3i Infotech, a mid-cap software products and services company, has been on an acquisition spree since its IPO in April 2005. Though its acquisitions have been small, the company has tried to fill gaps in areas where it is weak. |
The latest acquisition, G4 Software Technologies, will provide 3i expertise in payment solutions. G4 has revenues of about Rs 8.5 crore and a client base in India, South East Asia and the US. At about half the revenue of G4, the acquisition is quite cheap for 3i. |
3i caters mainly to the BFSI vertical, though it has some revenues coming from its ERP product. The company has targeted an even split between products and services and in the June quarter, product revenues accounted for about 47 per cent of its income. |
Its product portfolio too has expanded, thanks to its previous acquisitions. In April 2006, it had acquired Datacons, which makes products for mutual fund companies. |
In November, it had bought SDG Software, which had banking products in the area of surveillance and fraud management, and FormulaWare, which had an ERP solution, mainly for the chemical and paints industry. |
In September, it had bought Innovative Business Solutions, a consulting services company with revenues of $7.2 million. |
According to the management, 3i typically pays the average of 1.5 times revenues and 10 times net profit for a product company. Its acquisition strategy is to buy niche product players, widen its product basket and sell those products in other countries. |
In Q1 FY07, its operating margin improved by 330 basis points q-o-q to 25.6 per cent. At its current price, the stock trades at an estimated FY07 P/E of about 11 times, which is reasonable. |
Mutual funds: Surging index |
The last one-year performance history of mutual funds suggests that actively managed funds are no longer delivering big returns like in the past, while index funds are clearly doing better. |
Since the bull run began in April 2003, actively managed funds have consistently beaten their benchmark indices. |
But in the past year, index funds have raced ahead. According to data by Value Research, the average index fund generated a return of 41.6 per cent as on September 5, while the average diversified fund earned just 32.2 per cent. |
Over longer time periods, however, passive investing does not seem to have paid off. For instance, the three-year record suggests pretty much contrasting results "� diversified funds were on top delivering an annualised return of 46 per cent, while index funds earned 35.9 per cent. |
Take five-year annualised returns and one finds index funds fared the worst, generating 28.3 per cent compared to 41.5 per cent by diversified funds. |
One reason for the recent underperformance by active managers is their overweight position in mid-caps, which have failed to deliver this time around, while the index funds are biased towards large-caps. |
Also, since stock valuations now are more even across sectors as compared to those a few years ago, choosing winners is getting trickier, making things tougher for fund managers. However, in the long term, the case for active investing still stands, as is evident in the numbers. |