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Transitioning from product to platform…

About the stock: Intellect Design Arena (Intellect) provides software products to retail, corporate banking, insurance & treasury.

* The company is a transition from a product company to a platform company

* intellect generates 55% of revenues from developed markets & rest from emerging markets

* Recently, it saw a turnaround in margins (from 5% in FY20 to 23% in FY21)

Q2FY22 Results: Intellect reported robust Q2FY22 results.

* US$ revenues increased 10.2% QoQ to US$61 mn

* EBITDA margins improved 159 bps QoQ to 26.1%

* License linked revenue was at 57% of overall revenues

What should investors do?

Intellect’s share price has grown by ~4x over the past five years (from ~| 176 in Oct 2016 to ~| 690 levels in Oct 2021)

* We maintain HOLD rating on the stock

Target Price and Valuation: We value Intellect at | 750 i.e. 23x P/E on FY23E

Key triggers for future price performance:

* Transition from product to platform, which is likely to enhance margin profile

* Improving deal wins, deal pipeline (| 4,808 crore), increased penetration in US & Europe, improving quality of revenues (licence + AMC + Cloud from 46% in FY20 to 54% in FY21) bode well for long term revenue growth

* The company aspires to achieve 20% revenue growth in FY22. We would wait for early greens shoots on the same to turn positive on the stock

* It is expected to post 431 bps improvement in margins to 28% in FY21-23E]

Alternate Stock Idea: Apart from Intellect, in our IT coverage we also like LTI.

* LTI expected to register industry leading growth

* BUY with a target price of | 7,650

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