3i Infotech has made three acquisitions since April 2008—Regulus Group LLC (Regulus), Locuz Enterprise Solution (Locuz) and FinEng Solutions Pvt Ltd (FSL).
Post these acquisitions, we expect 3i Infotech’s top line to grow significantly in FY2009. However, the operating profit margin (OPM) and the net profit margin are expected to decline primarily due to revenue contribution from Regulus, which had a lower OPM of 13% in CY2007 and due to higher interest expenses associated with Regulus debt financing.
We have revised upwards our FY2009 earnings estimate by 7.2% and FY2010 earnings estimate by 12.7%. At the current market price, the stock is trading at an attractive valuation of 8.2x FY2009 earnings estimate and 6.7x FY2010 earnings estimate.
We maintain our BUY recommendation on the stock with price target of Rs180 (10x FY2010 earnings estimate).