Investor's Eye: Update - 3i Infotech (Raises Rs180 crore through QIP); Special - Q4FY2010 Cement preview

Investor's Eye [April 06, 2010]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE 3i Infotech Cluster: Emerging Star Recommendation: Buy Price target: Rs105 Current market price: Rs76 Raises Rs180 crore through QIP  3i Infotech has announced that its duly authorised committee of the board of directors has closed the bid period for a qualified institutional placement (QIP) on April 05, 2010 and has approved the issuance of 2.29 crore equity shares at a price of Rs78.6 per equity share (face value of Rs10 per equity share and a share premium of Rs68.6 per equity share). This has led to fund raising of Rs180 crore. Funds raised through the QIP would be used to retire debt and would allay concerns over the higher leverage of the company. If the entire proceeds are used to repay debt, 3i Infotech?s debt to equity ratio would come down to 1.1x from around 1.6x as on December 2009. In terms of the equity base, the QIP issue would expand 3i Infotech?s fully diluted equity base by 11.6% to 22 crore equity shares. However, this would be partially offset by savings in interest expenses from the repayment of debt from QIP proceeds. Hence, we expect 3i Infotech?s FY2011 and FY2012 earnings to get diluted by around 7.4% and 7.6% respectively. Currently we are maintaining our earnings estimates and will revise the same after the Q4FY2010 results.  Though the earnings dilution through the QIP is likely to remain an overhang on the stock in the near term, we believe it will allay the concern over the company?s weakening balance sheet. Hence, we maintain our Buy recommendation and price target of Rs105 on the stock. At the current market price, the stock is trading at attractive valuations of 5.3x FY2011 earnings estimate and 4.9x FY2012 earnings estimate.  SHAREKHAN SPECIAL Q4FY2010 Cement earnings preview  The cement industry normally enjoys a better volume growth in Q4 as construction activity picks up to meet the deadlines of the government for infrastructure projects. On account of increased demand and capacity addition, Sharekhan?s cement universe is expected to register a 14% growth in volumes in Q4FY2010 as against the expected all-India average growth of 9.7%.  On the revenue front, Sharekhan?s universe is likely to register an 11.6% growth in revenues largely due to a strong volume growth and income from the non-cement division in case of Grasim Industries. On the other hand, the realisation of the south-based companies is likely to drop significantly whereas the north-based companies are likely to benefit due to a strong regional demand. However, due to a series of price hikes noticed in the last couple of months the realisation on a sequential basis is about to increase for all cement companies. Despite a strong cumulative revenue growth of 11.6%, the adjusted profit after tax of the companies in Sharekhan?s universe is expected to increase marginally by 4.8%. The marginal growth in the bottom line is mainly on account of the contraction in the operating profit margin (OPM). Further, a sharp increase in the interest and depreciation charges due to capacity expansion will restrict the bottom line growth during the quarter. Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com  Manage your newsletter subscriptions