Broking firm, Anand Rathi sees an upside of at least 23% on the stock of Intellect Design Arena and says more focus on US, SaaS will lead to medium-term growth.The company largely caters to the Corporate Banking sector, Retail Banking, Brokerage Solution, Treasury Management, Insurance Softwares.
"With growth accelerating to 22% y/y, a large chunk driven by India and the Mid-East, Intellect had a strong Q2. At the analyst day, the company spoke about its sharpening focus on the US and the short-term impact of SaaS on licensing revenue growth.
Ahead, it expects more balanced growth and is relying on partnerships (Hexaware added) to drive sales in the region. Overall, the medium-term growth outlook is 20%+, driven by product cross-sales. Short-term margins are expected to be little lower due to rising people costs and investments in the Americas, and should touch 30% by Q4 FY23. We retain a Buy, valuing the stock at 30 times FY23," the brokerage has said.
Deal pipeline improves, India business shines
|Current market price||Rs 681|
|Target price||Rs 840|
According to Anand Rathi, Intellect's $61m revenue (Q2) was up 10% q/q, 22% y/y, with License/AMC 49% of revenue, growing 20% y/y, incl. SaaS license (split estimated).
"Excluding SaaS, License has been flattish in the last five quarters (down 12% y/y in Q2). The company believes this is due to the rapid adoption of SaaS revenue, up 155% y/y (excl. GeM, est. 120% y/y). It expects to close some large licensing deals in advanced markets, taking quarterly revenue to $75m in four quarters. The funnel looks strong at $650m, up 20% y/y. Overall, 57% of the business (incl. total SaaS) is IP-driven," the brokerage has said.
Cash generation reflects high India business
According to the broking firm, cash generation to improve in H2, reflects high India business. "The 26.2% EBITDA margin was up 219bps y/y, as Intellect re-invested in advanced markets (notably the US), leading to SG&A growing 20% y/y. The Q2 adj. EBITDA margin (for capitalisation) was 19.7% (16.3% a year ago). Overall, Intellect Design Arena may hit a 30% margin in FY23, as operating leverage holds high amid an expected recovery in advanced markets. CFO:NI was weak at 58% as receivables shot up on its fast-growing India business outlook. FY22 revenue would grow 20%+, and margins trend a little lower than 30%. Overall, EPS CAGR to be closer to 30% in the medium term.
Target revised to Rs 840, 30 times FY23 (E) adjusted EPS
Brokerage firm Anand Rathi says there is no meaningful change to its estimates or the target multiple. "The tweaks reflect higher wages in the short-term. We retain a Buy. Risk: Slower-than-expected growth in advanced markets," it has stated.
The stock has been picked from the a recommendation by brokerage firm Anand Rathi. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.