Fairval

Notes on Indian equities, sectors and economy

3i Info – Cheap once again

Posted by fairval on July 29, 2008

3i Info, at a price of around Rs 107, is now quoting again quoting at close to Rs 100 mark. Today’s market fall would have reduced this further. The scrip has failed to show any sustained appreciation since its IPO, which was I think around 3 years ago. The IPO was at a price of Rs 90 or so, so it really hasn’t appreciated much (don’t think there has been a bonus or split, but I could be wrong). It has occasionally come close to Rs 200, but in every correction falls back to Rs 100 or even lower. In this round, it seems to have touched Rs 85 also, since its 52 week hi-low is Rs 154/85.

At 11x trailing, and around 8x forward (according to an Isec report), the scrip looks cheap. It has shown fairly consistent EPS growth in recent times. FY08 growth was 38%, 1Q09 net profit growth was above 40%, and Isec projects around 50% eps growth for FY09. ROE is around 25%, so that is not so bad at all.

Hiking dividend payout is one way to influence share price. Div yield is only 1.4%, dividend payout was 15% in FY08. Indian market typically does not like low dividend payout ratios. 3i spends a lot on acquisitions, so the management has a need to conserve cash. Also, D/E is 1, which higher than for most IT companies, which tend to be zero debt. 3i Info has Rs 1300 crore of debt, which is quite large for a company of its size (Rev of Rs 1200 crore in FY08). Both these factors have perhaps tied the hands of the management in hiking payouts.

So what will make the stock go? If you look at historical trading range, current values are cheap. Also, perhaps the management needs to stop acquiring for a while, consolidate, bring D/E down somewhat to give more confidence to shareholders.

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