Weekly Stock Recommendation

INFOTECH ENTERPRISES



PRICE : RS.270 RECOMMENDATION : BUY

TARGET PRICE : RS.388

FY08E PE : 16X




The Reason to Buy this Stock :


We spoke to the management of Infotech Enterprises. We wanted to update
ourselves on the latest developments within the company and the impact, if any,
of the sub-prime issues prevalent in the US and Europe. We also spoke to Infotech
on the strategic partnership with Continental DataGraphics, a Boeing subsidiary.
The discussion reinforced our view that the recent sub-prime mortgages related
issues will not directly impact the company. As of now, Infotech does not operate
in this area. Hence, the company has no revenue exposure to the same. Infotech
is actively looking at a few acquisitions, for which it had raised close to Rs.3bn
recently. We expect the company to announce these in FY08.


We maintain our earnings estimates of Rs.16 per share in FY08 and Rs.22.8 in
FY09, based on fully diluted equity. We upgrade the stock from HOLD to BUY post
the recent correction. The price target remains unchanged at Rs.388.


The main takeaways are as under:
No direct impact of US sub-prime issues expected
n Infotech operates two businesses engineering, manufacturing and industrial
(EMI) and geospatial solutions design (GSD). The major verticals services by
Infotech are manufacturing, aerospace, telecom, government utilities, etc.
n The company has got no exposure to the financial services space. Thus, the
problems faced by the US sub-prime mortgage segment are not expected to
directly impact Infotech.

n The company has not faced any slowdown or cancellation of orders from any
of its clients, till date.

n However, a recession in major user economies may impact Infotech's customers.

In turn, this will impact revenue visibility for Infotech.

Strategic partnership with Continental DataGraphics

Infotech has entered into a strategic partnership with Continental DataGraphics.

As part of this partnership, Infotech and CDG will jointly bid for technical
publications businesses outside Boeing. The Boeing work will be handled by
CDG.

CDG is expected to handle the critical engine parts. The other work may flow
to Infotech, based on specifications. We also believe some work may be
outsourced by CDG to Infotech, which has got the requisite talent pool.

CDG specializes in the creation, production, and distribution of complex
engineering publications. It provides services like technical authoring and
illustration services, digital imaging. It hosts portal services in the US and
Europe.

The major verticals services by CDG including aviation, aerospace and defense,
manufacturing, energy and government.

CDG has developed complex technical and engineering publications for Boeing
aircraft and other heavy equipment manufacturers for many decades. In 2007,
it is expected to produce more than 2 mn hours in support of technology
initiatives related to the development, management, and delivery of technical
data and publications.

n Infotech is also working on technical publications. This partnership is expected
to help Infotech in reaching out to a larger set of customers.

n The financial details about the expected revenues and margins are not available.

n By virtue of being a vendor to aerospace companies like Bombardier and Boeing,
Infotech may be able to source additional business. This could come in from
the offset clause inserted by the Government in all large defense deals.

n Under the offset clause, foreign companies to which India awards defense
contracts, have to either manufacture 50% of the order value in India or
outsource goods and services amounting to 50% of contract value from Indian
suppliers.

n Infotech is currently executing a small contract under the offset clause.

n The company has formed a 50: 50 joint venture with Hindustan Aeronautics
Ltd (HAL). The JV is expected to target engineering design services for aero
engines, technical publications and the offset program for aerospace sales.

n The JV is close to appointing a CEO. We expect revenues to start kicking in
from Q3FY08.

n As the company had not hedged itself effectively against the rupee appreciation,
Infotech's Q1FY08 profits were impacted.

n The company has now raised its hedges. Currently, Infotech has receivables of
$80 mn hedged at an average rate of 41.61 per US dollar. This should allow
the company to protect its profitability in the event of a sustained rise in the
rupee.

Acquisitions on the anvil
n Infotech had raised about Rs.3 bn in Q1FY08 to fund potential acquisitions.

n We expect the company to complete the acquisitions by FY08 end.

n However, in the absence of any further information, we have not made any
changes to our estimates.


Future prospects
(Rs mn) FY07 FY08E YoY (%) FY09E YoY (%)
Income 5,425.4 6,764.1 24.7 8,984.8 36,312.2
Expenditure 4,291.7 5,427.1 7,217.5
EBDITA 1,133.7 1,337.0 17.9 1,767.3 9,754.9
Depreciation 256.0 334.9 430.0
EBIT 877.7 1,002.1 1,337.3
Interest 13.9 18.0 18.0
Other income 66.8 98.9 187.0
PBT 930.6 1083.0 16.4 1,506.3 9,095.1
Tax 186.5 229.0 346.5
PAT 744.1 854.0 1,159.9
Share of Profit 92.5 76.0 83.0
Adj PAT 836.6 930.0 11.2 1,242.9 11,035.3
Shares (mn) 46.2 54.5 54.5
EPS (Rs) 18.1 17.1 22.8
Margins (%)
EBDITA 20.9 19.8 19.7
EBIT 16.2 14.8 14.9
PAT 15.4 13.7 13.8