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Healthy traction expected across products…

We attended the analyst meet of Intellect Design Arena (Intellect). The company highlighted its key product features and its cloud & API ready products. Intellect also highlighted that it is seeing healthy traction across its product categories in corporate banking, retail and insurance segment. Currently top three products yielding value are digital transaction banking, liquidity and Quantum Central Banking. IDC, payments and digital lending are also expected to drive growth. The company is currently undergoing a phase of monetisation of products and in second phase will witness monetisation of big data analytics and artificial intelligence. This, coupled with cost control, sustainable capex and improving working capital bodes well for the company’s financials.

Retail banking, insurance products to drive growth

The company believes the overall market for retail banking is US$60 billion of which US$11 billion is Intellect’s addressable market that is expected to grow at 10% CAGR to US$16 billion in FY25E. This, coupled with the company’s focus on improving growth in Europe (especially Germany), healthy wins vs. Temenos (two out of five deals), Europe compliant solution, rapid proof of concept and holistic solution vs emerging peers is expected to drive iGCB revenues. Further, the company’s document extraction and underwriting solution in iSEEC is expected to be a game changer in insurance segment. Hence, the company expects ISEEC to reach US$100 million in revenues over the next few years. Apart from this, Intellect expects its risk & treasury market product to enter monetisation phase in FY23E. Healthy traction in government e-marketplace (GEM) and Magic Aadhar (| 50-100 crore market) can be other key revenue drivers.

Cash flows to improve

The company believes that~ | 300 crore of quarterly cost and ~| 200 crore of annual R&D expenses (amortisation & capitalisation) are sustainable. We believe this bodes well for margins. In addition, increased penetration of IGCB in advanced market will help lower working capital requirements. This bodes well for cash flows in coming quarters.

Valuation & Outlook

Healthy traction in IGCB & iSEEC is expected to drive revenues. This coupled with penetration in the US market, digital-ready product portfolio, healthy orderbook, huge addressable & underpenetrated market and improved annuity revenues are key long term drivers of revenues. In addition, improving cash flow and deleveraged balance sheet prompt us to be positive on the stock from long term perspective. However, the recent run up in stock price prompts us to downgrade the stock from BUY to HOLD with a revised target price of | 640 (5x FY23E price/sales and 21x PE on FY23E EPS) (earlier target price was | 455).

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