STOCK UPDATE
3i Infotech
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs110
Current market price: Rs85
Upgraded to Buy
3i Infotech has announced that its duly authorised committee of the board of directors, at its meeting on September 22, 2009, has decided to close the bid period for qualified institutional placement (QIP) and has approved the issuance of 3.75 crore equity shares at a price of Rs84.75 per equity share. This has led to fund raising of Rs317.8 crore.
Funds raised through QIP would be used to retire debt and would allay concern over higher leverage of the company. As per our working, 3i Infotech?s debt to equity would come down to 1.4x from 2.1x earlier.
In terms of equity base, the QIP issue expanded 3i Infotech?s fully diluted equity base by 23.4% to 19.7 crore equity shares. However, this is partially offset by savings in interest expenses from the repayment of debt from QIP proceeds. Consequently, 3i Infotech?s FY2010 and FY2011 earnings are expected to get diluted by ~15-17%.
We have now incorporated the expansion into equity base from QIP issue and the resulting interest expense savings into our estimates. Consequently, we have revised our FY2010 earnings estimate to Rs12.8 per share and FY2011 earnings estimate to Rs14.6 per share.
Though the earning dilution through QIP is likely to remain an overhang on the stock in near term, we believe, 3i Infotech has taken necessary steps such as QIP issue and sharp reduction in DSO days (121 days in FY2009 v/s 151 days in FY2008), which has allayed concern over its weakening balance sheet. This coupled with improvement in demand environment, we believe, 3i Infotech is a strong case for getting re-rated post QIP issue. Consequently, we are upgrading our recommendation on the stock to Buy with revised price target of Rs110. We have assigned target multiple of 7.5x on the stock, which is its long-term average PE multiple since its listing in April 2005.
Alphageo India
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs230
Current market price: Rs212
Downgraded to Hold
Key points
Alphageo?s pending order book as on March 31, 2009 stood at Rs114 crore (versus Rs63 crore as on March 31, 2008). The strong pending order book provides revenue visibility for FY2010 and beyond. We highlight here that the company is yet to get clearance from ONGC to commence Rs38.9 crore Nagaland project, as the agreement between ONGC and the government of Nagaland is still pending.
The company is focused to diversify its revenues from North east India (where heavy rains during monsoon severely impedes seismic survey work) to other regions that have differential monsoon pattern. In line with this, the company has bagged order worth Rs39 crore from ONGC in Cauvery basin (Tamil Nadu), which would be executed during monsoon. Hence, we expect better Q2 given the expected execution of Cauvery basin order during the period.
The company?s cash flow from operating activities declined to Rs20.4 crore in FY2009 as compared to Rs25.9 crore in FY2008 due to steep decline in the net profit and deterioration in the net working capital (deteriorating to 42 days of sales in FY2009 from -19 days in FY2008). On positive side, the company?s debt to equity ratio narrowed down to 0.2x in FY2009 from 0.4x in FY2008 and 1x in FY2007. With the cash flows expected to improve in FY2010, the company is likely to continue its debt repayment programme.
The company?s return ratios decreased in FY2009. Owing to 53% year-on-year (y-o-y) decline in the net income, the return on net worth (RoNW) declined to 11.5% in FY2009 from 32.6% in FY2008. The return on capital (RoCE) employed also plummeted to 19.5% in FY2009 (from 37.6% in FY2008).
In terms of outlook, the company expects exploration and production (E&P) spending to increase in India given the rebound in crude oil prices (to USD70 per barrel), tax sops provided by the government (income tax holiday under 80-IB extended to gas production) and expectation of strong participation in NELP VIII. Therefore, the company expects significant growth opportunities for seismic service providers going forward.
We believe that further upside to Alphageo?s order book could come from pending work from NELP VI and NELP VII, and the upcoming NELP VIII auction. Orders from these rounds could be in the range of Rs600-800 crore every year over FY2010-2013. The Directorate General of Hydrocarbons (DGH) has also estimated USD1.9 billion (out of this 50-55% is expected to be captive investment) worth of investment in on-land seismic surveys in India, as it expects E&P spending to increase over the next couple of years.
We have revised our earnings per share (EPS) estimates for FY2010 and FY2011 to Rs16.9 and Rs21.2 respectively based on updates from FY2009 annual report. We have rolled over the price target to the average of FY2010 and FY2011 earnings. Consequently, we have revised our price target to Rs230. However, due to the limited upside from the current market price of Rs212, we are downgrading the stock to Hold. At the current market price the stock trades at 12.5x FY2010 and 10x FY2011 estimated earnings.
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