Company Update | IT

February 27, 2012

Infotech Enterprises
Analyst Meet Update
We recently attended the analyst meet of Infotech Enterprises (Infotech) held at Hyderabad. The meet focused on giving investors an idea about the companys systems and processes through presentation by various business heads, sub-vertical heads and demo of a range of companys projects. The major take away from the meet was that the company is on the right track in terms of making investments to strengthen its product portfolio and is taking initiatives to improve its financial metrics. Infotechs performance over the past six quarters has been mixed, with operational margins being the major disappointment, which the company is now focusing to improve. We maintain our Accumulate recommendation on the stock. Focus on systems and process to provide scalability: During the meet, Mr. BVR Mohan Reddy, Infotechs Chairman and Managing Director, highlighted that the company is now focusing on strengthening its leadership along with improving its systems and processes and making them scalable. Further, the company will take in SAP integration, as currently three of the companys subsidiaries are operating independently. Along with integrating processes, Infotech is trying to expand its footprint in other addressable markets with existing clients. Healthy market opportunity: As per Zinnov Consulting, a leading IT consulting firm, the engineering market is expected to reach US$40bn by 2020 from US$10.4bn currently (led by industries such as aerospace, automotive, consumer electronics and telecom). Infotech, being a leader in the aerospace and telecom engineering spaces, has strong relationships with clients in these areas and, hence, can capitalize on this opportunity. Focus on improving client mining: Infotechs management is currently focusing on adding and increasing its wallet share from must have accounts across its target verticals. The company is doing this by changing the incentive structure of customer-facing roles and is investing considerably to improve client mining and account management skills. Outlook and valuation: At the CMP of `144, Infotech is trading at 8.4x FY2013E EPS of `17.1. We maintain our Accumulate rating on the stock with a revised target price of `162, valuing it at 9.5x FY2013E EPS. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2009
890 32.0 92 6.5 20.1 8.6 16.7 2.0 12.0 16.7 1.4 7.0

ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 1,611 0.5 171/100 21,839 5 17,446 5,281 INFE.BO INFTC@IN

`144 `162
12 Months

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 22.9 6.9 25.4 44.9

Abs. (%) Sensex Infotech

3m 11.2 22.9

1yr (6.6) (12.9)

3yr 93.8 238.8

FY2010
953 7.1 171 85.0 21.9 15.4 9.3 1.8 18.9 18.1 1.2 5.6

FY2011
1,188 24.6 140 (18.3) 15.2 12.6 11.4 1.5 13.4 12.6 1.0 6.4

FY2012E
1,562 31.5 139 (0.3) 17.4 12.5 11.5 1.4 11.9 17.8 0.7 3.9

FY2013E
1,802 15.4 190 36.3 16.9 17.1 8.4 1.2 14.1 17.2 0.5 3.0

Ankita Somani
+91 22 39357800 Ext: 6819 [email protected]

Source: Company, Angel Research

Please refer to important disclosures at the end of this report

Infotech Enterprises | Company Update

Focus on systems and process to provide scalability

During the meet, Mr. BVR Mohan Reddy, Infotechs Chairman and Managing Director, highlighted that the company is now focusing on strengthening its leadership along with improving its systems and processes and making them scalable. Further, the company will take in SAP integration, as currently three of the companys subsidiaries are operating independently. Along with integrating processes, Infotech is trying to expand its footprint in other addressable markets with existing clients.

N&CE: Infotech derives ~33% of its revenue from the network and content engineering (N&CE) business, with the base for most of its business being geographic information system (GIS). Currently, the company is working with clients in the telecom and utilities industry in this business and is trying to tap clients in the oil and gas and mining industries. Market size of data processing in the oil and gas industry grew by 10.8% yoy to US$9.7bn and that in the mining industry grew by 52% yoy to US$408mn. These market sizes are massive and present addressable opportunities to Infotech with its capabilities in GIS. Exhibit 1: Geography wise revenue N&CE
2.9% 25.4% 38.3% America EMEA APAC India

Exhibit 2: Industry wise revenue N&CE

20.9%

41.4%

Telecom Content Utilities

37.9%

33.2%

Source: Company, Angel Research

Source: Company, Angel Research

ENGG: Infotech derives ~67% of its revenue from the product and process engineering (ENGG) business, with a major focus on industries such as aerospace, industrial and telecom. The company is now focusing to tap clients in the automotive, hi-tech and consumer electronics spaces. In addition, in services, the company is trying to increase its focus on electronics from mechanical previously. Along with its presence in the U.S. and European markets, Infotech is expanding its presence in the Japanese market, as 22% of R&D spends, out of the overall spend coming from the top 500 R&D spenders, come from Japan (Source: Zinnov Consulting).

February 27, 2012

Infotech Enterprises | Company Update

Exhibit 3: Geography wise revenue ENGG

3%

Exhibit 4: Industry wise revenue ENGG (ex. aerospace)

26%

31% North America Europe APJ 66% 39%

35% Home Transportation Hi-tech

Source: Company, Angel Research

Source: Company, Angel Research

Healthy market opportunity

As per Zinnov Consulting, the engineering market is expected to reach US$40bn by 2020 from US$10.4bn currently (led by industries such as aerospace, automotive, consumer electronics and telecom). Infotech, being a leader in the aerospace and telecom engineering spaces, has strong relationships with clients in these areas and, hence, can capitalize on this opportunity.

Focus to improve client mining

Infotechs management is currently focusing on adding and increasing its wallet share from must have accounts across its target verticals, which have a high outsourcing potential. The company is doing this by changing the incentive structure of customer-facing roles, investing considerably to improve client mining and account management skills and offering integrated solutions from standalone solutions being offered earlier.

Exhibit 5: Client concentration

80 70 60 67.1 70.6

(%)

50 40 30 20

48.8

50.7

52.3

36.4

N&CE

ENGG Top 5 clients Top 10 clients

Overall

Source: Company, Angel Research

February 27, 2012

Infotech Enterprises | Company Update

Outlook and valuation

Infotech has been witnessing a 5.2% CQGR in its USD revenue over 2QFY20113QFY2012 because of inorganic growth due to the acquisition of Daxcon and Wellsco. Further, the company has witnessed price increases from some of its selective clients, which instills confidence in the companys performance going ahead. Thus, over FY2011-13E, we expect the company to post a USD and INR revenue CAGR of 17.6% and 23.2%, respectively. Infotech has been consistently underperforming on the operating margin front, which the company is now focused to address by levers such as improving utilization level, rationalizing SG&A expenses and shifting more work offshore. This year, management expects the companys operating margin to exit at ~17%, which can be easily achieved now, given the sharp INR depreciation. We expect EBITDA and PAT CAGR to be at 30.0% and 16.6% (lower due to tax rate moving to 33% from 17% in FY2011), respectively, over FY2011-13E. At the CMP of `144, Infotech is trading at 8.4x FY2013E EPS of `17.1. We maintain our Accumulate recommendation on the stock with a revised target price of `162.

Exhibit 6: One-year forward PE (x) chart

350 300 250 200

(`)

150 100 50 0

Apr-07

Apr-08

Apr-09

Apr-10

Oct-07

Oct-08

Oct-09

Oct-10

Apr-11
6x

Price
Source: Company, Angel Research

18x

14x

10x

2x

February 27, 2012

Oct-11

Infotech Enterprises | Company Update

Exhibit 7: Recommendation summary

Company HCL Tech Hexaware Infosys Infotech Entp. KPIT Cummins Mahindra Satyam MindTree Mphasis NIIT^ Persistent TCS Tech Mahindra Wipro Reco. Accumulate Neutral Accumulate Accumulate Neutral Buy Accumulate Accumulate Buy Accumulate Neutral Buy Neutral CMP (`) 484 107 2,880 144 160 68 450 414 44 310 1,250 591 424 Tgt. price (`) 520 3,047 162 87 502 440 55 332 693 Upside (%) 7.4 5.8 12.7 28.4 11.6 6.3 23.7 7.1 17.2 Target P/E (x) 13.0 11.0 18.0 9.5 10.0 11.0 10.0 12.0 6.9 9.0 19.5 8.0 15.3 FY2013 EBITDA (%) 17.5 19.0 32.0 16.9 15.4 16.0 14.7 16.6 16.3 23.0 29.9 17.1 19.7 FY2013E P/E (x) 12.1 11.6 17.0 8.4 9.8 8.4 9.0 11.2 5.6 8.9 19.3 6.8 15.3 FY2011-13E EPS CAGR (%) 22.1 79.4 18.9 16.6 19.9 38.4 42.1 (3.1) 19.3 0.1 20.6 32.3 13.1 FY2013E RoCE (%) 20.9 25.4 25.8 17.2 19.5 12.6 20.3 14.0 11.0 19.4 32.1 15.0 15.3 FY2013E RoE (%) 23.1 22.0 23.8 14.1 16.9 14.4 17.4 14.2 15.6 14.3 33.3 21.1 20.5

Source: Company, Angel Research; Note: ^Valued on SOTP basis

February 27, 2012

Infotech Enterprises | Company Update

Profit and Loss statement

Y/E March (` cr) Net sales Cost of revenues Gross profit % of net sales Selling and mktg. expense % of net sales General and admin expense % of net sales EBITDA % of net sales Dep. and amortization % of net sales EBIT % of net sales Other income Interest expenses Profit before tax Provision for tax % of PBT PAT Minority interest Adj. PAT Fully diluted EPS (`) FY2009 890 490 400 45.0 96 10.8 126 14.1 179 20.1 47 5.2 132 14.8 (30) 4 98 14 14.2 84 (8) 92 8.6 FY2010 953 543 410 43.1 87 9.2 115 12.0 208 21.9 44 4.6 165 17.3 46 3 208 51 24.3 158 (13) 171 15.4 FY2011 1,188 735 453 38.1 119 10.0 154 12.9 180 15.2 49 4.1 132 11.1 30 2 160 27 16.9 133 (7) 140 12.6 FY2012E 1,562 950 612 39.2 140 8.9 200 12.8 272 17.4 64 4.1 208 13.3 (13) 196 65 33.0 131 (8) 139 12.5 FY2013E 1,802 1,108 694 38.5 162 9.0 227 12.6 305 16.9 72 4.0 232 12.9 30 262 83 31.5 180 (10) 190 17.1

February 27, 2012

Infotech Enterprises | Company Update

Balance sheet
Y/E March (` cr) Equity capital Share premium account Reserves and surplus Shareholders funds Minority interest Borrowings Total capital employed Gross block Accumulated depreciation Net block CWIP Deferred tax asset Investments Sundry debtors Cash and cash equivalents Loans and advances Prepaid and other current assets Total current assets Sundry creditors and others Other current liabilities Provisions Total current liab. and provisions Net current assets Total capital deployed 656 82 103 39 224 433 790 FY2009 28 360 383 770 20 790 461 219 243 58 17 40 263 333 60 FY2010 28 363 516 906 4 911 494 239 255 61 3 202 207 234 134 33 606 66 50 101 216 390 911 FY2011 56 334 655 1,046 0.6 1,046 560 288 273 65 1.5 91 268 350 185 34 929 79 25 118 222 707 1,046 FY2012E 56 334 782 1,172 0.6 1,172 620 352 268 65 1.7 98 301 426 220 12 1,056 92 77 50 219 837 1,172 FY2013E 56 334 958 1,348 0.6 1,349 680 424 256 65 2.0 105 369 564 236 10 1,283 113 94 51 258 1,026 1,349

February 27, 2012

Infotech Enterprises | Company Update

Cash flow statement

Y/E March (` cr) Pre-tax profit from oper. Depreciation Exp. (deferred)/written off Pre tax cash from oper. Other inc./prior period ad Net cash from operations Tax Cash profits (Inc)/dec in Sundry debtors Loans and advances Other current assets Sundry creditors Others Net trade working capital Cash flow from oper. actv. (Inc)/dec in fixed assets (Inc)/dec in investments (Inc)/dec in dfrd. tax asst. Cash flow from invest. actv. Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cash flow from fin. actv. Cash generated/(utilized) Cash at start of the year Cash at end of the year (46) (16) 32 70 40 179 (118) 189 (18) 53 (23) 16 (10) (17) 214 119 333 56 (73) (33) (16) 9 (57) 157 (58) (162) 14 (207) (15) (22) (13) (50) (100) 333 234 (61) (51) (2) 13 (8) (109) 79 (71) 111 1 42 (4) 16 (16) (4) 117 234 350 (34) (35) 23 14 (16) (48) 155 (60) (7) (0) (67) (0) (13) (13) 75 350 426 (67) (17) 2 20 18 (44) 218 (60) (7) (0) (67) 0 (13) (13) 138 426 564 FY2009 128 47 (8) 182 (30) 153 14 139 FY2010 162 44 (13) 218 46 265 51 214 FY2011 130 49 (7) 186 30 215 27 188 FY2012E 208 64 (8) 280 (13) 268 65 203 FY2013E 232 72 (10) 315 30 345 83 262

February 27, 2012

Infotech Enterprises | Company Update

Key ratios
Y/E March Valuation ratio (x) P/E P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS (Basic) EPS (Fully diluted) Cash EPS Dividend Book value DuPont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (gross block) Receivables days Payable days 1.9 98 50 1.9 90 50 2.1 73 36 2.5 67 33 2.6 68 34 16.7 36.8 12.0 18.1 39.8 18.9 12.6 24.4 13.4 17.8 35.7 11.9 17.2 37.8 14.1 0.9 0.7 0.1 1.1 1.0 11.0 0.8 1.3 0.2 1.0 1.0 17.4 0.8 1.2 0.1 1.1 1.0 12.7 0.7 0.9 0.1 1.3 1.0 11.2 0.7 1.1 0.1 1.3 1.0 13.3 8.6 8.6 13.0 0.8 72.0 15.4 15.4 19.3 1.0 81.6 12.6 12.6 17.0 1.3 94.2 12.5 12.5 18.3 1.3 105.5 17.1 17.1 23.6 1.3 121.5 16.7 11.1 2.0 0.6 1.4 7.0 1.6 9.3 7.4 1.8 0.7 1.2 5.6 1.3 11.4 8.5 1.5 0.9 1.0 6.4 1.1 11.5 7.9 1.4 0.9 0.7 3.9 0.9 8.4 6.1 1.2 0.9 0.5 3.0 0.7 FY2009 FY2010 FY2011 FY2012E FY2013E

February 27, 2012

Infotech Enterprises | Company Update

Research Team Tel: 022 - 3935 7800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Infotech Enterprises No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

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Infotech Enterprises | Company Update

6th Floor, Ackruti Star, Central Road, MIDC, Andheri (E), Mumbai - 400 093. Tel: (022) 39357800 Research Team
Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Shailesh Kanani Bhavesh Chauhan Sharan Lillaney V Srinivasan Yaresh Kothari Hemang Thaker Nitin Arora Ankita Somani Varun Varma Sourabh Taparia Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Hiten Sampat Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Simran Kaur Dilip Patel Research Editor Production [email protected] [email protected] VP - Institutional Sales Sr. A.V.P- Institution sales Dealer Dealer Sr. Executive [email protected] [email protected] [email protected] [email protected] [email protected] Head - Derivatives [email protected] Sr. Technical Analyst Technical Analyst Technical Analyst [email protected] [email protected] [email protected] VP-Research, Pharmaceutical VP-Research, Banking Infrastructure Metals, Mining Mid-cap Research Associate (Cement, Power) Research Associate (Automobile) Research Associate (Capital Goods) Research Associate (Infra, Real Estate) Research Associate (IT, Telecom) Research Associate (Banking) Research Associate (Cement, Power) [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

CSO & Registered Office: G-1, Ackruti Trade Centre, Rd. No. 7, MIDC, Andheri (E), Mumbai - 400 093.Tel.: (022) 3083 7700. Angel Broking Ltd: BSE Sebi Regn No: INB010996539 / PMS Regd Code: PM/INP000001546 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / NSE Sebi Regn Nos: Cash: INB231279838 / NSE F&O: INF231279838 / Currency: INE231279838 / MCX Currency Sebi Regn No: INE261279838 / Member ID: 10500 / Angel Commodities Broking Pvt. Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

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