Home/ Markets / Stock Markets/  Why Intellect Design's share price is falling

From a loss-making company a couple of years back, Intellect Design has come a long way to become profitable. Today, it competes with IT biggies TCS, Infosys, among others.

Intellect Design does not directly offer IT services like Infosys or TCS. It makes software products for banking and financial services (BFSI) companies. It has multiple products catering to core banking, retail banking, transaction corporate banking, insurance, central banking, and risk & treasury management.

In the past five trading sessions, share price of Intellect Design Arena has declined more than 15%. The stock saw a steep fall of 14% yesterday after the company posted results.

However, the stock is down around 45% on a year to date (YTD) basis. So the recent results are not the only factor dragging the stock lower.

Let’s find out why Intellect Design shares are under intense pressure.

#1 Weak report card in September 2022 quarter

For growth stocks, weak results are a key drag. A product company like Intellect Design is considered as a growth stock as it has to make heavy investments initially to develop a new product.

Once the product gains traction from reputed clients in future years, then and only then the company is able to generate good revenue from it.

Back in July 2022, Tanla Platforms reported weak quarterly results and muted projections. Tanla Platforms saw a steep fall in the next couple of days.

A similar situation is unfolding with Intellect Design it appears. The stock fell 14% on Monday after reporting weak quarterly results. Yesterday, the stock fell another 2% and hit a new 52-week low.

On Monday, the company reported its Q2 results where net profit came in at 457 m against a profit of 688 m in the June 2022 quarter. This on the back of a fall in total income which came in at 5,384 m against 5,511 m in June 2022.

The company’s margin contracted 10% which was the main reason behind the fall.

High inflation in the European market hit the company as it resulted in a slowdown in decisions. Travel, talent and tax also affected profit margins.

Silver lining is the management is confident of hitting its guided of 20% this fiscal.

#2 Rising interest rates

Central banks over the world have been raising interest rates to control rising inflation. This has created a major problem for growth stocks like Intellect Design.

All growth stocks likePaytm, Zomato, etc, have been under pressurebecause of rising interest rates.

Growth stockshave placed a high bet for the future. Their present results may not show high returns but they have big plans for the future. Growth stocks are those spending big right now in order to get the benefits in the future.

Hence, their future cash flows are expected to be quite huge. But as interest rates rise, these cash flows are discounted at higher rates. Resultantly, the valuations of growth stocks fall.

When valuations fall investors tend to move away from these stocks and hence the share price falls.

#3 Rising Employee Costs

As mentioned by the company in the latest quarterly results, with the surge in demand for technology professionals post Covid, Intellect Design has had challenges in acquiring and retaining talent.

With growth coming back, demand for top talent has also increased. So, the company has been building some bench strength in this period and will factor an escalation in the cost for talent while simultaneously capacitating itself for the next leap of growth.

The company’s MD Arun Jain said in an interview,

“Three ‘Ts’ are impacting our PAT margins. One is travel, which was not there last year; talent, and tax. However, travel has stabilized in the two quarters. So, there will not be incremental travel costs.

Still, from year-to-year comparison, there is a substantial increase in travel costs, which is impacting the margin and tax costs 26% is significantly larger than 16% last year"

How Intellect Design has performed recently

Post covid, the stock saw a sharp rally in the next two years and broke out of the range in a big way.

The Covid-19 pandemic redefined our way of thinking and our way of living. It compelled organisations to digitise their processes and services, to not only thrive but also survive.

Take a look at the share price chart of Intellect Design for the past five years.

Intellect Design.
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Intellect Design.

In 2022 however, the stock has remained under pressure. It is down 45% in 2022.

Intellect Design has a 52-week high of 986 touched on 7 April 2022 and a 52-week low of 422 touched yesterday.

Intellect Design.
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Intellect Design.

Here’s a table comparing the company with its peers. Data is as of March 2022.

Comparative analysis.
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Comparative analysis.

About Intellect Design

Intellect Designs develops and delivers digital financial technology products for the BFSI domain.

Within IT services and solutions, BFSI is the largest vertical, contributing to more than 50% of the company’s revenue. On an average, banks and financial institutions spend about 7-8% of revenue on IT, which is the highest among all verticals.

The company was listed on the Bombay Stock Exchange and National Stock Exchange in December 2014.

You can now compare Intellect with its peers:

Intellect Design vs Newgen Software

Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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Updated: 02 Nov 2022, 10:20 AM IST
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