CRISIL revises Omnitech Infosolutions` fair value to Rs 182

CRISIL Research has come out with its report on Omnitech Infosolutions  . According to the research firm, company's revenues from Europe grew by 44% q-o-q due to fresh orders, which was offset by a decrease of 54% q-o-q and 43% q-o-q in Middle East and US revenues, respectively. Overall, overseas revenues decreased by 2% to Rs 301 mn.

Omnitech Infosolutions Ltd's (Omnitech's) Q1FY13 results were below CRISIL Research's expectations. Total revenues decreased by 2.9% q-o-q to Rs 1,280 mn due to lower revenue growth in India and overseas. Decline in cost of goods sold as a percentage of sales coupled with decrease in other expenses improved EBITDA margin by 299 bps q-o-q to 22.2%. Cost of goods sold as a percentage of sales fell to 55% in Q1FY13 from 57.3% in the previous quarter following lower mix of the low-margin systems integration business. Depreciation increased by 53% y-o-y due to capex of Rs 1.1 bn incurred in FY12 for technology upgradation at the Maphe center. Other income increased by 89% q-o-q as the company booked forex gain this quarter. The company reported a profit of Rs 60 mn compared to a loss of Rs 26 mn in the previous quarter because of lower tax outgo. It booked deferred tax liability for FY12 in the previous quarter, which was not present in this quarter. Consequently, adjusted PAT margin improved to 4.5%. Adjusted EPS was Rs 3.9. We maintain our fundamental grade of 3/5, indicating that its fundamentals are good relative to other listed securities in India.

Good performance in Europe offset by decline in the US and Middle East revenues:
Omnitech's domestic business contracted by 4.4% q-o-q to Rs 979 mn as the company is facing pressure due to increased competition at home. Revenues from Europe grew by 44% q-o-q due to fresh orders, which was offset by a decrease of 54% q-o-q and 43% q-o-q in Middle East and US revenues, respectively. Overall, overseas revenues decreased by 2% to Rs 301 mn. The company has shifted its focus more towards India, Europe and Asia Pacific from the US and Middle East businesses.

Subsidiaries continue to be in red:
Omnitech's Asia Pacific subsidiary and Avensus continued to report losses at the EBITDA level of Rs 10 mn each in Q1FY13. Management expects both to break even in Q3FY13. Avensus' profitability is expected to improve as the company will initiate increased offshoring. The company currently offshores 5-7% of Avensus' business. The Asia Pacific subsidiary has received a new order worth Rs 550 mn for FY13, which is expected to increase its margins going forward.

Earnings estimates and fair value revised downwards
We continue to use the discounted cash flow method to value Omnitech and have revised our earnings estimates downwards for FY13 and FY14 by 17% and 18%, respectively. The revision has factored in a delay in breakeven of Avensus and the Asia Pacific subsidiary, along with higher interest cost due to increased working capital requirement for the subsidiaries. Hence, our fair value is revised to Rs 182 per share from Rs 199. At the current market price of Rs 112, our valuation grade is 5/5.

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