Smallcap IT Stock To Buy With Strong Revenue Potential & Expansion In New Markets

Buy small cap stock Intellect Design

Sharekhan has recommended Intellect Design as a good stock to buy for long-term investors with a price target of Rs 910 on the stock.

The brokerage has said that the earnings disappointed with across-the-board miss, owing to lower-than-expected license revenue (lost couple of digital transformation deals worth $4.0 million) and increasing investments in products. "The company's USD revenue grew by 25.1% y-o-y to $67.7 million, but it declined 0.1% q-o-q, below our estimates. EBITDA margin contracted by 129 bps y-o-y to 23.7%, below our estimates, owing to higher employee expenses (up 27.3% y-o-y) and increasing investments in its products and platforms. Steady growth in the deal pipeline, continued strong revenue growth in Cloud/SaaS business, record-high deal wins, and robust cashflow generation remained impressive during the quarter," the brokerage has said.

However, Sharekhan remains optimistic on the growth outlook for 20223. "The company is set to report strong revenue growth in FY2023E as well, led by steady growth in licence-linked revenue, additional revenue from the partnership with Microsoft, entering into three new markets (Asia, Europe and Middle East/Africa), and ramp-up of large deals. However, we believe the company's earlier EBITDA margin aspiration of 30% in the next 2-3 quarters looks a tough task given its additional R&D expenses in developing products for new markets, rising wage inflation, increasing travel expenses, and investments in sales team," the brokerage has said.

Why to buy the stock at the current market price of Rs

One of the reasons to buy the stock is the strong deal pipeline that the company has. Apart from this Sharekhan believes that expanding markets into new regions, steady growth in license-linked revenue, and incremental revenue from Microsoft's partnership are the other reasons to buy the stock.

"However, margins are likely to remain under pressure in the medium term, given its additional investments on products and sales team. At the current market price, the stock trades at a valuation of 23x/18x its FY2023E/FY2024E earnings. We continue to prefer the stock, considering its early investments in products and platforms, partnerships to participate in the marketplace, large product portfolio, and strong cash balance. Further, the company started paying dividend to its shareholders. Hence, we maintain our Buy rating on the stock with an unchanged price target of Rs. 900," the brokerage has said.

Microsoft partnership, RBI order to boost earnings

According to Sharekhan, the strategic partnership with Microsoft helps the company to establish Corporate Banking transformation on Cloud. The company has won one deal under this partnership during the quarter. The company has recruited senior talents in this segment to boost its growth going ahead. The iGTB and Microsoft collaboration in the banking and finance services segment will provide access to newer deal opportunities in major markets such as US and Europe. The company won its record-high deal of around Rs. 400 crore from the Reserve Bank of India to implement the Cloud-native quantum core banking solution to power the next stage of its digital transformation agenda.

If you are looking to buy the stock of Intellect Design Arena, the shares are available at a price of Rs 715.