Stock Review: 3i Infotech

 

The stock trades at 3.6 times its earnings for trailing twelve months

 

The stock of 3i Infotech shot up over 9% to . 49.2 during the trading session on Monday despite the company's sluggish performance in the March 2011 quarter. The spike was triggered by news reports that its largest shareholder ICICI Bank may sell stake to IT giant IBM.

However, neither of the parties confirmed the news. The stock closed at . 48, 6.8% above its previous close in an otherwise flat market. A slower growth in its larger markets and margin pressure is likely to re-strict the improvement in the company's stock valuation in the near term.

Though IT outsourcing demand has picked up in the past few quarters, 3i Infotech is yet to report a sizeable recovery. The topline of this Mumbai-based mid-sized IT company remained in the narrow range of . 630-650 crore over the past four quarters. The company faces turbulence in its financial transaction business from developed markets.

During the March 2011 quarter, 3i Infotech's revenue grew by just over 2% sequentially to . 652 crore due to a sharp 4.1% drop in the volumes of transaction services. The segment has been witnessing a decline since the June 2010 quarter on account of volume loss in the US. The share of the segment has fallen to 25% from 38% in the June 2011 quarter.

The company's IT services segment grew by 3.4% during the quarter. The growth, however, was not enough to offset lower volumes of the transaction services segment. On a positive note, it reported traction in the emerging market business, which now forms 45% of the company's overall revenue against nearly 39% during the June 2010 quarter.

Muted revenue growth, high employee expense and high interest spend resulted in restrained profitability. While the company's operating profit margin remained flat at 19.3% during the March 2011 against the previous quarter, net profit dropped 1.5% to . 63 crore.

At the current price levels, the stock trades at 3.6 times its earnings for the trailing twelve months. The company has not been able to report meaningful growth in FY11. Given the slack in its US business, the company's future performance largely depends upon how fast it can ramp up its presence in emerging markets.