Infinite Computer Solutions (India) IPO Analysis

Focused on telecom vertical
Has seen stupendous growth over the last 18 months even when the general industry as well as the telecom vertical were not doing well
Infinite Computer Solutions (India), promoted by Sanjay Govil, is a global service provider of infrastructure management, intellectual property (IP) leveraged solutions and IT services, is significantly focused on the telecom vertical. The telecom vertical contributed 59.4% of the revenue for fiscal ended March 2009 (FY 2009) and 54.4% of the revenue in the first half of FY 2010. The other focus industry verticals include media, technology, manufacturing and healthcare.
Its services span from application management outsourcing, packaged application services, independent validation & verification, product development & support, to higher value-added offerings including, managed platform and product engineering services. In the telecom vertical, its services to original equipment manufacturers (OEMs) and service providers include product engineering and lifecycle management, operational support systems (OSS) and business support systems (BSS).
Geographically, for FY 2009, USA contributed about 91.2% (88.6% for H1 FY2010) of the revenues of the company, whereas Europe contributed about 2.1% (6.4% for H1 FY2010) of revenues, India about 5% (3.3% for H1 FY2010) and Asia Pacific contributed 1.7% (1.7% for H1 FY2010) of revenues. The company has five development centers in India at Bangalore, Hyderabad, Gurgaon and Chennai. It has a global sales network comprising 14 offices across six countries, i.e., North America, Europe, China and Asia Pacific.
As of September 2009, the company had an headcount strength of 2,648 employees including 2,385 technical and 263 support. The utilization was steady at 75%. The onsite headcount has remained stable at around 600 employees. The company had 70 clients as of September 2009, with contribution from Top 10 clients at 88.2% for FY 2009. The number of clients with US$ 20 + million revenue increased from one in FY 2006 to three in FY 2009 and the number of US$ 1 million clients increased from nine to 13 over the same period.
The public offer includes fresh issue and offer for sale by selling shareholders, which include promoter Sanjay Govil, key managerial personnel Vaibhav Bhatnagar and investor WhiteRock Investment (Mauritius).
The net proceeds of the issue would be utilized for upgrading the existing facility in Bangalore and set up a new facility in Gurgaon, acquisition, and repayment of debt. The facility is to be completed by August 2010 and the acquisition by July 2010.
Strengths
* The company has seen good growth over the last 18 months on the back of change in revenue mix. For FY 2009, the operating revenue grew 44% over FY 2008 and for H1 FY 2010, the company reported 65% of FY 2009 revenue. The company has moved away from low margin business to core higher margin business. In FY 2006, Application Development & Maintenance (ADM) contributed 80% of revenue. This has come down to 61% in FY 2009, whereas the share of remote infrastructure management services increased from 6% to 8%, testing services from 4% to 11%, and IP leverage services from 8% to 17%.
* The operating margins improved from 4.3% in FY 2007 to 11.9% in FY 2009 and further to 18% in H1 FY2010. The company, which was predominantly an onsite company, has since seen the level of offshore increase from 10% in FY 2006 to 25% in FY 2009 and further up to 32% in H1 FY 2010. The share of non-linear revenue has also increased, thereby boosting margins. The billing has changed towards fixed price and revenue sharing from time & material (T&M). T&M has decreased from 81% in FY 2006 to 51%, whereas fixed price has improved from 19% to 43% and revenue sharing to 6%.
Weaknesses
* The company derives significant portion of revenue from limited number of clients. Top client contributed 40% of revenue and the top 5 clients contributed 79.7% of the revenue for fiscal 2009.
* A significant portion of business is derived from the telecom vertical. For FY 2009, telecom contributed to 59.4% of revenue. The telecom vertical has been going through bad times and revival is expected only by mid 2010, subject to stability in the global economy. Many telecom companies, both OEMs and service providers, have cut back on their budgets and expansion plans.
* The day's sales outstanding (DSO) for the company have been increasing from 94 days in FY 2006 to 150 days in FY 2009. The number is slightly lower at 141 days for the first half of fiscal 2010. The actual DSOs for the company are about 100 days. The jump in DSOs is mainly due to an arrangement entered into with a long-standing client, who has cut down on its vendors from 100 to 12. The arrangement is back to back, wherein the company would be billing the client and the vendor who is still transitioning the work would bill the company. The revenue would include a small margin of this billing, whereas the complete impact would be seen in debtors and creditors. The management expects this arrangement to end in the next 2-3 years.
Valuation
At the issue price of Rs 155 – 165 on consolidated EPS of Rs 10.2 for FY 2009, the PE works out to 15.1 – 16.1 times. The company has seen a very robust FY 2009 and first half of FY 2010, when the general industry trend was negative to sluggish. Backed by growth in top 10 clients and change in business model, the Company reported 43% growth in operating revenues and 159% jump in net profit for FY2009, For H1FY2010, it has already done 65% of FY2009 revenues and 82% of FY2009 net profit. On annualized basis, FY 2010 consolidated EPS comes to Rs 19.1 and PE comes down to 8.1 – 8.6 times.