Banking on technological transformations in BFSI sector – Intellect Design ArenaPranav Mahajan
Update on the Indian Equity Market:
On Tuesday, NIFTY ended at 16,240 (-0.4%). HINDUNILVR (+3%), ASIANPAINT (+2.9%) and INDUSINDBK (+2.4%) were the top gaining stocks. COALINDIA (-7.5%), TATASTEEL (-7.3%) and ONGC (-7%) lost the most.
Within the sectoral indices, PRIVATE BANK (+0.8%), BANK (+0.6%) and FINANCIAL SERVICES (+0.5%) closed in the green while METAL (-5.2%), REALTY (-2.9%) and OIL & GAS (-2.3%) ended in the red.
Excerpts of an interview with Mr. Arun Jain, Chairman & MD, Intellect Design Arena (INTELLECT) with The Economic Times on 9th May 2022:
- The company, which mainly sells software to banks and financial institutions, showcased an FY22 revenue growth of 25%. EBITDA and PAT grew by 33% and doubled their cash balance over the previous year. Subscription revenues grew by 112%.
- Sequentially, EBITDA Margins were lower due to an increase in salary costs, a multi-million-dollar deal with a Russian Bank in Germany falling through owing to the Russia-Ukraine war, and capacity building for a USD 75mn quarterly revenue run rate.
- The company’s license-linked products have a life cycle of about 10 years. This translates into continuing revenue streams in the form of maintenance, production support agreements, change requests, etc. The revenue from these license-linked products crossed the mark of ₹ 10bn in FY22. The company joined hands with 48 new clients in FY22.
- An improvement in margins over the last two years was achieved by shrinking the product delivery cycle to 6 months against the industry average of 12-18 months. This was made possible by being operationally efficient. Also, the pandemic led cost savings in travel and business promotion upped the margins.
- Its license-linked revenues (license, AMC, and subscription) make up 56% of revenues. The subscription revenue growth of 112% YoY translated to higher margins.
- The company is moving its products to platform-based. Platforms consist of multiple products. It is experiencing a YoY increase in average deal size by winning large transformational deals in multiple countries. Banks and financial institutions’ digital transformation & cloud adoption journeys play a big role in achieving the company’s target of a 20% revenue growth year on year.
- Focusing on ‘destiny deals’, the company is making additional investments in geographies like Vietnam, France, and Saudi Arabia, to deepen engagements with their major clients. This will bring in more subscription deals.
- The company enjoyed success with Government eMarketplace, LIC, and AMFI. Going ahead, the company expects to offer a retail / corporate banking ecosystem.
Asset Multiplier Comments:
- The banking services penetration in India will rise with a rise in India’s per capita income. The expansion of the banking & financial services sector in rural India will create more demand for digital transformation which provides scalability.
- This may eventually result in better revenue prospects for a company like Intellect Design Arena from banks, NBFCs, insurance companies, and the likes.
- The closing price of Intellect was ₹ 608/- as of 10-May-2022. It traded at 23x/16x the consensus EPS estimate of ₹ 26.3/37.9 for FY23E/FY24E respectively.
- The consensus price target price for Intellect is ₹ 940/-. It implies a P/E multiple of 25x on the FY24E EPS of ₹ 37.9/-
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