Hold Intellect Design Arena Ltd For Target Rs.815 - ICICI Direct
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EBITDA margins disappoint…
About the stock: Intellect Design Arena (Intellect) provides software products to retail, corporate banking, insurance & treasury
* The company 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)
Q1FY22 Results: Intellect reported weak Q1FY22 results.
* US$ revenues increased 2.3% QoQ to US$55.3
* Adjusted EBITDA margins declined 285 bps QoQ to 22.3%
* License linked revenue was at 58% of overall revenues
What should investors do?
Intellect’s share price has grown by ~4x over the past five years (from ~| 205 in July 2016 to ~| 745 levels in July 2021)
* We downgrade from BUY to HOLD
Target Price and Valuation: We value Intellect at | 815 i.e. 25x P/E on FY23E
Key triggers for future price performance:
* Improving deal wins, deal pipeline (| 4,630 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 14-16% CAGR in revenues over the next five years. However, the near term impact of Covid prompts us to factor in 13% CAGR in dollar revenues
* 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.
* Larsen & Toubro Infotech’s (LTI) ability to deliver end-to-end solutions is expected to help in registering industry leading growth
* BUY with a target price of | 5,065
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