i-flex: Two to tango

Mantas buy will give i-flex better cross-selling opportunities

With the acquisition of US-based Mantas, which provides anti-money laundering and compliance software and services to financial institutions. i-flex will pay 3.5 times trailing 12-month revenues and about 17.8 times operating profit, which seems reasonable for a product company.

i-flex itself trades at 5.8 times trailing 12-month revenues and 28.5 times operating profit. Mantas' products will be complementary to i-flex's products such as Flexcube and Reveleus, and will provide it better cross-selling opportunities.

In the June 2006 quarter, which is generally slack for software firms, i-flex came out with disappointing numbers. Its top line fell nearly 11 per cent q-o-q and operating profit declined 65 per cent.

On a y-o-y basis, top line and operating profit grew a reasonable 51 per cent and 17.74 per cent respectively, but that was because of the low base last year.

The decline in revenues was owing to a lower booking of license fees, though its order book is robust. License fee as a percentage of product revenues fell from 50 per cent in Q4 FY06 to just 31 per cent in Q1 FY06, and as a result product revenues declined 23.6 per cent q-o-q.

Services revenues grew 5 per cent sequentially, which is good considering a higher base in Q4 FY06 and the fact that some milestone payments were delayed.

Operating profit fell owing to 15-20 per cent wage hike and Rs 2 crore ESOP expense. As a result, operating profit declined by 1745 basis points y-o-y and 316 basis points q-o-q.

In products, i-flex has a great potential in core banking software as well as compliance software. It is now eyeing more business from markets such as Japan and China. i-flex's relationship with Oracle will also open doors.

Going forward, i-flex's top line will improve owing to higher licence fees and milestone payment in services. To finance the Mantis acquisition, i-flex will make a preferential issue to Oracle. At 31 times estimated FY07 EPS and 25 times FY06 EPS, the upside in the i-flex stock seems limited.

Reliance Energy: Input cost woes

Rising input costs had a negative impact on Reliance Energy's operating profit, which declined by 17.1 per cent y-o-y to Rs 133.41 crore in Q1 FY07, though sales went up 21.7 per cent.

Operating profit margin dipped 540 basis points y-o-y to 11.55 per cent in Q1. Meanwhile, Tata Power also saw its operating profit margins decline by 319 basis points y-o-y to 18.74 per cent in Q1 FY07.

Reliance Energy's electricity sales grew 3.4 per cent y-o-y to 2.3 billion units in the last quarter. However, its purchase of electrical energy went up 8 per cent to 1.15 billion units.

Average realisations are estimated to have grown 15 per cent y-o-y to Rs 4.1 per unit in Q1 FY07, which was slightly better than the 14.5 per cent y-o-y increase in fuel costs to Rs 234.33 crore in the last quarter.

Tata Power also saw its realisations grow by 20.7 per cent y-o-y to Rs 3.5 per unit in Q1 FY07. Apart from rising fuel costs, Reliance Energy's cost of electrical energy purchased went up approximately 14 per cent.

The company has filed the annual revenue requirement (ARR) for FY07 with the state regulator, MERC, and a tariff order is expected shortly. At its current price of Rs 1,029, the stock is reasonably priced at about 15-16 times estimated FY07 earnings.