Intellect Design Arena (2QFY19): Growth acceleration. Maintain BUY

(TP Rs 300, CMP Rs 215, MCap Rs 28bn)

Intellect Design Arena (INDA) posted strong numbers both on the revenue and margin  front.  Revenue  stood  at USD 54.3mn (vs our est. of USD 48mn), up 21.7%  QoQ  and 30% YoY. Revenue out-performance was due to large deal wins leading to strong Licence growth (+137% QoQ). Order backlog remains healthy at  Rs 12.50bn (+5.0% QoQ), which provides growth visibility. EBITDA margin adjusted  for  write-off expanded 895bps QoQ to 13.0% (higher than our est. of  11.0%)  led  by revenue growth. Investment in sales engine (+10.1% QoQ) and R&D (+10.7% QoQ) is required to drive growth and product innovation.

Deal  wins  has  improved  significantly  led  by  higher acceptance of the Intellect   products   (iGTB   and   IDC).   The  company  won  four  large transformational  deals in the quarter (six in 1H and 12 in FY18). The deal funnel stands at healthy USD 515mn (+15% QoQ) with 134 opportunities and 35 active  pursuits.  The digital deal sizes are in the range of USD 3-8mn and the   win  ratio  is  at  ~25-30%.  The  company  has  entered  into  cloud partnerships   with  global  leaders  (AWS,  IBM  Cloud)  which  can  boost subscription  revenue.  We  maintain  our positive stance based on (1) Huge addressable  market  opportunity (2) Highly-rated and digital-ready product portfolio,  (3)  Robust order book, and (4) Traction in large deal wins. We increase  USD revenue estimate by 6.2/4.8% for FY19/20E to factor in growth acceleration.  Maintain  BUY  with  a  TP  of  Rs  300, based on 2.2x FY20E EV/revenue multiple.

Highlights of the quarter

  • Gross  margin  stood at 49.3%, up 268bps QoQ despite investments made in  building  capacity  to  fuel  future growth. Out of the 35 active pursuits,  eight  are  more  than  Rs 0.5bn in size and 11 are in the range of Rs 0.3-0.5bn. Win ratio is the best in 0.2-0.3bn bracket.
  • One large iGTB deal is with a leading bank in Asia to implement Trade Finance  and  Supply  chain  Platform and another win is with a large bank in Australia for core transformation with Intellect Digital core (IDC).
  • After  adjusting  for  R&D  capitalisation  of  Rs 0.29bn the company posted EBITDA of Rs 0.09bn. Net Cash stands at Rs 0.18bn vs Rs 0.10bn in FY18.
  • Near-term  outlook:  We  expect revenue growth to moderate in 3QFY19 led  by  drop  in  licence  revenue  and  margins will decline led by non-linearity.

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