Stock Review: 3i INFOTECH

The sale of low-growth, low-margin payment processing business would enhance 3i Infotech's focus on its core IT products and services business. But it will take at least two quarters for its profitability to reflect the positive impact of the development. The proceeds of $137 million (around . 610 crore) from the sale of the transaction services division to Cerberus Capital Management will be utilised to reduce the current debt burden by nearly 30% to . 1,500 in the near term. This will also reduce 3i Infotech's debt-equity ratio to 1.2 from 1.6. In 2007-2008, mid-tier IT player 3i Infotech had entered the US payment processing market through acquisitions of Regulus, J&B Software, and JP Morgan's unit. This was a part of 3i Infotech's strategy to strengthen its presence in the US banking and finance segment. The strategy, however, hit the roadblock during the subprime crisis in late 2008. The revenue from this segment since then has remained sluggish. For instance, the total annual revenue earned by the three units at the time of acquisition was over . 800 crore. With revenue of . 820 crore in FY11, it has hardly budged from the three year-ago level.

In FY11, revenue from 3i Infotech's IT products and services rose by 14% whereas it was 10.4% lower for the transaction services. According to company's MD and global CEO V Srinivasan, the sale is highly lucrative. He mentions the company had spent $25 million (. 115 crore) of internal accruals (equity) towards the total purchase value of $ 115 million (around . 530 crore) for the three units in 2008. The company has earned $ 45 million (over . 207 crore) in operating profit before depreciation so far. Considering this and the current sale value, return on equity turns out to be more than 200%, highlights Mr Srinivasan.

The latest sale will lower the company's future net profit but the impact will be mitigated largely due to the reduction in interest cost and depreciation. Srinivasan pegs a decline of one rupee or 8% in the annual earnings per share. But in the long run, its profitability is expected to improve by 100-200 basis points now that the company has sold the low-margin business.