3i Infotech: Buy

 
Investors with a two-year horizon can buy the shares of 3i Infotech, considering its strong business prospects and very attractive valuation. At Rs 40, the share trades at just three times its likely 2008-09 earnings.

Concerns over the IT sector in general and worries about 3i Infotech's BFSI (banking, financial services and insurance)-centric business model has caused the stock to be beaten down considerably to the point of being quite undervalued. However, the company's lower US dependence, focus on basic banking and insurance operations, and inorganic growth prospects render it attractive.

3i Infotech has a robust business model comprising a blend of products, services and transaction processing offerings. The service-mix features near-equal contribution from IT products, services and transaction processing. Transaction processing is a low-margin service, yet it may be less prone to a cut in discretionary spends of clients.

Its inorganic moves are also targeted at expanding share in basic areas such as payment processing, mutual funds, insurance payments and core banking operations.

A lower dependence on the US and a presence in the critical aspects of the BFSI industry has led to 3i Infotech being minimally affected, certainly less than its mid-tier peers, due to the credit or mortgage crisis and the recession in the US.

The company's 96.8 per cent growth in revenues and 56 per cent growth in first-half profits is evidence of this.

The acquisition of Regulus — an independent remittance provider — in April also strengthens prospects. Regulus delivers document processing services in the US for clients in insurance, telecom, healthcare and finance sectors, giving a broad vertical-mix. Apart from giving 3i Infotech access to 150 clients, Regulus presents an opportunity to up-sell and cross-sell its IT services and products as well.

3i's dependence on the US is a little over 40 per cent, with India and the Asian countries contributing to a bulk of its revenues, making for a sound geographic-mix away from the pain points.

The company derives over 60 per cent of its revenues from fixed price contracts, a more efficient way of billing clients and also being demanded of vendors in current times. This is higher than all mid-tier companies and even top-tier companies, paving way for optimum resource allocation and planning and better realisations.

This apart, the company's strong presence in the e-governance space also offers opportunity. The government is expected to increase spends on the economy in general and the IT enablement is a key focus area with increasing budgetary spends. 3i Infotech appears well placed to tap into this space.

K. Venkatasubramanian