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Intellect Design Arena reported revenues of Rs 5,469 mn (+4% q?o?q, +8% y?o?y), lower than our/consensus estimates. Intellect attributed lower than expected revenues to slowdown in European license deals, driven by macroeconomic factors. Overall pipeline continued to grow at Rs 70,306mn (+5% q?o?q, +45% y?o?y).while the company had 6 deal wins over Q3FY23. EBITDA was Rs 1,050 mn (+25% q?o?q, ?21% y? o?y), which was above our estimates with an EBITDA margin of 19.2% (Q2FY23: 15.9%). R&E expenses were Rs 435 mn (8.0% revenues, +40.2% y?o?y). Intellect management pointed out increasing traction for products in US/Europe, especially for its core banking products in Europe and Magic Submission product in US. We revise our revenue forecasts for FY23/24E by ?3%/?5% and EBITDA margins by +50/?90 bps due to lower growth in licenses/SaaS business. We value the company at 20x H1FY25 EPS and a target price of Rs 493 with an ADD rating.

Revenue growth continues to be lower than expected

Revenue from operations of Rs 5,469 mn (+4% q?o?q, +8% y?o?y), was below our estimates of Rs 5,788 mn. The company attributed this to slowdown in European license deals due to macroeconomic factors. Platform revenues were Rs 1,110 mn (?6.7% q?o?q, +24.7% y?o?y), while license revenues recovered sequentially at Rs 720 mn (+5.9% q?o? q, ?35.8% y?o?y). AMC revenues were strong at Rs 980 mn (+8.9% q?o?q, +18.8% y?o?y). Deal pipeline continued to grow at Rs70,306mn (+5% q?o?q, +45% y?o?y).

EBITDA margins improve sequentially on a low base, and expected to improve further

EBITDA was Rs 1,050 mn (+25% q?o?q, ?21% y?o?y), which was above our estimates with an EBITDA margin of 19.2% (Q2FY23: 15.9%) improving on a q?o?q basis but below Q3FY22 EBITDA margin of 23.3%. Intellect expects EBITDA margins to increase as greater contribution from license/SaaS deals flows down to margins. It continues to invest substantially in R&E to further add platform capabilities to its existing products. R&E expenses were Rs 435 mn (8.0% revenues, +40.2% y?o?y).

Intellect expects strong traction in Europe & North America as it expands in these regions

Within Europe, Intellect considers itself in the top 3 for core banking– primarily competing with ThoughtMachine and Temenos. The company is seeing more traction in its European products with its MACH (Microservices based, API?led, Cloud?ready, with Headless option) platforms. In US, Intellect sees more traction in their Magic Submission product and expects to grow 20%+ in the US moving forward on a small base. The company also announced deal wins with the largest French bank for the corporate treasury exchange (CTX) platform and with Fifth Third Bank (US) for a fully cloud? hosted/managed platform for CBX and Corporate Treasury Exchange (CTX).

Valuation: We value Intellect Design at 20xH1FY25 EPS with a target price of Rs 493

Given slower than expected growth, we revise our revenue forecasts for FY23/24E by ? 3%/?5%. We further revise EBITDA margins by +50/?90 bps due to lower growth in licenses/SaaS business. We note that Intellect’s products continue to be ranked highly among industry benchmark rankings and we continue to be positive on the long?term growth story in the company’s banking products despite near term challenges. We retain
ADD at Rs 493.

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