Stock Review: Infinite Computer Solutions

 

A 10-year strategic alliance with Motorola is going to keep the revenue flow a lot smoother. But high client concentration and service mix may muddle the scene

 

SMALL-SIZED information technology company Infinite Computer Solutions, which is heavily dependent on its top few clients for business, has embarked on diversifying its client portfolio. The company has also forayed into the government vertical and recently bagged a project from the Uttarakhand government. It is currently eyeing multiyear, multi-engagement deals across verticals. Yet, heavy dependence on the US — which is the highest revenue earner for the company — high client concentration, and low-margin service mix are key challenges in the coming quarters.

BUSINESS:

Infinite Computer Solutions is a global service provider of IT solutions in application management, infrastructure management services, and intellectual property leveraged solutions. The company is present across multiple locations, including India, the US, the UK, Singapore, Malaysia and China. The US contributes over 80% to the total revenue of the company. Infinite offers IT solutions to telecom, manufacturing, healthcare, energy and utilities, retail, media, and technology sectors. While telecom and media contribute over half of the company's total revenue, 20% comes from healthcare.

GROWTH DRIVERS:

Infinite depends heavily on its top few clients to drive growth. However, over the past three quarters, the company has diversified its overall customer portfolio by acquiring new clients. This was reflected in the sequential decline in revenue share from top 10 clients to 29% in October-December from 33% in July-September. Also recently, the company bagged a 125-crore IT modernisation project from Uttarakhand Power Corporation, which is expected to boost revenues in the coming quarters. The company is currently in the process of bidding for more government projects in other states. In fiscal year 2009-10, Infinite entered into a 10-year strategic alliance with Motorola through its whollyowned subsidiary — Infinite Convergence Solutions. The alliance is likely to benefit the company with a revenue stream of $40 million per year. In line with peers and in order to cash in on the growing IT demand globally, Infinite is setting up a Special Economic Zone (SEZ) in Bangalore with a provision of 1,200 stations.

FINANCIALS:

Infinite has been posting a double-digit growth in revenue and net profit over the past four quarters. It has maintained its operating margin in 16-18% range during the period. For financial year 2010-11, the company is aiming at a 30% annual growth in sales to Rs 866 crore and 30% rise in net profit to Rs 101.30 crore. The guidance looks rational as the company achieved over 70% of the target in the first nine months of the fiscal year.
   The company had an attrition rate of less than 6% in the first two quarters of the current fiscal year. However, this shot up to 12% in October-December or the third quarter, in line with the broader sector trend. The company takes over 66 days to collect outstanding sales, which is in line with its bigger peers, indicating efficiency in managing its working capital cycle.

BUSINESS CHALLENGES:

Over 50% of the company's revenue comes from the telecom sector, which is facing concerns globally. High dependence on the sector is seen negatively, impacting the company's volume growth, going ahead. The company is also faced with competitive pressures due to the presence of players such as Tech Mahindra and Sasken Communications which have better execution capabilities. Heavy dependence on the US, which contributes over 80% to its total revenues, makes the company vulnerable to fluctuations in rupee-dollar. High client concentration increases business risks further.
   Infinite derives over 65% of its revenue from services delivered from onsite locations, which results in high costs to the company and weighs on margins. Although the share of offshore revenue has increased over the years, it still remains quite low compared with the sector average of around 50%.

VALUATIONS:

At the current market price of 158.3, the stock trades at seven times its earnings for the trailing twelve months. Although larger in size, Sasken Communications, which also has a telecom focus, trades at a priceearnings ratio of 5.8.