Edelweiss Note on Infinite Computer's IPO.
Infinite Computer Solutions – IPO note
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Issue details
Company description
Incorporated in 1999-00, Infinite Computer Solutions (ICS) was promoted by Mr. Sanjay Govil and operates via four delivery centers in India and employs more than 2,600 employees as on September 2009. Promoter (& promoter group companies) currently own 78% of the shares in the company which is expected to come down to 64% post IPO. ICS is service provider of Application Management Outsourcing, Packaged Application Services, Independent Validation and Verification, Product Development and Support, focused on the Telecom, Media, Technology, Manufacturing, Power and Healthcare industries. Telecom is the dominant vertical for ICS contributing 55% of total revenues offering services to TSPs, OEMs and ISVs. Also from a horizontal perspective 60% of its revenue are derived from application maintenance services.
Management background
Promoter, Mr. Sanjay Govil holds the position of a Non-executive Chairman of the board. Prior to floating Infinite, he had worked with companies like Verizon and IBM. He
holds the degree of Bachelor of Science degree in Electrical Engineering from Auburn University and a Master of Science degree in Electrical Engineering from Syracuse University. Infinite's board is headed by Mr. Upinder Zutshi, MD. He is an engineering bachelor from BITS, Pilani and has over 20 years of work experience in IT services industry and worked with companies like CMC Ltd and ESS in the past. He has been with Infinite since 2003 and is also on board. He heads a team of fairly experienced senior management and key management personnel who have rich domain expertise. The senior management includes, Mr. Navin Chandra (Whole time Director) with over 45 years of experience and has worked with Indian Navy.
Strength in telecom domain
Telecom is the dominant vertical for ICS contributing 55% of total revenues and its services offerings cater to all three segments i.e. TSPs, OEMs and ISVs. ICS is strong in telecom infrastructure management and managed platforms services with its years of association with large clients such as Verizon and AOL. ICS's telecommunication-specific services and solutions to Telecom OEMs and ISVs include product engineering and lifecycle management (acquired mainly from Comnet acquisition in 2007) services relating to telecom equipment used in areas such as transmission, switching, access and Operational Support Systems (OSS). Solutions for TSPs include process consulting, development of their BSS and OSS systems, as well as, the integration of those systems with the underlying network technologies.
Long term large client relationships
ICS has successfully been able to manage multi-year large client relationships. This is reflected from the fact that ICS's top 5 client list over the past few years has mainly has mainly remained constant. Some of the large clients for ICS are Verizon, Alcatel-Lucent, IBM, ACS, AOL and Fujitsu among others. Though the company has an active client base of 65, its top 5 clients contribute revenues to the tune of 84% of total. One of key differentiator for the company of USD 130mn size is that they have been engaging themselves on a risk-reward based, fixed bid and revenue-sharing models thereby engaging themselves closer to customer's business and also allowing company to decouple revenue to headcount linkage.
High onsite centricity provides opportunity to shift work offshore
Over the past two years, ICS has focused on moving work offshore, as a result of which the offshore proportion of revenue have increased from meager 23% (in FY09) to 32% now (H1FY10) aiding margin increase. We note that ICS still has high potential to increase its offshore portion of work, which will improve the profitability for the company.
Strong financial performance in past two years
FY08-H1FY10 period has seen as sharp growth in revenue along-with margin expansion. This has been as a result of greater offshore work and increased spending in the top client base as slowdown accelerated the same. ICS's EBITD margins at 18% are now comparable to most other mid-tier players.
Summary financials
Valuations and outlook
Over the past two years ICS has focused on improving its financial performance resulting in margin expansion along-with above industry growth for FY09 as well as H1FY10. We believe company has potential to sustain its above industry growth rate given the low base at which it is operating and high offshore potential. Annualised FY10 net profit estimates is INR 838 mn translating into EPS of INR 19.1 on fully diluted share count of 44mn. At higher band of INR 165/share the P/E stands at 8.7x FY10. Assuming a 20% growth in FY11 on EPS INR 22.9 the P/E stands at 7.2x. Other comparable mid-tier players in the IT services space are trading in the range of 8-10x FY11. We believe ICS has a potential to deliver 10-15% returns on listing.
Other key information -
· Client concentration - Top five clients accounted for 83.80% of revenues in H1FY10.
· Delivery centers - ICS has four delivery centers in India – company owned facility in Bangalore, and leased facilities in Hyderabad, Gurgaon and Chennai.
· Employee strength – as at September 09, ICS had 2,650 employees (2,385 technical and balance support).
· Bankers to the issue - SPA Merchant Bankers and India Infoline.
Risks and concerns
· High client concentration and US centricity
ICS has heavy reliance on very few clients for most of its revenues. Verizon has been one of the major clients for Infinite since its inception. Over the years, Verizon has contributed ~40% of Infinite's revenues. Further, the top 5 clients of Infinite contribute more than 80% of the company's revenues, which exposes it client specific risk that could materially impact its financials. Further, the geographical revenue distribution also indicates that the company is highly US centric, though is increasingly concentrating to expand its Europe presence. Revenue contribution from US currently stands at 89%.
ICS is heavily dependent on its top 5 clients
Geographical revenue composition for H1FY10
Objects of the Issue
Shareholding pattern pre and post Issue
Key milestones
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Thanks & Regards,
Abhishek Kothari
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