Background
iGate Global Solutions (formerly known as Mascot Systems) was set up in India in 1993 as an offshore arm of iGate Corp, US. The company focused on IT services till it acquired BPO and contact centre businesses in 2003. Today, it is full-fledged end-to-end provider of IT solutions with an offshore-centric model. Its services span technology consulting, enterprise solutions, application development & maintenance, data analytics, independent verification & validation and infrastructure management. The company has over 108 active clients and centres spread across the US , UK , Canada , China , Malaysia and India . Its facilities are certified for CMM Level 5 and follow Six Sigma initiatives. The company also enjoys good utilization rates of around 71% and has taken initiatives to boost margins and profitability.
Investment Rationale

Focus on Fortune 1000 clients to boost realizations
iGate has embarked on a strategy to focus on Fortune 1000 customers. These customers currently account for 85% of its revenues and are billed at significantly higher rates. We believe this would boost realizations as the contribution to revenue from these customers increase.

Cost-cutting to improve margins
The company plans to lower employee expenses by reducing lateral hires and stepping up recruitment of trainees and less-experienced workers. This initiative is likely to boost its gross margins on an ongoing basis. We estimate average gross margins would rise from 30% in FY07 to 30.9% in FY08E. We expect average operating margins to increase from 11.4% in FY07 to 17.1% in FY09E as the company benefits from higher leverage of SG&A on a higher revenue base.

Possible acquisition could act as a trigger
iGate plans to make an acquisition to enhance its domain expertise in the banking, financial services & insurance (BFSI) vertical. If successful, the company would be better positioned to create differentiated transaction-based service offerings for its IT-enabled services.

Concerns over US sub-prime mortgage market overblown
We believe the markets overreacted to the comments made by the management (during the announcement of Q4FY07 results on April 11) about a slowdown in the sub-prime mortgage market in the US . The company’s exposure to the sub-prime mortgage market accounts for around 10% of revenues. Though there is a possibility of sluggishness in this business, the core IT services business continues to be buoyant, cementing our positive view on the stock.

Risks & Concerns

* The company currently has an attrition rate of 20% and employee ramp-up remains a challenge. Its ability to effectively retain employees and quickly scale-up in an environment that lacks employable manpower could impact its performance.

* Any significant change in the IT-spending environment on account of political or economic factors could also hit the company’s performance.


Financials:

The company reported EBIDTA margins of 15.3% in Q4FY07 against 12.6% in the previous quarter. This can be attributed to a higher offshore effort of 75% (previous quarter: 73%). Higher billing rates also contributed to the improvement with a 0.5% rise in offshore rates and 2.9% increase in onshore rates. Direct costs were lower as the company deployed fewer employee onsite and SG&A costs declined by 133 basis points, contributing significantly to the expansion in margins. For the year ended March 31, 2007 , it recorded a 26.6% growth in top line to Rs 805.1 crore and an 802% increase in bottom line to Rs 49.8 crore. The margins expanded on lower SG&A costs, higher offshore activities and higher billing rates.

Valuations

At the current price of Rs 337, the stock discounts its FY08E EPS of Rs 24.8 by 13.5x and FY09E EPS of Rs 40.7 by 8.2x. We find these valuations extremely attractive for a company whose earnings are likely to grow at CAGR of 85% over FY07-09E. On an EV/EBIDTA basis, the stock trades at 5.1x FY09E earnings. We rate the stock an Outperformer with a price target of Rs 404 over the next 3-6 months.
Technical Outlook

On the charts, the stock has gone into bigger consolidation phase after breaking out at Rs 280 levels. The scrip has got into a trend of moves between Rs 320 – Rs 420. Also, the daily RSI have been moving towards the oversold zones. We expect the stock to find support at these levels once again and move up to the Rs 380- Rs 420 level in the short-term.