Omnitech Infosolutions Ltd (Omnitech) - KR Choksey Stock Recommendations

Key Data 

Investment Rationale 

Strong order book and pipeline contracts– The company’s order book position stood at Rs. 78 Cr. by the end of 3QFY08. The company is expecting to execute about 75% of its order book (amounting to about Rs. 58 Cr.) in the next 12 months. It has also signed a 3 year contract, worth US$ 4.5 million (Rs. 18 Cr.) with one of the largest private sector insurance company.  

Remote infrastructure management, a highly scalable business – Infrastructure management is very scalable and enjoys high margins. The current market size of RIM services in India is estimated to be $3.2-3.6 bn. India is strongly positioned to capture $13-15 bn by 2013 (55% of global RIM market), leading to creation of 3.25 lakh to 3.75 lakh jobs. This would translate into expanding margins going forward and would depend on the pace at which the company is able to ramp up customers.   

Omnitech (OIL) eyeing infrastructure management companies for acquisition - OIL is looking to grow inorganically by way of acquisition in the area of infrastructure management space. The company’s management had indicated that they have shortlisted 2 companies for acquisition with the help of an M&A agency in New York.  

Total manpower has increased to 725 in Dec 07 quarter - To cater to new business ventures and avenues, OIL has overall added 80 people in Q3FY08 taking the total manpower to 725, heading towards its target of 850 by the end of March’08. This includes 562 technical professionals (vs. 493 in Q2FY08) and 163 support employees (vs. 152 in Q2FY08).The company management expects to surpass this number at the end of the last quarter. 

Well integrated services portfolio - Omnitech InfoSolutions has a very well integrated services portfolio, specialized towards Managed Services, Software Development and Software Testing. The wide array of service capabilities helps the company cross-sell its services to its existing clients. Thus, the company has been successful in getting recurring business from its clientele - about 65% of the company’s business is generated from existing clients. 

Strong customer base - Omnitech’s clientele includes some of the big names in the industry verticals it serves. These names include HDFC Standard Life Insurance, Kotak Mutual Fund and Kotak Mahindra Life Insurance in the BFSI sector; and Siyaram’s and HCC in the manufacturing; Maharashtra State Transport (ST)  and Jet Airways in the Transportation sector. Outside India, the company’s customer base spans across US, Canada, UK, Middle East, Japan and Belgium. The company further plans to increase its share from the international business, which will reduce its exposure any particular geography. The company’s top 10 customers include largest taxation company in the US and a Canadian telecommunication company. Additionally, the company’s top 10 customers constitute about 60% of the company’s business. Thus, it has low exposure to any single client.  

Financial Performance:

Omnitech Infosolutions Ltd (OIL) ended the third quarter with a 33.6% QoQ and 83.9% YoY increase in revenues to Rs 374.6 mn, on the back of its strong focus on the service industry. 76% of the revenues came from India where as 24% were international revenues out of which US contributed 8%. The company has surpassed its own revenue targets and sees a very strong growth in domestic as well as the international market areas. 

Other income has increased by 464.7% from Rs 1.2 mn in Q2FY08 to Rs 6.6 mn in Q3FY08 as a result of the interest accrued coming in from the company’s investment in liquid funds. 

For Q3FY08, EBITDA stood at Rs 102 mn which was up 34.5% sequentially and 116% on YoY basis. EBITDA margins for the quarter increased by 20 bps QoQ at 27.2%, compared to 27% in Q2FY08 and 23.2% in Q2FY07. 

Key Developments

Omnitech is in the final stages of acquiring a business in Bangalore, while it has also short listed two companies in the US which provide IMS and PMS services. It has provided a non-binding term sheet to one of the target companies in the US which it expects to acquire in the near future. Given the economic turmoil in the US, the company is presently evaluating the feasibility of these acquisitions. The acquisitions are expected to contribute Rs50 crores to FY09 revenues. 

Valuations

At the CMP of Rs 134.3, Omnitech is quoting at a PER of 8.47. On EV/Sales and on EV/ EBIDTA basis it is quoting at 2.39x and 8.47x respectively based on consolidated twelve months earnings ending as on Dec’07.

Click Here For In-depth Omnitech Infosolutions Ltd research report by KR Choksey, company profile along with stock recommendations, Omnitech Infosolutions Ltd Ltd target price and for making informed investment decisions.

Kisan Ratilal Choksey Shares and Securities Pvt. Ltd.
1102, Stock Exchange Tower, Dalal Street, Mumbai 400 001
Phone: 91-22-56338050 / 66965555. Fax: 5633 8060
Members: BSE & NSE
www.krchoksey.com
Email: customercare@krchoksey.com / eservices@krchoksey.com