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Robust growth in cloud revenues…

Intellect reported a healthy set of Q4FY21 numbers. Dollar revenues increased 4.5% QoQ to US$54.1 million. Rupee revenues increased 3.2% QoQ to | 394.6 crore mainly led by 54.2% QoQ growth in cloud revenues and 1.0% QoQ growth in AMC revenues. EBIT margin was flat QoQ at 20.2% mainly led by higher other expenses. PAT was flat QoQ at | 80.6 crore due to lower other income. The company’s net DSO declined from 124 days in Q3FY21 to 114 days in Q4FY21.

Healthy pipeline, recurring revenues key positives

The company has been winning healthy deals over the past few quarters and, especially, destiny deals (i.e. high value deals) in corporate & retail banking. Intellect has won four large deals in the current quarter as well.

In addition, the company’s focus on improving growth in Europe (especially Germany), healthy wins, Europe compliant solution, rapid proof of concept and holistic solution vs. emerging peers is expected to drive iGCB revenues. To cater to European & US demand, Intellect has also hired sales leadership in these regions and is also investing in cloud to drive growth.

This coupled with the company’s focus on improving quality of revenues (licence + AMC + Cloud from 46% in FY20 to 54% in FY21), huge addressable fintech market, strong deal pipeline (| 4177 crore) and monetisation of ISEEC has made the company aspire to achieve 14-16% CAGR in revenues over the next five years. Near term impact of Covid prompts us to factor in a 13% CAGR growth in dollar revenues.

Operating leverage to drive margins

The company has seen a healthy improvement in margins in FY21 (from 5% in FY20 to 23.7%). This was possible as Intellect was able to align its cost to non-licence revenues (i.e. AMC + Cloud + implementation revenues is equal to operating cost). This, coupled with revenue growth, is expected to enable the company to register 631 bps improvement in margins to 30% in FY21-23E. In addition, increased penetration of IGCB in the advanced market will help lower working capital requirements.

Valuation & Outlook

Improving deal wins in IGCB, IGTB and iSEEC, increased penetration in the US & Europe market, digital-ready product portfolio, healthy pipeline, huge addressable & underpenetrated market and improved annuity revenues bode well for revenue growth. In addition, healthy margins prompt us to revise our EPS estimates upwards by ~10% and ~13% for FY22E & FY23E, respectively. This, coupled with improving cash flows, prompts us to upgrade the stock from HOLD to BUY with a revised target price of | 875 (6x FY23E price/sales and 25x FY23E EPS) (earlier target price | 640).

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