3i Infotech (3IINFO) / Varun Shipping (VARSHI)

3i Infotech (3IINFO)
Current price : Rs 131 Target price : Rs 178
Potential upside : 36% Time Frame : 12 months
OUTPERFORMER

Unique business model boosts results …
3i Infotech’s results for Q3FY08 were ahead of our expectations with revenues growing 14.2% q-o-q to Rs 317cr in Q308 (our estimate: Rs304 crore). This outperformance was a result of a 27% q-o-q growth in products revenue. The recent acquisition of J&B Software & Services contributed around Rs 15 crore to revenue. Services, however, grew at a meagre 3%. EBITDA margins at 21.1% remained relatively flat compared to 21.2% in Q208. This was a result of 10 bps q-o-q improvement in Products Gross Margin and 50 bps q-o-q reduction in services gross margin. Net profit grew 21% q-o-q to Rs 48.5 crore ue to lower minority interest.

Key Highlights
The company is well insulated from the two factors concerning the Indian IT sector – namely rupee appreciation and the US sub-prime crisis. The company derives 37% of its revenues from India. Its net inflow of US dollars is around 6%, and hence it is not significantly impacted from rupee appreciation. The acquisition of J&B Software and Services, which contributed Rs 15 crore in the quarter, is in the business of check & payment processing and hence not impacted significantly by the sub-prime crisis. The company has cash of Rs320 crore and debt of Rs1,100 crore (including FCCB of Rs 600 crore) which would help them in future acquisition. The company has also reduced its debtor’s days from 154 days in Q208 to 133 days in Q308.

Valuations
The unique business model along with its acquisition-led strategy has driven the growth for the company. The 7.7% growth in pending order book also provides comfort on the future prospects of the company. We maintain our outperformance rating on the stock company with a price target of Rs178, which discounts FY09E EPS of Rs16.5 by 11x.

Varun Shipping (VARSHI)
Current price : Rs 80 Target price : Rs 123
Potential upside : 53% Time Frame : 12-15 months
OUTPERFORMER

Sailing strong …
Varun Shipping Corporation reported a 41% y-o-y increase in revenues to Rs 229.95 crore in Q3FY08 on the back of revenues from newly acquired vessels and higher freight rates. The reduction in bunker expenses to-sales ratio from 7.6% to 6.6% and repairs and maintenance-to-sales ratio from 11.5% to 5.0% enabled the company to report an improvement in EBIDTA margin from 54.5% to 64.2%. Despite depreciation and interest expenses being higher by 43% and 42% respectively, the company has been able to report a robust growth of 85.9% in net profit to Rs 73.69 crore.

Varun has been able to report strong revenue growth due to incremental revenues from the new vessels. Revenue growth was is mainly driven by new vessels in the offshore segment. Varun deployed two AHTS vessels having the highest bollard pull capacity in India with Reliance Industries at very lucrative rates. The company has a dominant presence in the less-volatile LPG carrier segment with a market share of 80%. Its strong presence in the niche LPG carrier segment and the buoyant offshore segment, along with a well established customer base that includes Indian public sector undertakings and reputed international charterers would provide visbility of its revenues and earnings in the next few years.

Valuations

Varun should report steady growth in revenues going forward. We expect the company to register a 14% CAGR in revenue over FY07-09E. We expect EBIDTA margin to improve from 55.86% to 58.7% over the same time. The stock trades at 4.1x FY09E earnings and 3.6x FY10 earnings, making it the cheapest stock available in the shipping sector. With steady revenue growth and improvement in operating margin we expect the stock to be re-rated. We believe that the stock is available at attractive valuations and maintain our outperformer rating with a target price of Rs 123, an upside of 53%.