 Result Update

Exhibit 10: Change in estimates

FY2013E Parameter (` cr) Net revenue EBITDA PBT Tax PAT Earlier estimates 1,895 341 289 98 201 Revised estimates 1,886 338 299 102 207 Variation (0.5) (1.0) 3.3 3.3 3.2 Earlier 2,049 359 308 103 217 FY2014E Revised 2,032 352 321 109 224 Variation (%) (0.8) (2.0) 4.4 6.0 3.4 (%) estimates estimates

Source: Company, Angel Research

Exhibit 11: One-year forward PE (x) chart

400 350 300 250 200 150 100 50 0

(`)

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Apr-12
2x

Price
Source: Company, Angel Research

18x

14x

10x

6x

Exhibit 12: Recommendation summary

Company HCL Tech Hexaware Infosys Infotech Entp. KPIT Cummins Mahindra Satyam MindTree Mphasis NIIT^ Persistent TCS Tech Mahindra Wipro Reco. Accumulate Buy Accumulate Neutral Buy Neutral Buy Neutral Neutral Neutral Accumulate Accumulate Buy CMP (`) 580 111 2,368 195 118 110 648 404 34 432 1,281 950 353 Tgt. price (`) 648 140 2,573 142 747 1,405 1046 421 Upside (%) 11.7 25.7 8.7 20.3 15.2 9.7 10.1 19.1 FY2014E EBITDA (%) 18.1 21.4 30.4 17.3 16.4 18.4 17.7 16.9 11.0 24.3 29.1 17.1 19.3 FY2014E P/E (x) 12.1 9.1 13.8 9.7 9.1 11.0 8.7 10.8 5.4 9.8 17.3 9.5 12.6 FY2011-14E 10.1 10.9 5.6 11.6 17.3 (0.6) 11.6 (0.5) (1.5) 7.7 10.8 4.2 7.3 FY2014E 1.4 1.2 2.6 0.7 0.8 1.1 0.8 0.9 0.3 1.0 3.5 1.7 1.4 FY2014E RoE (%) 22.0 23.9 23.1 14.0 20.0 22.2 19.7 12.6 14.3 15.5 28.6 20.5 17.9 EPS CAGR (%) EV/Sales (%)

Source: Company, Angel Research; Note: ^Valued on SOTP basis

October 17, 2012

Oct-12

Infotech Enterprises | 2QFY2013 Result Update

Company background
Infotech Enterprises, a mid-cap Indian IT company, specializes in geographical spatial solutions and engineering design services with a focus on the aerospace, rail and hi-tech segments. Infotech has entered into long-term strategic relationships with global clients, such as Bombardier, Boeing, Hamilton Sunstrand and Alstom Transport, and has signed multi-million dollar contracts with them. The company's offerings are spread across two verticals - network and content engineering (UT&C; contributing ~31% to revenue) and engineering manufacturing and industrial products (ENGG; contributing ~69% to revenue).

October 17, 2012

Infotech Enterprises | 2QFY2013 Result Update

Profit and Loss statement

Y/E March (` cr) Net sales Cost of revenues Gross profit % of net sales Selling and mktg. expense % of net sales General and admin expense % of net sales EBITDA % of net sales Dep. and amortization % of net sales EBIT % of net sales Other income Interest expenses Profit before tax Exceptional item Provision for tax % of PBT PAT Minority interest Adj. PAT Fully diluted EPS (`) FY2010 953 543 410 43.1 87 9.2 115 12.0 208 21.9 44 4.6 165 17.3 46 3 208 51 24.3 158 (13) 171 15.4 FY2011 1,188 735 453 38.1 119 10.0 154 12.9 180 15.2 49 4.1 132 11.1 30 2 160 27 16.9 133 (7) 140 12.6 FY2012 1,553 946 607 39.1 136 8.8 200 12.9 270 17.4 49 3.2 221 14.2 17 1 236 2 84 35.3 151 (10) 163 14.5 FY2013E 1,886 1,149 737 39.1 160 8.5 240 12.7 338 17.9 58 3.1 279 14.8 21 1 299 102 34.0 197 (10) 207 18.7 FY2014E 2,032 1,250 782 38.5 173 8.5 258 12.7 352 17.3 63 3.1 289 14.2 34 1 321 109 34.0 212 (12) 224 20.2

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Infotech Enterprises | 2QFY2013 Result Update

Balance sheet
Y/E March (` cr) Equity capital Share premium account Reserves and surplus Shareholders funds Minority interest Borrowings Total capital employed Gross block Accumulated depreciation Net block CWIP Deferred tax asset Investments Sundry debtors Cash and cash equivalents Loans and advances Prepaid and other current assets Total current assets Sundry creditors and others Other current liabilities Provisions Total current liab. and provisions Net current assets Total capital deployed FY2010 28 363 516 906 4 911 494 239 255 61 3 202 207 234 134 33 606 66 50 101 216 390 911 FY2011 56 334 655 1,046 0.6 1,046 560 288 273 65 1.5 91 268 350 185 34 929 79 25 118 222 707 1,046 FY2012E 56 334 805 1,195 0.6 1,196 620 337 283 65 2.0 98 300 426 220 28 1,071 92 77 57 225 846 1,196 FY2013E 56 334 1,000 1,390 1,390 690 396 295 70 2.5 105 377 564 236 15 1,297 115 96 63 274 1,023 1,390 FY2014E 56 334 1,211 1,601 1,601 750 459 292 90 3.0 124 429 693 271 9 1,527 131 110 70 311 1,216 1,601

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Infotech Enterprises | 2QFY2013 Result Update

Cash flow statement

Y/E March (` cr) Pre-tax profit from oper. Depreciation Exp. (deferred)/written off Pre tax cash from oper. Other inc./prior period ad Net cash from operations Tax Cash profits (Inc)/dec in Sundry debtors Loans and advances Other current assets Sundry creditors Others Net trade working capital Cash flow from oper. actv. (Inc)/dec in fixed assets (Inc)/dec in investments (Inc)/dec in dfrd. tax asst. Cash flow from invest. actv. Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cash flow from fin. actv. Cash generated/(utilized) Cash at start of the year Cash at end of the year 56 (73) (33) (16) 9 (57) 157 (58) (162) 14 (207) (15) (22) (13) (50) (100) 333 234 (61) (51) (2) 13 (8) (109) 79 (71) 111 1 42 (4) 16 (16) (4) 117 234 350 (33) (35) 7 13 (10) (57) 155 (60) (7) (1) (67) (0) (13) (13) 75 350 426 (76) (17) 13 23 26 (32) 234 (75) (7) (1) (82) (1) (0) (13) (14) 138 426 564 (52) (35) 6 17 21 (45) 242 (80) (19) (1) (100) 0 (13) (13) 130 564 693 FY2010 162 44 (13) 218 46 265 51 214 FY2011 FY2012E 130 49 (7) 186 30 215 27 188 220 49 (10) 279 17 296 84 212 FY2013E 278 58 (10) 346 21 367 102 266 FY2014E 287 63 (12) 362 34 396 109 287

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Infotech Enterprises | 2QFY2013 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS (Basic) EPS (Fully diluted) Cash EPS Dividend Book value DuPont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (gross block) Receivables days Payable days 1.9 90 50 2.1 73 36 2.5 67 33 2.7 66 33 2.7 66 33 18.1 39.8 18.9 12.6 24.4 13.4 18.5 36.4 13.6 20.1 42.8 14.9 18.0 41.6 14.0 0.8 1.3 0.2 1.0 1.0 17.4 0.8 1.2 0.1 1.1 1.0 12.7 0.6 1.1 0.1 1.3 1.0 12.7 0.7 1.1 0.1 1.4 1.0 14.2 0.7 1.1 0.1 1.3 1.0 13.2 15.4 15.4 19.3 1.0 81.6 12.6 12.6 17.0 1.3 94.2 14.5 14.5 19.1 1.0 107.7 18.7 18.7 23.9 1.0 125.2 20.2 20.2 25.9 1.0 144.2 12.7 10.1 2.4 0.5 1.8 8.3 1.9 15.5 11.5 2.1 0.6 1.4 9.5 1.6 13.4 10.2 1.8 0.5 1.1 6.1 1.4 10.4 8.1 1.6 0.5 0.8 4.4 1.1 9.7 7.5 1.4 0.5 0.7 3.8 0.8 FY2010 FY2011 FY2012E FY2013E FY2014E

October 17, 2012

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Infotech Enterprises | 2QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Infotech Enterprises No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

October 17, 2012

13