iGATE Global Solutions - superior show; positive comments on CY08 budgets; result update Q3FY08

iGATE Global Solutions (IGS IN, INR 401)

 

iGATE delivered strong Q3FY08 results with revenue momentum picking up and margins improving, and indicated better outlook. Revenues grew 4.3% Q-o-Q (volume grew 2.5% and realisation improved 1.9%) in line with expectations, while the net profit growth of 7.9% was marginally higher than expectation. Operating margins (EBITDA margin) improved by 170 bps Q-o-Q at 17.5% and further the company indicated its target of reaching 20% by end of FY09, which it believes, is conservative. The up move in the operating margins for iGATE is mainly driven by continuously improving average realizations and a focused approach towards attaining operating efficiencies over the past 4-6 quarters. Revenue flow from high-margin services like EAI (ERP implementation) and new iTOPs deal has contributed to increase in the company's average realisations. New multi year large deals won in the iTOPs segment have contributed increased visibility for iGATE.

 

Client addition though remained low with only three new additions this quarter, the company has commented on a healthy pipeline and expect more client additions, going forward.

 

Update on de-listing process

iGATE is awaiting approval from SEBI for delisting at a price of INR 410 that was discovered through the reverse book building process. The process is expected to be completed by January end, post which, the window period of six months for the remaining shareholders will open in early February.

 

Outlook and valuation

At CMP of INR 401, the stock is trading at a P/E of 14x and 12x FY08E and FY09E earnings, respectively. On Mcap/revenue basis, the stock is trading at 1.5x and 1.3x FY08E and FY09E revenues, respectively. 

 

As the trading period for iGATE shares on Indian stock exchanges is expected to be hardly one month, we do not see any movement in the stock price from the current levels. Last quarter, we gave our DCF-based fair value of INR 416 as an indicative value for tendering the shares in the delisting process. We would recommend the existing investors to tender their shares in the window period expected to open in February at INR 410 (price discovered through reverse book building process).

 

Comments on CY08 budgets by Phaneesh Murthy, MD & CEO

"CY08 IT budgets are expected to be flat to marginally higher" - This is sentimentally positive, as there is a lot of dust as of now on how FY09 will pan out for the offshore IT vendors. It also gives an indication of what we could hear from other IT majors.

Q1CY08 spending could be lower than Q4CY07 – but this is primarily due to delay in fixing the budget and project finalisation.

Positive trend in billing rates and no push back while going for rate increases.

Offshore percentage in the IT spends to increase for clients in the US.