Stock Review: 3i Infotech

 

IT has been quite a while since the Mumbai-headquartered IT player, 3i Infotech, reported meaningful improvement in sales and revenue despite the overall recovery in global IT demand. The mid-tier company's topline growth has been in the lower single digits for the last five quarters. In contrast, its larger counterparts have reported a double-digit growth during the period.

   To accelerate growth, the company is focusing on its business in the emerging markets, where the growth has been faster than in its traditional markets in the developed economies, including the US and Europe. The strategy is expected to put 3i Infotech back on the growth track in the next two years.

   The company has historically earned nearly two-thirds of its revenue from the developed markets. But its growth in these markets has remained sluggish since the subprime crisis two years ago. One reason could be the fact that the bigger IT companies have been quick to take advantage of the demand revival in these markets due to their multifold offerings and ability to scale up fast.

   Due to the stagnant performance in its key developed markets, 3i Infotech's quarterly revenue has hovered between . 610 crore and . 650 crore over the last five quarters. This has also curbed the growth in its earnings and has impacted its performance on bourses. The stock has underperformed the ET Infotech index over the past six months.

   The company is now concentrating on the emerging market business, which has shown demand traction. The region, which includes countries in Asia-Pacific, West Asia, and Africa, contributes over 40% to the total revenue. The verticals, including banking and retail lending, Islamic banking and insurance, e-governance, and enterprise applications, are the key growth drivers in these markets.

   According to Pankaj Chawla, who heads the emerging market operations at 3i Infotech, billing rates and volumes have grown by 5-10% year-on-year in the region.
   Improving political stability and increasing integration with global economies due to higher technology adoption are expected to maintain the tempo in countries such as Vietnam, Kenya, Tanzania, and Ethiopia, feels Mr Chawla.

   The benefit of the growth in its emerging market business will, however, be felt only gradually. The company's management has guided for a flat revenue for the second half of the fiscal.

   At the Wednesday's close of 57, its stock trades at an estimated FY11 P/E of 4.3. This is at a discount to the valuations of other tier-II IT players, which command P/Es in the range of 6-10. A significant improvement in 3i Infotech's valuation will require a higher growth visibility.