Sandeep, there is something cooking and I am not saying this because I got any mail from Raj 
Avoid this counter.
Vinod
Hi Vinod - Can you please e-mail your reasons for saying this to me at my ID
rapidriser1 [at] g m a i l dot com and if possible also forward to me Rajâs e-mail.
I have been tracking this counter for some time and was even thinking of taking an initial position based on its cheap valuation.
Hi Ajit,
Raj did not sent any mail to me. After seeing the response from the market and speaking to a few people from the industry I thought it better to avoid this scrip.
Client concentration is high and I suspect some big client has has either reduced the a/c size or is leaving.
Cheers
Vinod
Hi Vinod,
Gaining and losing clients is part and parcel of its Business. Yes being a small company this client concentration risk will always be there⌠And thatâs why market is assigning low PEâs to these scripts⌠like thinksoft,Rs-software,nucleus etc⌠But what i am not able to understand is the bashing that it has received for slightly missing the projected figures and on managementâs low guidance for the FY14. I dont find anything wrog with management being candid in their forecasts rather than showing a flamboyant forecast and then missing it finally⌠Let me know if you are telling to avvoid this out of intuition or you know something bad about this ?? No hard feelings mate⌠already lost a quite a good amount of mny on this⌠Hence seeking the advice of the fellow boarders now.
In most such cos the prices fall first and the reasons come to light later. The crash on Friday does not give a comfortable feeling. I plan to avoid this co at last until I read the AR for FY-2013.
Hi Sandeep,
Both! Intuition says something is wrong and then heard from some people in the industry that they might have lost or could be on the verge of losing a big account. You can take this as an unconfirmed report. All small IT cos have this risk but when risk is expected to become actual loss they get hammered.
My suggestion is to avoid this com, there are many better opportunities.
Cheers
Vinod
Iâm quite new to Infinite Comp. stock. Can someone briefly explain how good the management or promoters of this company are? Which mid or small IT company would be a good comparable peer for Infinite Comp Sol?
If you can also briefly explain their business model and risks it would be valuable. Thanks.
Sridhar
Any idea why this stock has hit the upper circuit today?
Hi Guys, Anyone still interested in this? I see some of you have sold out. I am still holding, I think with ~9% dividend and high promotor stake and buybacks being done this has enough margin of safety so holding. However price has run up recently just like most of the stocks in the market so I found this thread to get hold of some experts :). Business can have 1-2 bad quators or years as business is business and this is a small player. So it has risk and so does almost any stock. I have been following this guys in conference calls etc and so far I am not displeased with the management. Also if there is information that people for some reason cant share here I would be happy to hear it,I can be reached atkmukul . Even at this market high this is one of the relatively cheap stocks that I can find 
Hi Mukul,
Yes. May not the best of the lot. But is certainly the most undervalued small cap IT stock at present. Their investment thesis has resulted in reduction of their Ebidta margins for FY14. They should be back to normal BAU this year if the managementâs words are to be believe. If that happens it can clock an eps of more than 40. Technically too a weekly close above 170 can double the script in short time.
havent gone through all transcript, but per extract from Q4 concall :
In view of that we have, based on the visibility we have right now, there are few other activities that are going on but wedonât have exact revenue and margin visibility at this point, prepared a guidance for this fiscal. We are expecting ourrevenue to grow both in INR as well as US Dollar terms, 10% to 12% and our Net Profits to grow around 25% to 30%. AsI said, there are certain things where we donât have complete visibility right now and also in view of the Rupee fluctuation;we will continue to watch both these aspects and perhaps after the end of the first quarter, maybe come with a morevalidated guidance. But as of this point, we believe our revenue should grow about 10% to 12% and net profit to growabout 25% to 30%.
Taking this at face value, the FY15 eps can be ~26. This and RS soft have always commanded pretty low multiples though they try hard to be seen as âinvestor friendlyâ . RS has Dolly to itâs credentials now. Infinite has been doing buy backs, high dividend policy, promoter buying etc . Given the market sentiment, this might well get rerated on a good result.
Thanks Manish and Mr Sood for your comments, RS isnt as cheap/friendly as their dividend is less. This is much better Another one with similar valuation is R Systems. You might like it
Hi Mukul,
Believe, it is a cheap one. If you track the history of the company over the past four years their average OPM is 17.5% where as the last yearâs OPM is 10.65% which is way below their average. This was because of the managementâs calibrated investment into mobility and few other product areas to lay down the base for the strong future. Because of this their bottom-line was impacted despite strong growth in their revenues.
Their OPM should be back to the average levels if not higher in the next two years with their continued growth in its topline. But as stated by Mr sood above, clarity is lacking from the management on their guidance. Hopefully Q1 will bring out more transparency on its future.
Also noteworthy point is that the management has always been a conservative one beating their guidanceâs almost three times in the last four years.
This company deserves a closer look.
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 â 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 â who till recently was Senior Vice President & Head of BFSI business at NIIT Technologies joined Infinite as Senior Vice President â Sales & Marketing in 2013.
Srirama Srinivasan â 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 â 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 â Asia & Japan at Ipass Inc has joined Infinite's Mobile & Messaging business unit as Vice President â APAC & Middle East Region from October'2011.
Myles Naughton â who was till recently Vice President â North American Sales at Cloudmark 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 â who was till recently Director of Sales at Tyntec Ltd. has joined Infinite's Mobile & Messaging business unit as Director of Sales â Europe Region from January'2014.
Samsung Electronics Achieving 'joyn Blackbird' Accreditation.
On 1st 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 ;â 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 30th 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 |
Views Invited.
Rgds.
Discl.- Accumulating
1 Like
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There earnings are on rise(except FY14) but why they are not able to generate FCF?
-
Why so much capital is locked in working capital?
-
Why FY14 was bad year for them? There revenue increased but cost (mainly SG&A) have increased much faster.
if we can answer 2 and 3 then we automatically answer 1.
also there margins have contracted continuously from last 2-3 years but seen improvement in latest quarter.
we need to find the reason why there margins contracted and also can they improve there margin going forward to the level before.
My Reply on infinite on another forum covering broad aspects :
Hi Mahesh,
Why such a low valuation? though it has tactical advantages.
is it somehting market is digesting some news/events/ Mgmt integrity?
Plz share
The same thing haunted me when I started analysing this stock few months back as I always consider Mr. Market as perfect while assigning valuations to any stock. Even investor communication from this company was above par so there was no question of market not knowing or suspecting anything with rgds. to transparency. This made me talk to market guys as also to some dedicated analysts tracking the sector. Few reasons that were given for such low valuations were :
Company being heavily dependent on Telecom sector,
Company having very high client concentration,
High DSOs,
Company doing majorly low margin work (and in the books therefore revenues are understated while margins are overstated)
Motorola deal which was called a game-changer at the time of signing, has although given the promised revenue so far but it's value add i.e. RCS is having uncertainty as so far consumers response has been negative.
Apart from Motorola and one other deal, company not able to clinch any significant deal in PES space.
Out of all these, I was not able to find a single reason of management credibility at stake here except one when company's US head was arrested (Neeraj Tiwari) for some bad things in 2011 ; whom company sacked immediately at that time (but still he holds 0.76 mn. Shares in the company). This is the reason why I decided to check this issue from industry sources as also company's clients' side. To my surprise, industry sources indicated it as a company with reasonable management and recent appointments of that of Amit Srivastav and Ravi Nimmagadda were quite known face and enjoyed good reputation. From client side I was able to check with only IBM sources and they had very high regards for Infinite team. In fact in the words of one of the source, he told me Infinite is like an 'extended family''.
However, apart from this, since ISG also has many IT industry guys, I would like to hear from ISG also rgdg. this as it will help a lot.
Now I will tell you my thought process asto why I have decided to invest in this company :
1). From the feedback I was able to gather from market, industry and client side, I didn't find major negative with rgds. to management quality. Infact the strategy that they are adopting I liked it and the efforts they are putting seemed quite serious to me. So unless there is some major negative that I am not able to see on the management side, I am prepared to take the business risks.
2). Over last many years, I have seen many bad management companies, and the crucial sign of assessing management is how much money they are willing to part with especially with public shareholders. Here, this company seemed to do quite well with two buybacks, promoter's open market buying as well as good dividend in 2 years out of 4 years it has been listed. It seemed a case of promoters doing their bit but are failing which was a good sign to me. Infact, it was nice to hear mr. Sanjay govil in one of the last concall he attended, where he seemed so passionate about Infinite and Infact he gone to that far in saying that he hoped one day he will provide good answer to shareholders of his company's investments in Mobility by unlocking value via overseas listing or something like that.
3). Over last one year, company's CSR activities have increased which is comforting.
4). With management's credibility substatiated, I thought of checking its business whether its real or not in the sense that the top notch clients they are boasting of working with is actually true or not. Here it was not so difficult as its clients are well established corporates in the industry. I found that Infinite's employees are actually working on projects for IBM (infact Infinite has a large dedicated business unit for IBM), Verizon (in Wireless & Wireline both), Clearwire, Panasonic, etc. as also company's claim last year of it building Sentiment Analytics framework as also Healthcare Platforms is real. To add, deal with Mototrola was also real and its tie-up with Nokia Siemens for RCS was real.
5). So now, with management as also its business being assessed as real and reasonable, my focus turned to business risks.. Now, here, one particular thing which I found risky was High DSOs but when I looked at it in the backdrop of the profile of clients it is working with I didn't found it too risky. Second, its strategy of farming which has resulted in high client concentration might actually prove beneficial for the company in the long run because of its focus on platformization of the business.
6). Rgdg. RCS, frankly speaking, I don't see it a big winner with consumers but operators all over the world will eventually move to it to reduce dependence of consumers on OTT applications. I talked with industry guys on this and they said the major issue because of which consumers are not adopting RCS is not the platform/service but the hardware problems associated with it. If device issues are sorted out and if it resides like SMS/MMS platform on handset then eventually consumers will move to it. On this lines Samsung's accreditation to latest 'jaoyn Blackbird' standard is a welcome move and it is expected to be followed up by other manufacturers too. On ground operators are more then willing than before to adopt to RCS.
7). Having assessed Infinite on all above parameters, I looked at its valuations asto are the risks associated justify the current low valuations of the company on the bourses. Here, it will important to note historical multiples assigned to it post listing by the market :
|
Mcap/Sales TTM |
Mcap/Sales Forward |
EV/Sales TTM |
EV/Sales Forward |
EV/EBITDA TTM |
EV/EBITDA Forward |
|
|
FY14 |
0.24 -0.48 |
0.18 -0.37 |
0.18 â 0.42 |
0.16 â 0.34 |
1.24 â 2.87 |
1.47 â 3.21 |
|
FY13 |
0.28 â 0.63 |
0.21 â 0.48 |
0.19 â 0.55 |
0.15 â 0.42 |
1.05 -3.01 |
1.04 -2.86 |
|
FY12 |
0.29 â 0.98 |
0.25 â 0.82 |
0.25 -0.94 |
0.15 â 0.79 |
1.45 â 5.39 |
0.83 â 4.35 |
|
FY11 |
0.88 â 1.44 |
0.66 â 1.08 |
0.87 â 1.43 |
0.62 â 1.04 |
5.02 â 8.21 |
3.56 â 5.95 |
|
FY10 |
1.30 â 1.69 |
1.12 - 1.44 |
1.30 â 1.68 |
1.11 â 1.43 |
10.01 â 12.97 |
6.33 â 8.22 |
Now, what I see is for this low valuations to sustain, either the revenues and/or profitability has to go down substantially or some major negative thing specific to the company has to come. As on date I don't see either of that happening and so what I believe is valuations should correct themselves to trade at atleast reasonable levels from now on.
8). Having said all these, I must admit that I am not going overboard on it as I would have gone with any other company with such fundamentals at such valuations mainly because of the trading history of the company on the bourses.
Please consider my views expressed here in the backdrop of me accumulating the company's shares and therefore they may be biased. Do your own homework and build your own conviction before buying any shares in the market.
Rgds.
Hi Vaibhav Kumar Agarwal,
On your queries, yes, working capital position of Infinite is relatively higher than other IT companies but, its not alarming. Also, here I would like to point out one thing that in case of Infinite, its reported revenues are actually understated whereas margins are overstated. This is because of the pass-through work it does for IBM for whichonly margins (2-3 %) are recorded as revenues rather than entire revenue. I will provide the table below :
|
|
FY14 |
FY13 |
FY12 |
FY11 |
FY10 |
|
Reported Revenue ( Booked in Books ) |
1732.73 |
1390.61 |
1055.81 |
883.28 |
664.30 |
|
Actual Revenue ( including pass-through revenue ) |
NA |
1871.08 |
1571.62 |
1330.56 |
969.90 |
In case of margins, companywas investing heavily in various platforms/products for Healthcare and Mobility vertical as also building up sales team for Mobility vertical for capturing the RCS as also opportunity for its other products like EMS and PMC. Company informed in advance regarding magin reduction in FY13 itself which was a good sign.
Rgdg. improvement in margins, in short term I see the margins stabilising at 12 % whereas in the medium to long term, I expect margins to inch up closer to historical 15-16 % but it may take a while. This is because, as the revenue from RCS andEMS start rising, it will contribute more to margins as they are under revenue share arrangements / per transaction based pricing.
Also, FY14 was not a bad year for infinite in revenue terms as in constant currency terms it grew its revenues by 12 % ; it was margins which suffered because of management's strategy of investing for future growth.
Rgds.
Stock up 10 % today @175 after touching high of 184 with good volumes. If the stock manages to close at this levels today, this will be the first time since Aprilâ2011 that stock will close above 163. Lets keep our fingers crossed.
Rgds.
Discl. - Invested
Mahesh,
Any additional information/analysis on Infinite?
Rgds