3 i Infotech - Will the share price rise despite profits going downhill?

3 i

Infotech, with its key assets of 8000 employees, is a global Information Technology company which provides technology solutions to over 1500 customers in more than 50 countries across 5 continents, spanning a range of verticals.

The Company's Global Delivery Model provides for the best resources to be drawn from its vast talent pool across the globe to offer optimal solutions.

3i Infotech was promoted by ICICI Bank, India's largest private sector bank. The Company integrates its products and services to create customized solutions to allow its clients to undertake technology-based business transformation that allows reorganization in line with today's dynamic digital business environment.

3i Inotech business model revolves around the following products and services which it offers to its clients within the domestic as well as to its clients spread across 50 countries.

Premia Insurance Software Solutions Suite ,Kastle – Secure Banking Solutions,Tradis – Integrated Broker Office Solutions Suite, MFuund -Mutual Funds Solutions, C – matis – Wealth Management / Portfolio Management Services and i-enable rmf (remote monitoring framework)

Besides the above Products, 3i Inotech has established a niche in the domestic as well as in the international markets for its superlative offerings in the following services :

Business Process Outsourcing (BPO) Services - An Overview

3i Infotech provides end-to-end outsourcing solutions for Banking, Financial Services & Insurance (BFSI) and Telecom industries. Being the Registrar and Share Transfer Agent for one of the largest private banks in India for 15 years, it has established it’s credentials in both voice and non-voice based BPO services.

Needless to mention, 3i Infotech is the Registrar and Share Transfer Agent of ICICI Bank.

Software Services –

Some of the offerings of 3i Infotech in the Software Services arena are as under:

• Custom Software Development
• Product Re-engineering
• Software Testing
• Data Warehousing & Business Intelligence

Financial Performance

In brief, the financial performance was dismal especially due to Rs.260.46 crores hit on account of impairment of assets:

Rs.crs

	Fiscal 2009-10 Rs.	Fiscal 2008-09 Rs.
Total Income	2468	2304
Net Profit	33	282
N.P. Margin %	1.33	12.23

Though total income rose by 7.07 per cent, the Net Profit went downhill to touch Rs.33 crores against N.P. of Rs. 282 crores of previous year, down by roughly 88.29 per cent.

The reason for the downslide in Net Profit is due to the P&L being badly hit by “impairment of assets” explained below.

In accordance with AS on “Impairment of Assets” the company has reduced its profits by Rs.260.46 crores.

An impairment loss is recognized in P&L whenever the caarying amount of its Groups assets exceeds the recoverable amount. This is something akin to say, if you buy a share of “X” company for Rs.100/= which quotes now at Rs. 60, then your asset [ investment ] stands impaired to the tune of Rs40/share multiplied by the total number of shares purchased of “X” company.

Notwithstanding the above, it should be noted that the company’s bottom line was indeed robust considering the global slowdown encountered by al I.T. firms.

The major revenues generated in fiscal 2009-10 were from following sources :

1.Software Products : Rs.783 crs, down by 3.45 % compared to previous year.

2.I.T. Enabled services : Rs.749 crores [ previous year Rs.748 crores ]

3. Transaction Services : Rs.915 crores, up by 26 % compared to previous year.

Massive investments in 57 subsidiaries and massive debt levels !

As on 31 March 2010, the company had cash and cash equivalents to the tune of Rs.199.60 crores and its Debt Equity ratio was 2.17.. It should be noted that 3i Infotech has 57 subsidiaries, combined Goodwill of .the Group being Rs.1810.71 crores. 3i is planning a QIP of Rs.500 crs in order to reduce its debt which will bring down the D/E ratioto 1.67 whilst resulting in savings of about Rs.60 crs Per annum presuming 12% interest rate

Goodwill arising on consolidation - The excess of cost to the Parent, of its investment in subsidiaries over its portion of equity in the subsidiaries at the respective dates on which investment in subsidiaries was made, is recognized in the financial statements as goodwill and in the case where equity exceeds the cost; the same is being adjusted in the said goodwill. The Parent’s portion of equity in the subsidiaries is determined on the basis of the value of assets and liabilities as per the financial statements of the subsidiaries as on the date of investment.

The Market Capitalization of the company stands at Rs.1697.21 crores based on today’s closing price of Rs.63.15/share. The 52 week High-Low was Rs.103/60.15

So, my dear friends , based on above would you place a bullish bet on 3i Infotech – not as a multibagger but in order to obtain decent returns of say 40-60 per cent in a span of say one year or so!

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd