ICICI Bank Ltd and its affiliates are in talks to sell its entire stake in 3i Infotech Ltd,
according to a report in The Economic Times, although 3i says it’s not aware of any such move. The ICICI group has been bringing down its stake in the company gradually over the past few years. It owned 92.45% in the company just before its initial public offering (IPO) in early 2005. It brought this down to about 55% through the IPO and has continued to sell in the ensuing years. A mid-October filing with stock exchanges shows that ICICI Bank sold 7.7 million shares recently, bringing its stake down to only around 26% in the software company.
It’s quite evident that 3i Infotech hasn’t been looked at as a core investment by ICICI Bank. So any decision to exit will not be a big surprise, in that context. Having said that, valuations aren’t particularly high, which means ICICI Bank may not be able to get big bucks from a stake sale now.
IIFL Cap expects the company to report earnings per share of Rs12.10 in the year till March 2011. The company’s current share price of Rs89.30 discounts that by only about 7.4 times, lower than other similar-sized information technology companies.
One of the concerns surrounding 3i Infotech was its high debt of around Rs2,000 crore. The company had made a spate of acquisitions—about 30 between mid-2005 and mid-2008—and this not only led to high debt but also resulted in negative cash flow generation. There haven’t been any acquisitions in the past 18 months and this should help the company generate cash flow.
Graphics: Yogesh Kumar / Mint
Besides, the company raised around Rs300 crore through a qualified institutional placement (QIP) in September this year, which has also allayed concerns about the company’s leverage. Also, only about one-fourth of its total debt was due in the next three years. Thanks to the QIP issue, the company should be able to easily manage debt payments due in the next three years.
What’s more, the company’s business prospects seemed to have looked up in the previous quarter ended September, with revenues growing by 5% quarter-on-quarter. Growth was led by the transaction services business, which led to a drop in margins. Operating profit was flat, as a result, but the growth in revenues is a healthy sign.
Given these positives and the relief on the debt front, one would have imagined ICICI Bank would wait for the results to show and valuations to improve before offloading its stake.