Infotech Enterprises: Investors should use the correction to buy the stock
Infotech Enterprises' low valuation compared to its large-cap peers is another reason why analysts are still betting on the stock.
The topline will continue to show growth in the US dollar terms due to the recovery in the US and Europe, and also due to the continued momentum in engineering businesses. However, the earnings before interest, tax, depreciation and amortisation (EBITDA) margin and net profit are expected to fall q-o-q. Besides the fact that the fourth quarter is seasonally weak, the appreciation of the rupee against dollar to the 60 level will also affect profitability.
Infotech Enterprises, an engineering solutions provider to various industries like aerospace, energy, medicine, oil and gas, mining, heavy equipment, transportation, telecom and utilities, is also using the inorganic route to propel growth. To add muscle to its telecom arm, the company recently acquired the US-based Softential Inc through its American subsidiary, Infotech Enterprises America Inc.
Though it paid 1.1 times the Softential’s 2012-13 annual revenue, the acquisition will add to the company’s earnings per share (EPS). The return on equity (RoE) is also expected to improve by 50 basis points at the consolidated level due to this acquisition. With the capacity to generate strong free cash flow and balance sheet—cash balance, including liquid investments, stood at Rs 655 crore at the end of December 2013—Infotech Enterprises is expected to use the acquisition route in the future as well.
The recent correction, triggered by a fall in the US dollar and due to a shift in investor preference from defensive to cyclical sectors, provides a good entry point for this counter. The low valuation compared to its large-cap peers is another reason why analysts are still betting on the stock.
Though the ongoing brand building and organisational restructuring exercise has acted as a drag on profits in recent quarters, it should help Infotech Enterprises win better clients and enjoy higher valuations in the coming quarters.
To develop a unique identity, the firm is also changing its name to Cyient. The board has already approved this measure and the shareholder approval is expected to come through soon via the ongoing postal ballot.
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