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iGATE Q4 revenues seen at Rs 2.1 bn

Edelweiss Research has come out with pre earnings report on iGATE. It has recommended buy rating on the stock.

Expected numbers

Edelweiss expects iGATE to close Q4FY07 with revenues of INR 2.1 billion, a muted Q-o-Q growth of 1.5% and Y-o-Y growth of 27.8%. Net profit is estimated at INR 184 million for the current quarter, a growth of 15.2% Q-o-Q (on account of small base). EBITDA margin is expected to increase to 14.6% from 12.7% in the previous quarter, driving net profit growth.

Edelweiss report on iGATE

Phased ramp-up on track

During the current quarter, iGATE inaugurated phase 3 of its corporate campus at Bangalore, with a 900-seater capacity, as an extension of its present workspace for around 3,500 employees. The investments made by the company over the past few years in both ready and under-construction facilities in Chennai, Hyderabad, and Noida are indicative of robust contracts in the pipeline, necessitating greater manpower requirements. As indicated by the management, the company intends to add over 1,500 employees through FY08E, with a greater proportion of the incremental work being offshored.

Operating margins to improve despite rupee hurting revenue growth

The sharp appreciation of the rupee against the USD during the end of the current quarter will negatively impact revenue growth as iGATE derives about 40% of its quarterly revenues in March. However, the company’s EBITDA margin is expected to continue its upward movement, as the company derives increased proportion of its revenues from high-margin clients.

Focus on high value adding service lines

The investments made in high margin service lines of testing, infrastructure management services and high-end transaction processing is bearing fruit with the revenue composition improving remarkably. We expect these offerings to favorably impact gross margins over the coming quarters.

Valuations

At CMP of INR 383, the stock trades at P/E of 12.9x and 9.4x and EV/EBITDA of 6.5x and 4.3x for its FY08E and FY09E earnings, respectively. We retain our Buy recommendation.

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Expects i-flex Sols Q4 net profit at Rs 1.4bn

Edelweiss Research has come out with pre earnings report on i-flex Solutions. It has recommended buy rating on the stock.

Expected numbers

Edelweiss expects i-flex Solutions to close Q4FY07 with revenues of INR 6.5 billion (Q-o-Q growth of 18.7%) and net profit of INR 1.4 billion (Q-o-Q growth of 81.4%).

Edelweiss report on i-flex Solutions:

Product license fees likely to surge

Q4 of a financial year has historically been the best quarter for products, particularly license revenues, which we believe will be the case this quarter as well. We expect license revenues to grow 60% sequentially on a quarterly basis comprising 38% of overall product revenues. Revenues from AMC for Q4FY07 could decline slightly, though we expect AMC revenues to clock over 45% revenue growth in FY07 over FY06. The company’s product tank size, as of the past quarter, stood at USD 73.6 mn, an all-time high.

Update on Mantas acquisition

We are keen to know if i-flex has already incurred substantial acquisition-related expenses pertaining to its acquisition of Mantas last August. We expect the margin impact of this acquisition to be neutral-to-positive going forward.

Offshore services revenues likely to surge

The past quarter (Q3FY07) has seen i-flex’s offshore services revenues register significant sequential quarterly decline; this impacted EBITDA margins of this segment as well. We believe there will be growth in Q4FY07 with beneficial impact on EBITDA margins as well.

Recent product wins sustain comfort

In the January-March quarter, i-flex announced several product wins for specific functionalities. The company has also won from Firstbank of Nigeria, independent orders for its anti-money laundering solution acquired from Mantas. PT Bank Danamon Indonesia (Bank Danamon), the second-largest private national bank in Indonesia, has commenced the implementation of FLEXCUBE® as the core banking solution for its retail and corporate banking operations.

Other focus areas

Demand has perked up in capital markets and treasury segments. We believe that i-flex will likely gain from increased activity in this space. Also, the company has outlined its focus on solutions for private banking, an entirely organic effort.

Valuations

At a CMP of INR 2,057, the stock currently trades at a P/E of 35.5x and 28.4x and EV/EBITDA of 25.3x and 19.7x for our FY08E and FY09E, respectively. We retain our buy recommendation.

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Expects Geometric to post net profit of Rs 127mn

Edelweiss Research has come out with pre earnings report on Geometric Software Solutions. It has recommended accumulate rating on the stock.

Edelweiss expects Geometric to close Q4FY07 with revenues of INR 1.1 bn (Q-o-Q growth of 7.3%) and net profit of INR 127 million (Q-o-Q growth of 20.0%). The growth in the net profits is higher on account of absence of integration costs in the current quarter.

Change in Chief Financial Officer

During the quarter, Geometric announced the appointment of G Ravishankar as its CFO. He will be succeeding Shashank Patkar, who will now assume the dual responsibility of managing Investor Relations and vice presidentship of Strategic Initiatives for Geometric. This shift in the management is intended to achieve the aggressive growth plan laid out in the 2010 strategy. Ravishankar joins in from GE Healthcare, South Asia, where he was the CFO and has 15 years of experience in the Finance and Accounting domains.

SG&A investments underway

Geometric is currently undertaking big-ticket investments for strengthening its direct sales infrastructure and creating a strong brand recall. Also it is taking initiatives in upgrading its delivery facilities for better capacity utilization. Though these may lead to a short term impact, they will be instrumental in sustaining improved margins from the latter half of FY08.

Vision 2010 strategy in place

Geometric has now charted out its 2010 strategy, and has set a goal of USD 275-300 million of revenues with an operating profit margin of 18-20%. With the strategy in place, induction of new members in the management team, and integration of Modern Engineering, we remain positive on the company and will track it closely for any opportunity to revisit the recommendation.

Valuations

At CMP of INR 99, the stock trades at P/E of 10.0x and 6.6x and EV/EBITDA of 4.9x and 3.3x for its FY08E and FY09E earnings, respectively. We maintain our ‘Accumulate’ recommendation on the stock.

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Infotech Q4 net seen up 19% at Rs 223mn

Edelweiss Research has come out with pre earnings report on Infotech Enterprises. It has recommended buy rating on the stock.

Expected numbers

Edelweiss expects Infotech Enterprises to close Q4FY07 with revenue of INR 1.5 billion, a Q-o-Q growth of 6.4% and 41.2% growth Y-o-Y. Net profit is estimated at INR 223 million, Q-o-Q growth of 19.0% and Y-o-Y growth of 34.4%. Positive profit contribution from the IASI JV will result in higher net profit growth.

Report on Infotech Enterprises

Strategic investments to propel growth

Infotech has investments lined up over the next four to eight quarters for enhancing its domain knowledge where it already has a strong foothold and also for spaces it proposes to enter. We view these investments as being appropriate for enhancing and broadening its customer base in the blooming engineering IT services space, though this means a slight dip in EBITDA margins from the current levels of ~22%.

Marine engineering development centre announced

During the current quarter, Infotech announced an estimated investment of INR 300 million on phase I of its development centre at Visakhapatnam. This is its fifth centre after Hyderabad, Bangalore, Noida, and Kakinada and will commence operations by 2009. The unit with a seating capacity for close to 250 employees will provide marine design related services, a space which Infotech has recently entered and is expected to register an encouraging growth of 40-45% over FY08E.

Likely acquisitions to be positive

We note that the company has been focusing on expanding its presence in fast-growing engineering services. The company is foraying into automotives and intends to get expertise at the earliest to take advantage of the available opportunities through acquisitions. We believe any acquisition in this regard to be a positive driver for the company.

Valuations

At CMP of INR 351, the stock trades at P/E of 14.8x and 11.2x and EV/EBITDA of 12.1x and 8.4x for its FY08E and FY09E earnings, respectively. We retain our buy recommendation.

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Rolta India

Edelweiss Research has come out with pre earnings report on Rolta India. It has recommended buy rating on the stock.

Expected numbers

Edelweiss expects Rolta to close Q3FY07 with revenue of INR 1.8 billion, up 6.6% Q-o-Q and 26.3% Y-o-Y. Net profit is estimated at INR 435 million, up 6.4% Q-o-Q and 31.8% Y-o-Y.

Change in top management

During the current quarter, Rolta announced the appointment of Ben Eazzetta as president of International Operations, replacing A.P. Singh, who assumes the new position as Jt. MD. Eazzetta comes from Integraph Corporation, where he was the president of the Security, Government, and Infrastructure division. We expect these appointments to give a fillip to Rolta’s revenues from international operations and strengthen its global delivery system.

Likely expansion through the inorganic route

We note that Rolta has plans to increase its penetration in global markets and broaden its client base, for which it is continuously seeking inorganic opportunities. There have been reports in the press on likely closure of a acquisition in the GIS space. Our discussions with management suggest that company is, on an ongoing basis, assessing various target companies and nothing has been finalised as of now. Any closure on this front will be a boost, as no equity dilution is expected and will be EPS accretive.

Operating margin to improve

Rolta possesses a number of levers for enhancing margins, in the form of improved utilizations, productivity improvements, and combating the rise in wages with better billing rates. There has also been a gradual change in the composition of revenue, with the share of engineering services inching up to 30% of the revenue in Q2FY07, against 27.5% in the corresponding quarter of the previous year. Based on these factors in play, we expect the EBITDA margin to improve from 40.2% in the previous quarter to 41.2% in the current quarter.

Valuations

At CMP of INR 325, the stock trades at P/E of 11.1x and 8.1x and EV/EBITDA of 6.0x and 4.1x for its FY08E and FY09E earnings, respectively. We retain buy recommendation.

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Patni to report Q1 revenues of Rs 7.3bn

Edelweiss Research has come out with pre earnings report on Patni. It has recommended accumulate rating on the stock.

Expected numbers

Edelweiss expects Patni to close Q1CY07 with revenues of INR 7.3 billion, up 7.3% Q-o-Q and 27.7% Y-o-Y. Our net profit estimate for the company stands at INR 1 billion, a Y-o-Y growth of 44%, however, a Q-o-Q decline in growth of 32%.

Report on Patni Computer

Focus on growing IMS; new business head in

Dr Sanjay Savla has been appointed as the senior vice president and business unit head of the IMS SBU. IMS has been a focus area for most of the scale players and it also is a relatively untapped and high potential market. Dr Savla has 18 years of industry experience and prior to this, was associated with Computer Science Corporation (CSC). We believe this induction will help Patni increase its revenue share from IMS.

Product engineering services to remain the fast-growing practice

Patni’s product engineering services division is expecting strong market opportunity and witnessing increased traction. The company aims to generate revenue of USD 500 million and has a roadmap to it. We believe the company currently has around 2,500 R&D engineers and is looking to double its headcount from this level, which is encouraging.

Geographical diversification of revenues, de-concentrating on US

Patni has been, over the past three-four quarters, growing its revenues from other than US geographies. This has led to reduction in the revenue contribution from the US geography to 78% currently, from 86% two years ago. The company has also been focusing on the Asia Pacific and Japanese markets and continues to invest in marketing infrastructure in these regions.

High attrition and forex to put pressure on margins

During the quarter, we expect the company’s margins to decline on account of pressure from factors such as attrition and forex. Patni has the highest attrition rate in the industry of 27.4% (December 2006), which will put pressure in the form of higher employee costs and thereby negatively impact margins.

Valuation

At a CMP of INR 375, the stock currently trades at a P/E of 12.0x and 10.5x and EV/EBITDA of 6.6x and 4.8x for our CY07E and CY08E, respectively. We maintain accumulate recommendation.

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Mphasis likely to post Q4 net profit of Rs 406mn

Edelweiss Research has come out with pre earnings report on MphasiS. It has recommended buy rating on the stock.

Expected numbers

Edelweiss expects MphasiS to close Q4FY07 with revenues of INR 3.2 billion, Q-o-Q growth of 6% and net profit of INR 406 million, a Q-o-Q growth of 13.4%.

Edelweiss report on MphasiS

Focus EDS (India) integration

We believe that focus will be on two key points: (a) size of contracts and/or revenues booked through EDS; and (b) strategic plans for the coming quarters to better align the interest of MphasiS with EDS.

Optimistic outlook on BPO business

Growth in the BPO business is likely to look up after a reversal of tepid performance in 3QFY07. However, we would look for growth in international accounts as MphasiS, despite having grown domestic accounts, has not been able to realize the desired profitability on such accounts. Also, we are keen to see continued growth of higher-margin non-voice related businesses (technical support, research, HR, and F&A).

We believe that some of the technical support work for EDS could transition to MphasiS going forward.

Estimates do not include EDS (India) numbers

Our current estimates for FY07 and FY08 do not take into account the EDS (India) numbers, as detailed financial numbers for EDS (India) are not available. We have however, worked out the consolidated nos. and given the same in the table on the next page. We note that EDS (India) will likely close FY07 with revenues of about INR 4,500 million with net profit margin of about 13-14%. Going forward in FY08E and FY09E we estimate the impact on EPS to be accretive by INR 1.6 and INR 2.6 respectively.

Valuations

We expect the company to shift to a higher growth trajectory with EDS backing. At INR 275, the stock currently trades at a P/E of 20.7x and 16.6x for our FY08E and FY09E consolidated earnings, respectively. We retain buy recommendation.

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Expects Mastek to post net profit of Rs 242mn

Edelweiss Research has come out with pre earnings report on Mastek. It has recommended buy rating on the stock.

Expected numbers

Edelweiss expects Mastek to close Q3FY07 with revenue of INR 2.1 billion (Q-o-Q growth of 2.8%) and net profit of INR 242 million (Q-o-Q growth of 11.0%). The company’s guidance, which stands at INR 2.2–2.3 billion for revenue and INR 235-245 million for net profit will be impacted on account of loss of revenues from the DC JV for one month during the quarter.

Report on Mastek

Exit from the DCJV

Mastek announced culmination of its five-year-old joint venture with Deloitte, with the latter acquiring 50% of Mastek’s sale in the DCJV. We understand from the company that the valuation of the JV was done at 1x its revenues and Mastek will receive ~ INR 530 million from this sale. Accordingly, one-time gain of approximately INR 260-270 million could be recognised in the books during the quarter. Revenues to the extent of INR 1 billion, which used to get consolidated, will be lost from FY08.

M&A agenda underway

We note that the company’s NHS contract, which currently contributes ~ 35% to its total revenues, is due to expire in December 2007. Our discussions with the management suggest that the contract will spill over to June 2008. Post that, the ~ 65% the contract revenues that are development related will fade. We believe the company has plans on the M&A front which can fructify during the first half of the next fiscal. Mastek, as of December 2006, had ~ INR 1.3 billion in cash and cash equivalents. Additionally, the company will also receive INR 530 billion on sale of its stake in the JV, apart from the quarterly cash flows.

Contribution from past quarter wins in US

In the previous quarter, Mastek had won four clients in the US in its insurance vertical. We understand that two of them have already started to contribute to revenues. Going forward, as all these accounts ramp up, we will see higher growth momentum in the insurance vertical.

Expertise of MajescoMastek’s new president

During the quarter, William S. McCarter has been appointed as the president of MajescoMastek, Mastek’s North American unit. Mr. William brings in his expertise in technology for insurance companies and financial institutions, which we expect will provide traction to the financial services vertical going forward.

Valuations

At a CMP of INR 302, the stock currently trades at a P/E of 8.1x and 6.9x and EV/EBITDA of 4.0x and 3.1x for our FY08E and FY09E, respectively. We retain buy recommendation.

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