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.