3i Infotech has announced that its duly authorized committee of the board of directors, at its meeting on 22 September, has decided to close the bid period for qualified institutional placement (QIP) and has approved the issuance of 3.75 crore equity shares at a price of Rs84.75 per equity share. This has led to fund raising of Rs317.8 crore.
Funds raised through QIP would be used to retire debt and would allay concern over higher leverage of the company. As per our working, 3i Infotech’s debt to equity would come down to 1.4x from 2.1x earlier.
We have now incorporated the expansion into equity base from QIP issue and the resulting interest expense savings into our estimates. Consequently, we have revised our FY2010 earnings estimate to Rs12.8 per share and FY2011 earnings estimate to Rs14.6 per share.
Though the earning dilution through QIP is likely to remain an overhang on the stock in near term, we believe, 3i Infotech has taken necessary steps such as QIP issue and sharp reduction in DSO days (121 days in FY2009 v/s 151 days in FY2008), which has allayed concern over its weakening balance sheet.
This coupled with improvement in demand environment, we believe, 3i Infotech is a strong case for getting re-rated post QIP issue. Consequently, we are upgrading our recommendation on the stock to BUY with revised price target of Rs110.