Driven by the strong growth in products business, i-flex Solutions is expected to comfortably outperform the industry
i-flex Solutions continued its growth momentum this quarter also. It's revenues increased sequentially by four per cent (qoq) and 50 per cent (yoy) to Rs 174 crore last quarter. Net profit, at Rs 58.8 crore, grew by three per cent (qoq) and 116 per cent (yoy) and was much better than market expectations of around Rs 50-Rs 52 crore.
The growth, once again, was largely driven by the products business which grew sequentially by four per cent to Rs 113.4 crore. Since the company had booked Rs 14 crore of product revenues pertaining to the earlier period in the second quarter, analysts were expecting a flat or marginally negative sequential growth in products revenue during the last quarter.
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After adjusting for the extra income of Rs 14 crore in the previous quarter, the company's products revenue actually vaulted sequentially by 20 per cent in the last quarter.
Given the lumpiness in products revenue on a quarterly basis, it probably makes more sense to look at a longer time period. For the first nine months, products revenue increased by 33 per cent to Rs 303.5 crore. The margins in the products business have improved considerably, up from around 33 per cent to about 41.7 per cent in this fiscal. What's more, the order book continues to remain strong at $29.7 million (Rs 143 crore approx), excluding the rollout of its flagship product Flexcube for Citibank in 100 countries across the world.
The company has added seven new clients for Flexcube this fiscal. The services business has also shown some encouraging signs. The contribution from non-Citi clients improved by five per cent to 32 per cent of the total services business.
On the back of an increase of three per cent in its billing rates, operating margins have also expanded sequentially by one per cent to around 13 per cent during the last quarter. However, they are still well below the industry standard of about 30 per cent.
One of the major concerns in the company's stock has been the high level of debtor sales outstanding (DSO) in the past. The company has brought it down drastically to 96 days as compared to 106 days and 158 days as on September 2002 and March 2002 respectively.
"We had no doubts about the quality of accounts receivable," points out Aman Chowhan, research analyst, TAIB Securities. "It was only a matter of aggressively pursuing collections from the customers," added Chowhan. Clearly, i-flex's performance was much better than its peers. More importantly, the management appears upbeat about growth in the coming quarters.
"We are witnessing a good traction in both products and services business and are optimistic about the growth in future," said Rajesh Huku, managing director, i-flex Solutions in a recently held earnings conference call.
At the current price of Rs 838.50 the scrip trades at a price-earnings ratio of 13 times its estimated FY03 earnings (Rs 64 per share). The stock looks richly valued relative to IT companies of a similar size. But analysts are still quite bullish on the stock.
They argue that the company's products business is going strong and one can expect better-than industry growth rates going forward. In fact, many analysts have upgraded the projected revenues for the next fiscal and pegged the target price in the range of Rs 975 to as high as Rs 1,250 over the next one year.