Stock Synopsis: Infinite Computer Solutions Cheap Midcap IT Stock

Positives :

Undervaluation.

A net debt-free, profit-making, reasonable scale company ( FY14 = 1732 cr. ) available at an EV/EBITDA of just 3.13 and EV/Sales of just 0.33 with a stated dividend policy of distributing 30 % of PAT as dividend every year. If company maintains its dividend policy then on FY15e PAT, dividend yield itself works out to 5 % at CMP thereby providing reasonable downside safety.

Strengthening of Senior Management Team over last 1 Year.

Senior C-level executives from prominent IT firms like Wipro, HCL Technologies, NIIT Technologies, Tyntec, Ipass, etc. who themselves enjoy a very good reputation in IT industry have joined Infinite over last one year which gives a lot of credence to bright prospects of the company as also depicts the seriousness of the promoter ( who himself is an alumini & fellow of Wharton School of Business and is a member of the Global CEO Advisory Council for Wharton Fellows program ) to see his company scale up the value chain.

Some of the noteworthy additions to Infinite team are :

Amit Srivastav – who after spending 6 years at HCL Technologies and was its Head-Strategic Alliances & Sourcing Advisory in USA has joined Infinite as President of IT Services business unit since May'2013.

Ravi S Nimmagadda – who till recently was Senior Vice President & Head of BFSI business at NIIT Technologies joined Infinite as Senior Vice President – Sales & Marketing in 2013.

Srirama Srinivasan – who after holding leadership positions in Healthcare & Life Sciences vertical at HCL Technologies, Mahindra Satyam and Syntel and spending 14 long years at HCL Technologies joined Infinite as Senior Vice President from April'2014.

Sheppard Lyngdoh – who after spending 16 years in Infosys and Wipro and was Delivery Head at Wipro till recently has joined Infinite as Senior Vice President and Chief Delivery Officer from September'2013.

Chee Leng Loy - who after spending 15 years in British Telecom & Ipass Inc. and was till recently Managing Director – Asia & Japan at Ipass Inc has joined Infinite's Mobile & Messaging business unit as Vice President – APAC & Middle East Region from October'2011.

Myles Naughton – who was till recently Vice President – North American Sales at c****mark has joined Infinite's Mobile & Messaging business unit as Vice President - Americas Sales from July'2013.

Franz Obermayer - who was till recently Director Sales at Tyntec Ltd. has joined Infinite's Mobile & Messaging business unit as Vice President - European Sales from September'2013.

Nadeem Ladha – who was till recently Director of Sales at Tyntec Ltd. has joined Infinite's Mobile & Messaging business unit as Director of Sales – Europe Region from January'2014.

Samsung Electronics Achieving 'joyn Blackbird' Accreditation.

On 1^st August 2014, Samsung became the first smartphone provider accredited with 'joyn Blackbird' from GSMA and wil be offering joyn Blackbird based services on its flagship models including Galaxy S4 and S5 by the end of 2014 in Germany and Spain with subsequent European availability in France, UK and Italy. In addition to such fillip from device manufacturers, telecom operators are now increasingly warming up to the idea of offering RCS & VoLTE services to counter growing revenue-loss threat from OTT applications like WhatsApp, Viber, WeChat, etc.. Three companies including Infinite, Mavenir Systems and Acision are major players in this segment and Infinite has a tie-up with Nokia Siemens Network for selling of its RCS platform/product. In addition, Infinite has also signed three telecom operators on its own (one in Lebanon, Middle East, one in Singapore and one in US) for its RCS platform.

Whether RCS will be a success with the consumers or not that is a different matter alltogether but growing adoption of RCS by telecom operators should be a very good news for all the three major companies in this space including Infinite. This is because, almost all the RCS contracts are on revenue share basis and as the transactions go up, the revenue for Infinite also grows ;– to add, the nature of this revenue is non-linear, i.e., once it reaches a particular scale, it adds more to profitability than expenses ( EBITDA margins of this business unit is 20-22 % ). Hence, target for Infinite RCS is just three or four major operators signing it on a worldwide basis and if it can achieve that then it will add significantly to its profitability. Just to make a note here, Infinite has already inplace SMS/MMS platform (acquired from Motorola) for major telecom operators in US on which it serves 100 mn. subscribers.

Business Model.

Infinite's focus over last four years has been to increase non-linear revenue share to its business. It focusses on products/platforms that are at the end of their lifecycle but are likely to exist over medium term (if not long term) and are generating stable revenues, however, the organization running it is no longer inclined to invest in providing value-add to it. Infinite acquires such enitire platform/product (alongwith tangible assets involved) from the respective organization and supports it as also invests in it to provide value-add, getting in return the revenue share arrangement generated from the product as also IP rights to the value-add it makes to the product. Arrangement with Motorola was on the similar lines and company has invested significantly to derive results from this focus.

To explain breifly company's entire business, Infinite operates under three business units, viz., IT Services (ITS), Product Engineering Services (PES) and Mobility & Messaging (M&M).

ITS which contributes ~72 % to company's revenues enjoys lowest EBITDA margins in the range of 10-11 % whereas PES enjoys 16-17 % EBITDA and M&M enjoys 20-21 % EBITDA. Over last few years company is focussing on increasing its business from PES and M&M which is likely to augur very well for margins and therefore robust cash generation at the company over long term.

FY15 Guidance. No Forex Loss a Positive.

Despite flat Q1FY15, company maintained its guidance of ~1900 cr. revenue with 112-117 cr. PAT for FY15. 180 basis points YoY and 150 basis points QoQ improvement in EBITDA margins was a positive sign in Q1FY15 but, irrespective of such improvement, if we consider the fact that all of company's remaining few hedges are coming to an end in November'2014 and it has incurred a forex loss on such hedges of 18.75 cr. in FY14 (loss of 17.37 cr. in FY13) then PAT will increase by ~15 cr. to 105 cr. in FY15 from this factor alone which makes achieving PAT guidance a certainty thereby enabling the company to deliver an EPS of ~Rs. 27 for FY15.

Payback to Investors.

Company came out with its IPO in January 2010 at a price of Rs. 165 per share. Today, even after 4 years, it is still quoting at below its issue price inspite of it growing its revenues at a CAGR of 27.1 % from Rs. 664 cr. in FY10 to Rs. 1732 cr. in FY14 and growing its EBITDA at a CAGR of 11.5 % from 120 cr. in FY10 to 185 cr. in FY14. Post its IPO, company has done two buybacks (one in FY12 and then in FY14) at average price of Rs. 112 per share and has spent Rs. 42.68 cr. on the buyback alone. In addition, company formulated a policy of 30 % dividend payout in FY12 and paid rich dividends thereafter (except FY14 where PAT itself was low). If we count only dividend paid to pure public shareholders (excluding shares of company's management personnel from public holding) which forms only ~29 % of total shares, then post the IPO, the amount spent on dividend to public shareholders alone works out to be Rs. 28.60 cr.. To add further, in FY13, promoter bought 0.66 mn. shares from open market at average price of Rs. 98 thereby spending Rs. 6.50 cr.

If we go back to the IPO, out of the total issue of 1.15 cr. shares made to the public, only 5.73 mn. were fresh issue and 1.76 mn. shares were offered for sale by existing promoter of the company (Sanjay Govil). If we include both of this and consider the amount received by the company and its promoter from IPO then the amount works out to be Rs. 123.70 cr. out of which company has already repaid to the investors Rs. 77.78 cr. via buybacks, dividends and promoter's open market purchases which is a good 62.8 % payback and reflects strong confidence of the management on prospects of their company.

High Promoter Holding.

Promoter Holding, as at Q1FY15 is at 71.5 % excluding the shares held by the CEO (Upinder Zutshi) of the company considered under 'Public' category.

Negatives :

Customer Concentration.

Company has since inception adopted a strategy of farming (i.e. deepening relationship with existing clients) rather than hunting (acquiring more and more clients) because of which it has inplace long standing relationships with most of its top clients. Its top 5 clients are IBM, Verizon, Nokia Siemens Network, Xerox and Alcatel-Lucent. IBM contributes 52 % to company's revenues whereas Top 5 clients contribute 80 % and Top 10 clients contribute 92 % to company's revenues. Although prima-facie, contribution of 50 % from top client i.e. IBM looks risky but it has to be seen in the backdrop of :

Infinite is working with IBM since inception.

Infinite is one of the only six premier partners for IBM which work for it across the globe. Infinite itself is working in six countries for IBM. It does all sort of work for IBM starting with pass-through work (enjoying 2-3 % margins) to its internal project works and specialised product support works for IBM's clients.

Because of the lowest margins invloved (maximum average 10 %), and comfort achieved over last one and a half decade, Infinite is a critical trusted partner for IBM, loss of which either party can't afford.

So far, company has been able to handle client concentration quite well as it has also weathered the slowdown of one of its top telecom client when 'Telecom Wireline' segment suffered significant slowdown in FY12.

Geographical Cocentration.

Company has since inception projected itself as a US-centric company with base in US (promoter Sanjay Govil and majority of senior management team resides in USA). This is the reason why USA contributes ~89 % to company's revenues. This thing has both, pitfalls and benefits in the sense that in case of any downturn in US economy, company can suffer the most but, at the same time, it is at an advantage while bidding for federal contracts as also is quite insulated in case of adversities like that with 'US Immigration Bill'.

High DSOs.

DSOs are relatively high for Infinite despite the fact that even in worst times it has hardly suffered any significant bad debts because of the top notch financially sound clients it is working with. Major reason for high DSO is the 'pass-through' work that the company does for IBM. Since such work is at very low margin (~2-3 %), company only books margins and doesn't book entire revenue arising out of such work. However, debtors pertaining to 'pass through' revenues are booked in full and therefore much higher than actual revenue booked in the books.

To cite here the example, in FY13, company did 'pass through' work generating actual revenue worth 497 cr. for IBM, but, in its books, it booked only 17 cr. as revenue from such 'pass through' work.

T Rowe Price International selling in the market.

T Rowe bought 2.2 mn. shares as anchor investor at the time of IPO in 2010. Since last two quarters it seems to be selling in the market. As at 30^th June 2014, it still holds 1.74 mn. shares which is 4.35 % equity of the company.

Post IPO Revenue Performance :

( fig. in ` cr. )	FY14	FY13	FY12	FY11	FY10

IT Services	1250	961	NA	NA	NA

Mobility	241	198	NA	NA	NA

PES	243	232	NA	NA	NA

Total	1733	1391	1056	883	664