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Intellect Design Arena Ltd>
  • CMP : 755.2 Chg : 10.15 (1.36%)
  • Target : 575.0 (6.48%)
  • Target Period : 12 Month

16 May 2023

Investments in platform journey continues; aiming for 20% revenue growth in FY24

About The Stock

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

  • Intellect is in a transition from a product company to a platform company
  • The company generates 55% of revenues from developed markets and the rest from emerging markets
  • Recently, it saw a turnaround in margins (from 5% in FY20 to ~20% in FY23)
Q4FY23 Results:

Intellect reported robust revenue growth in Q4FY23.

  • Revenue in rupee terms grew 20.8% YoY
  • EBITDA margins improved ~450 bps QoQ & fell ~150 bps YoY to 22.2%
  • Funnel was flattish QoQ at ₹ 7,041 crore
What should Investors do?

Intellect’s share price has grown by ~2.6x over the past five years (from ~₹ 203 in May 2018 to ~₹ 540 levels in May 2023).

  • We maintain our HOLD rating on the stock
Target Price and Valuation

We value Intellect at ₹ 575 i.e., 20x P/E on FY25E.

Key Triggers for future price performance
  • Strong deal wins as well as continued healthy funnel are expected to aid future revenue growth
  • Improving quality of revenues (licence + AMC + Cloud) from 47% in FY20 to 57% in FY23) bode well for long term revenue growth
  • The company is making investments to improve the quarterly revenue run rate to US$90-100 mn in 10-12 quarters from now
Alternate Stock Idea:

Apart from Intellect, in our IT coverage we also like Newgen.

  • Strong logo additions with continuous focus on enhancing annuity revenues would aid 20.9% revenue growth over FY23-25E
  • BUY with a target price of ₹ 660

Key Financial Summary

Particulars FY20 FY21 FY22 FY23 5 year CAGR (FY18-23) FY24E FY25E 2 year CAGR (FY23-25E)
Net Sales 1,346.9 1,497.5 1,878.2 2,231.3 15.5 2,672.5 3,008.3 16.1
EBITDA 70.8 354.8 472.1 435.2 43.2 539.2 620.8 19.4
EBITDA Margins (%) 5.3 23.7 25.1 19.5 - 20.2 20.6 -
Net Profit 16.0 262.8 349.1 267.2 41.7 339.4 404.3 23.0
EPS (|) 1.2 19.6 25.1 19.2 - 24.1 28.7 -
P/E 453.8 27.6 21.5 28.4 - 22.4 18.8 -
RoNW (%) 1.0 18.9 19.3 13.0 - 14.2 14.4 -
RoCE (%) 2.1 20.2 22.7 17.5 - 18.8 19.1 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

  • The company reported a revenue of | 615.5 crore, up 12.5% QoQ & 20.8% YoY. License revenue (18% of mix) grew 56.9% QoQ & 39.9% YoY to | 113 crore aiding in the strong revenue growth during the quarter. SaaS revenue (19% of mix) grew 2.7% QoQ & declined 4.4% YoY to | 114 crore while AMC revenue came in at | 106 crore, up 22.4% YoY
  • License linked revenues (License+ SAAS+AMC). i.e. 54% of revenue mix grew 16.1% YoY to | 333 crore
  • EBITDA margin improved ~450 bps QoQ to 22.2% while on a YoY basis the EBITDA margin declined 150 bps. The company indicated that it capitalised ~| 34-35 crore of expenses during the quarter
  • For FY23, revenue came in at | 2,231.3 crore, up 18.8%. SaaS revenue increased 80 bps to 20.7% of revenue mix and reported revenue of | 461 crore, up 23.3% while license revenue declined 430 bps to 14.8% of revenue mix, coming at | 330 crore, down 8.1%. License linked revenue (License+ SAAS+AMC) now forms 52.5% of the revenue mix. It came in at | 1,173 crore, up 10.3%. The company for FY23 reported an EBITDA margin of 19.5% compared to 25.1% due to the investments made in technology development during the year by the company
  • The company mentioned that it offers its services in license & SaaS form as per the customers preference and the license revenue jump in Q4 was due to the client preference. The company mentioned that it has not set any target for license or SaaS revenue but its overall endeavour is to grow the license linked revenue which is a high margin business. On the SaaS revenue decline on YoY basis the company mentioned that GeM contribution is lower in Q4 and also mentioned that GeM is due for renewal & the company is competing for its renewal. The company also mentioned that the SaaS revenue has a time lag in booking after the deal win and the time lag could be in the range of 12-24 months, which has also impacted the revenue growth during the quarter
  • The company mentioned that bank tech wave started in 1965. It is currently in phase 5 of bank tech wave wherein cloud and AI disruption is taking place. Intellect added that when tech disruption happens the companies have to realign themselves to tech stack and for that investment has to be done 3-4 years in advance. The company mentioned that it was able to see this signals that cloud & AI is going to disrupt the banking industry had started investment in these spaces since 2017
  • By investing in the cloud & AI space the company has developed eMach.ai which is a composable platform that is almost zero code (less than 5% of codes) and includes all its products in retail, corporate & wealth banking. The company mentioned that it contains 285 microservices, which can be assembled to design a product related for a specific segment in specific market without employing an IT service company. The company mentioned that the platform can be integrated with GSI partner or the banks/FIs IT teams
  • The company mentioned that in the last year it had announced that it will invest 5% of its margins for building the next generation technology, which impacted margins in FY23. Intellect added that it has almost completed the investments. Now it will focus on distributing and growing the business. The company mentioned that now its investment in business will come down however it will increase its marketing spend for branding & showcasing its products & platforms to grow the business. Intellect also mentioned that in the last 18 months it has focused on building strategic partnership. The company mentioned that it had already entered into a partnership with Microsoft and is now working with Accenture, which gives the company a strong cloud & AI partner and a digital partner. The company further mentioned that its partnership with IBM is also going strong. It is talks for multiple deals with IBM
  • On the future growth outlook, the company mentioned that its business is designed to grow at 20% revenue growth. Intellect aims to grow at 20%+ revenue growth in FY24. The company mentioned that the company is designed for 25% EBITDA margins but it continues to invest back 5% into platform journey. The company, however, mentioned that five years down the line margins will be in the range of 40% aided by increase in AMC business. The company also mentioned that cash generation in FY24 will higher be compared to FY23 as the investment phase is behind but Q1FY24 cash generation will be impacted by bonus payout
  • The company mentioned that margin maintenance & improvement will be there once the client is onboarded as the contract is for longer duration of 15-20 years. Intellect, however, mentioned that for growing the business client addition is a priority and it will pick up due to investments made by the company. The company also mentioned that it is not looking to diversify is business from BFSI space. Intellect also mentioned that multiple deals are happening in India and it looking to grow its business in India
  • On the SaaS model, the company mentioned SaaS model is not fully matured. Intellect mentioned that in some deals the payment is in front end and some deals the payment is back ended. The company has healthy cash balance. Hence, the working capital is not a constraint for the company. The company’s aim is to win sustained SaaS business. Intellect also mentioned that SaaS in a matured model that could provide margins as high as 70% but that takes about four to five years after the client is stabilised
  • On R&D investment, the company mentioned that its cost of investment for developing a platform is one-tenth compared to competitors like Thought machine. The company mentioned that it has built new technology with US$5-10 mn investments compared to US$550-600 mn investments made by competitors
  • The company also mentioned that it is seeing huge opportunity in core banking transformation space in large tier I banks & large regional banks. The company mentioned that some banks have legacy core architecture. Till now, banks were building new solutions around the old core, which was not giving them complete benefits. However, now the banks are more open to core transformation. With Intellect eMach.ai the risk of transforming the core is declining. The company hence is seeing large opportunity in this space and its unique offerings it is well placed to capture compared to competitors
  • The company mentioned that it is still in top three contenders for large bank deals in Europe along with Temenos & Though Machine in a couple of deals while in one deal it in top two contenders now. The company mentioned that the results of the deals will be declared in a couple of quarters. Intellect also mentioned that it has entered into a few RFPs and the Europe market where it is competing is becoming a three company competition among Intellect, Temenos & Though Machine
  • On the US banking crisis the company mentioned that it has seen many uncertain events in the last seven years like the UK Brexit, Covid pandemic, Russia-Ukraine conflict, regional banking crisis in US, etc. It is of the opinion that the market calibrates itself and the tech demand is back in two to three quarters. The company also mentioned that its exposure to US banks in minimal. Hence, the current banking crisis will have minimal impact on revenues. The company also mentioned that its exposure to developed markets in more in Europe & Canada. The company also mentioned that although its insurance business in US is growing it is still in single digit of revenue mix although the pipeline is growing is strong
  • The company funnel remained flattish QoQ while on a YoY basis it was up 18.4% to | 7,041 crore. The company also mentioned that out of the total funnel 173 opportunities account for | 5,248 crore of funnel i.e. ~75% of the funnel. The company during the quarter added two destiny deals to its pipeline taking the total destiny deals to 70. The company further mentioned that it focused on having right funnel instead of growing funnel size so that the deal wins are higher and sales effort are channelised in the right direction as deal closure takes ~18-24 months. The company also mentioned that is focused on growing its destiny deals wins
  • The company mentioned that in Q4FY23 on sequential basis its Global DSO excl. India declined by 19 days to 107 while India DSO declined by 63 days to 119 bringing the total DSO to 110
  • The company declared final dividend of | 2.5 per share for FY23



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