Ultra cheap Indian Software services company?? Potential to make 5 times of your money??

Infinite Computer Solutions (NSE: INFINITE)

Business:

Infinite Computer Solutions is a global service provider of Application Management, Infrastructure Management, Product Engineering and Mobility, and Messaging Products and Solutions. It has a focus on Telecom, Energy & Utilities, Media & Content, Healthcare, and Banking & Finance industries. Our strength stems from the alignment with client business objectives, even as we engage with clients across multiple engagement models to align better with your business needs. With a global headcount of around 5000 professionals and offices spread across India, US, UK, China, Malaysia, Singapore and Hong Kong. This includes delivery centers in the US at Maryland, Illinois and Tennessee, and in India at Bangalore, Delhi, Hyderabad and Chennai. Established in 1999, Infinite today is a publicly listed entity headquartered in Bangalore, India, with an span across three continents, a diverse employee base and over 50 premier clients, including several leading Fortune 100 companies.

The company went public in 2010; the shares were oversubscribed by 43 times. The shares went public at 165 Rupees/share.

Revenue mix:

Applications Management Services – 68%

Infrastructure Management Services – 15.6%

Management:

Upinder Zutshi is the CEO and managing director of the company; he is the nominee & close in race for the 2013 CEO of the Year Award in India. The company was listed in Forbes Asia 200 Best under a Billion in 2011.

Clients:

Verizon, IBM, Fujitsu, Xerox, Alcatel-Lucent, Motorola/Nokia Siemens, Western Union, Iron Mountain & Tellabs.

  

Ownership:

Founder (Sanjay Govil) & Chairman owns about 60% of the shares outstanding. So we have an owner manager, whose interests are highly aligned with passive shareholders. Employees own about 10% of the stock. T. Rowe Price International owns little more than 5%.

Selected figures from financial statements (in Cr Rupees):

Year	FY 10	FY 11	FY 12	FY 13
Revenue	664.3	883.28	1,055.81	1390.61
EBITDA	121.34	147.89	183.49	218.42
EBIT	107.66	136.24	158.33	158.54
PAT	79.17	107.18	120.71	130.75
No. of Shares	43,959,995	43,959,995	42,559,995	42,559,995
EPS (in Rs.)	20.18	24.38	28.05	30.05
Net worth (in Rs. Crores)	326.95	416.28	508.84	596.26
Total cash (in Rs. Crores) *	118.04	94.62	156.54	171.81
Debt(in Rs. Crores)	47.7	46.1	59.13	85.86
Return on net worth	24.20%	25.80%	23.70%	21.90%
Cash per share	26.85	21.52	36.78	40.37

Valuation & Analysis:

The company trades in the market for around 475 Cr. Rupees (Rs. 112/share). If we exclude the excess net cash (about 100 Cr), it is trading for about 2 times annual profit & 2/3 of the stated book value, as the RONW is over 20%. The company has a huge tail wind in terms of market opportunity as the market for various software services grows globally. The company’s board recently announced a buyback of ~10% of the shares outstanding. This is great capital allocation at work. The company also has a policy of paying out ~30% of the profit as dividends to the shareholders. In today’s stock price, the dividend yield is more than 8%. The buyer of this stock at these prices risk of losing the invested capital is almost zero; the business is earning healthy profits on the invested capital and excess capital in the balance sheet. At some point the market participants will come to their senses, and bid up the prices relative to the company profitability. At that point the shareholders will realize huge profits via share price appreciation. If we are right about the assessment/prospects of the company, the capital will compound at very high rates. If this company trades at the valuation of many software services companies(both in India and global), the stock will be worth more than 10 times of annual earnings which will be 5 times more than the price it trades today.

Risks:

Client concentration:

Top 5 clients contribute 75% of the revenue, top client being 34% although the concentration is reducing over the years. It is quite common in a small size company like Infinite computer solutions. Most of the revenue is from the repeat business as the contracts with existing customers are long term in nature.

Geographic Risk:

US customers accounts for 76% of the revenue mix.

Disclosure:

I own shares of this company.