>Infotech Enterprises Ltd.(MERRILL LYNCH)

Cut to Underperform; PO cut to Rs75
We cut FY10E and FY11E earnings by 27% and 39% respectively to factor in increasing signs of challenges faced by its top 5 clients. We forecast 20% decline in earnings (excl forex losses) over the next two years. While the stock has underperformed about 30% in last 6 months, our downgrade reflects our 15% below consensus earnings & lack of catalysts. Cut PO to Rs75 (vsRs180), at 4x

FY10E, a 20% discount to historical valuations.
Top clients face challenging business conditions Last two months, Infotech’s top 3 engineering clients – Boeing, Pratt & Whitney, and Bombardier reported challenging business conditions & announced layoffs, which could impact project inflows to Infotech. We also see downside risk to
growth from TeleAtlas (largest GIS client) which caters primarily to the auto industry. TeleAtlas’s parent and key client TomTom guided at flat unit sales for portable navigation devices for CY09. Top 5 clients contribute ~40% to revs.

FY10 cyclical pressures grow; Weak 4Q
We expect FY10 reported earnings to grow by 30% which should be primarily driven by lower forex hedging losses. We expect USD revenues to decline 1% and EBITDA to decline 5% yoy. 4QFY09 too is likely to be weak given low volume growth, fluctuations in cross currency impacting revenues, and a likely Rs300mn hit from FX hedge losses. We expect 4Q PAT to decline 58% QoQ.

Upside risks from offset business, rupee depreciation
Key factors we would look for before we become more constructive on the stock: a) faster than expected pick-up in product development by aerospace/rail clients b) Progress in awarding defence equipment related contracts and consequent offset business c) Rupee depreciation, where 1% depreciation can impact margins by an estimated. 30-40bps.

To see full report: INFOTECH