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Anand Rathi Research India Equities
India I Equities
+9122 6626 6531
+9122 6626 6511
Key financials (YE Mar) FY15 FY16 FY17 FY18e FY19e
Sales (` m) 6,087 8,065 9,110 10,030 11,503
Net profit (` m) -829 -411 -243 521 938
EPS (`) -8.3 -3.9 -2.3 4.0 7.3
Growth (%) - NM NM NM 80.0
PE (x) NM NM NM 24.5 13.6
PBV (x) 1.6 1.7 1.7 1.5 1.4
RoE (%) -12.5 -6.6 -3.3 7.2 10.5
RoCE (%) -15.6 -9.8 -5.7 6.7 9.5
Dividend yield (%) - - - - -
Net debt/equity (x) -0.4 -0.1 0.1 -0.1 -0.1
Source: Company, Anand Rathi Research
Target Price: `150
Share Price: `99
Key data INDA IN / INEE.BO
52-week high / low `197 / `97
Sensex / Nifty 31214 / 9711
3-m average volume $0.9m
Market cap `11bn / $168m
Shares outstanding 102m
Shareholding pattern (%) Jun'17 Mar'17 Dec'16
Promoters 29.4 29.4 29.6
- of which, Pledged -
Free float 70.6 70.6 70.4
- Foreign institutions 11.9 11.1 8.0
- Domestic institutions 7.9 7.4 7.6
- Public 50.9 52.1 54.9
Change in EstimatesTargetReco
14 August 2017
Intellect Design Arena
Steady Q1 on rev & margins, lower target on rights dilution; Buy
Intellect had a stable Q1: revenue at $37.4m, flat q/q, up 22% y/y, in
line with estimates. The benefits of more revenue and a high operating-
leverage-driven model resulted in a much higher Q1 FY18 adj EBITDA
margin of 5.6% (-6.5% a year ago). With costs now stable, it had a
second consecutive quarter of profits. We retain a Buy but reduce our
target to `150 (1.6x FY19 EV:sales) from `175 earlier, on 23% rights
dilution and currency movements.
Steady cost structures. Intellect suffered from variability in both revenue and
cost till Q3 FY17. Revenue, at this scale, will arguably be volatile for a few more
quarters but is clearly trending up (FY15: $99m; FY18e $156m, all organic). The
company achieved stable costs (and positive EBITDA) in the last six months
and now doesn’t anticipate further increases. Therefore, a large part (~70%) of
further revenue should flow to EBITDA, from Q2 FY18.
Low tangible and stable R&D capex (of `1bn) to drive FCF in FY19.
Intellect’s capex on infrastructure is complete. It now expects just `400m-
500m maintenance capex (down 40% from FY16). This, coupled with a ~7-
day reduction in receivables (to 155) and rights proceeds (`2bn) will make for
a comfortable balance sheet. We estimate it should turn FCF positive in
Amortisation to start from H2 FY18. Intellect may see an increase in D&A
expenditure from H2 FY18 as amortisation of capitalised R&D kicks in. This
is done over a period of five years from the date of launch of a product and is
built into our estimates.
Retaining a Buy; estimate changes reflect currency movements. We
retain our revenue estimates largely, but lower EBITDA by ~5%, primarily
due to currency movements. We also build in a 23% dilution due to the rights
issue at `86 a share (14% below the CMP). These changes lead to a new target
of `150 (1.6x FY19 EV:sales, a 15% discount to Majesco, reflecting lower
profitability). Risk: Sharp rupee appreciation.
Relative price performance
Estimates revision (%) FY18e FY19e
Sales ($) 0.4 0.0
EBITDA (4.9) (4.8)
PAT (9.9) (8.4)
3. 14 August 2017 Intellect Design Arena – Steady Q1 on rev & margins, lower target on rights dilution; Buy
Anand Rathi Research 3
Q1 FY18 Results at a Glance
Fig 8 – Quarterly result (` m)
Year-end: Mar Q1 FY18 % q/q % y/y FY17 FY16 % y/y
Sales ($ m) 37 0.1 21.7 137 124 10.6
Sales 2,412 (3.7) 17.8 9,110 8,065 12.9
EBITDA 135 (13.4) NM (136) (555) NM
EBITDA margin (%) 5.6 -63 bps 1211 bps (1.5) (6.9) 540 bps
EBIT 77 (20.5) NM (377) (763) NM
EBIT margin (%) 3.2 -67 bps 1256 bps (4.1) (9.5) 532 bps
PBT 91 22.6 NM (239) (513) NM
Tax (36) NM 3.8 (28) 91 NM
Tax rate (%) (40.1) NM NM 11.9 (17.7) NM
Net Income 7 (95.0) NM (202) (411) NM
Fig 7 – Segment-wise results
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Q/q % Y/y %
Revenues ($ m) 31 35 34 37 37 0.1 21.7
Growth Y/y % 1 10 14 16 22 524bps 2055bps
Revenues (` m) 2,048 2,294 2,265 2,504 2,412 -3.7 17.8
Eff. exchange rate 66.6 65.2 67.5 67.0 64.5 -3.8 -3.2
Employees (EoP) -est 4,220 4,240 4,200 4,180 4,280 2.4 1.4
Revenue Productivity ($ ‘000/employee) 7.3 8.3 8.0 8.9 8.7 -2.2 20.0
CoR (excluding D&A) (1,648) (1,793) (1,857) (1,794) (1,774) -1.1 7.7
As % of revenue -80 -78 -82 -72 -74 -190bps 692bps
SG&A (533) (516) (552) (553) (502) -9.2 -5.7
As % of revenue -26 -22 -24 -22 -21 127bps 519bps
EBITDA (133) (14) (145) 156 135 -13.4 NM
EBITDA margin % -6 -1 -6 6 6 -63bps 1211bps
EBIT -192 -75 -206 96 77 -20.5 NM
EBIT margin % -9 -3 -9 4 3 -67bps 1256bps
Other Income 175 (48) 106 18 56 213.9 -68.2
Forex gain / loss 142 15 50 (70) 10
PBT -33 -147 -133 74 91 22.6 NM
PBT margin % -2 -6 -6 3 4 81bps 536bps
Taxes (35) (27) (37) 71 (36) NM 3.8
ETR % 107 18 28 95 -40 NM NM
PAT (68) (174) (170) 145 54 -62.4 NM
PAT margin % -3 -8 -8 6 2 -352bps 556bps
Source: Company, Anand Rathi Research
Note: Analyst judgement used for R&D costs. May not match with the reported numbers. This is to normalize reported numbers for management discretion on capitalization and expensing out.
4. 14 August 2017 Intellect Design Arena – Steady Q1 on rev & margins, lower target on rights dilution; Buy
Anand Rathi Research 4
Conference call takeaways/other
There was no conference call in Q1 FY18 as the company was in a rights
Here are the other details from results:
The business environment overall continues to be strong for BFSI
products as judged by the deal pipeline. Therefore, Intellect’s revenue
continues to scale up. We expect it to end the year with a comfortable
14% revenue growth in dollar terms.
The rights issue closed on 9th Aug’17.
R&D expenditure continues at ~`1bn a year. In Q1 FY18, there seems
to be additional capitalisation of `26m compared to Q4 FY17. This
benefitted the reported EBITDA by the same amount.
Intellect has a workforce of ~4,300, of which 1,500-1,600 are deployed
in R&D (new product developments).
The tax rate is a function of which subsidiaries and regions are turning
profitable. Therefore, “percent” may be misleading regarding an
effective tax rate. In absolute terms, the tax rate may hold at similar
levels as in Q1 FY18.
The Bangladesh subsidiary had a large proportion of revenues this
quarter and that led to the dramatic increase in minority interest for the
quarter. This will be normalized from next quarter.
Capex would be low as infrastructure needs are complete and the
business model is non-linear. R&D will be the major recurring capex.
Amortisation of new software will start in Q2 FY18 and increase
overall depreciation in FY19. We expect `130m amortization vs.
`1,000m R&D capitalisation in FY19.
Fig 9 – Intellect Design – License Revenues (US$m)
Source: Bloomberg, Anand Rathi Research
License + AMC Implementation and Support
5. 14 August 2017 Intellect Design Arena – Steady Q1 on rev & margins, lower target on rights dilution; Buy
Anand Rathi Research 5
We have valued the stock on EV/sales, of 1.6x FY19e and an implied PE
of 20x. We retain our Buy recommendation with a new target of `150,
reflecting our optimism regarding Intellect’s ability to scale up revenues and
the efficacy of the cost-management programs in Q4 FY17 and Q1 FY18.
The company needs to deliver growth to create value and generate returns
for shareholders. Since most of its costs are fixed, it tends to suffer greater
losses in periods of slow growth (as in most of FY17). We believe that, at
this stage, the single most important variable for it is revenue growth. We,
therefore, continue to value it on EV:sales.
Capex is almost complete and will continue to trend lower, at ~`300m-
400m, further requirement being restricted to new-product development,
estimated at `1bn a year.
Revenue growth is coming along well, adjusted for overall weakness in the
industry. Margins are also turning out to be better now as the company
focuses on cost rationalisation and balances out disproportionate spending
The positive thing about Intellect is that it can, at its discretion, decide to
cut costs as and when needed; it exercised this option in Q4 FY17 to
demonstrate the profitability of the underlying business model. We saw this
continued focus on managing costs in Q1 FY18.
Fig 10 – Change in estimates
(` m) New Old Chg % New Old Chg %
Revenues ($ m) 156 155 0.4 178 178 -
Revenues 10,030 10,383 (3.4) 11,503 11,957 (3.8)
EBITDA 932 980 (4.9) 1,503 1,578 (4.8)
EBITDA margin % 9.3 9.4 -15 bps 13.1 13.2 -13 bps
EBIT 678 734 (7.6) 1,133 1,302 (13.0)
EBIT margin % 6.8 7.1 -31 bps 9.9 10.9 -104 bps
PBT 693 768 (9.8) 1,177 1,283 (8.3)
Net Profit 588 653 (9.9) 940 1,026 (8.4)
Source: Anand Rathi Research
Fig 11 – 1-year forward EV/Sales
Source: Bloomberg, Anand Rathi Research
6. 14 August 2017 Intellect Design Arena – Steady Q1 on rev & margins, lower target on rights dilution; Buy
Anand Rathi Research 6
Business: Intellect operates in an industry (BFSI/discretionary
spending), currently traversing some turbulence on account of BRexit.
Its revenue targets/guidance may be affected by some of these
unforeseen circumstances. Of its revenue, 33% arises from Europe.
Sharp rupee appreciation.
The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the
compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
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no bearing whatsoever on any recommendation that they have given in the Research Report.
Important Disclosures on subject companies
Rating and Target Price History (as of 14 August 2017)
1 01-Oct-15 Buy 230 171
2 04-Apr-16 Buy 290 236
3 07-Feb-17 Buy 175 133
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below:
Ratings Guide (12 months)
Buy Hold Sell
Large Caps (>US$1bn) >15% 5-15% <5%
Mid/Small Caps (<US$1bn) >25% 5-25% <5%
Research Disclaimer and Disclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014
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