The Q3FY2009 revenue of 3i Infotech grew by 1.2% sequentially to Rs608.8 crore largely due to 4.5% sequential decline in its product revenue.
The product revenue declined on account of a sharp depreciation in the Pound Sterling (GBP) against the rupee during the quarter.
Furthermore, in Q2FY2009 the company had booked a one-time income of Rs17.4 crore related to the sale of an intellectual property right (IPR) licence to its Chinese joint venture (Elegon).
Adjusting for the same, 3i Infotech’s top line grew by 4.2% sequentially during the quarter.
The operating profit margin (OPM) declined by 92 basis points to 18.1% in Q3FY2009 due to a higher proportion of revenues from the low-margin transaction services and the higher expenses associated with the new initiatives such as TaxSmile and kiosk (Rs14.2 crore in Q3FY2009 vs Rs7 crore in Q2FY2009).
Consequently, operating profit declined by 3.7% sequentially to Rs110 crore during the quarter.
Given the cautious demand environment, we expect 3i Infotech’s financial performance to remain subdued in the next few quarters.
In addition, the lack of clarity on the conversion/repayment of the outstanding foreign currency convertible bonds (FCCBs) aggregating Rs808 crore (which is significantly out of the money) is likely to remain as an overhang on the stock.
However, these concerns are already reflected in 3i Infotech’s share price. 3i Infotech is currently trading at 2.3x FY2009 and 2.2x FY2010 earnings estimates. The valuations are the lowest since the stock’s listing in April 2005.
Considering that 3i Infotech’s earnings are expected to grow at 25% during FY2008-10 supported by its strong order book and the Regulus acquisition, the current valuations are attractive.
We maintain our BUY recommendation on the stock but keep our price target under review.