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Blue Star Infotech Ltd

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Recommendation BUY Blue Star reported Q1FY15 numbers in line with our expectations. Revenues for the quarter have grown by 13% YoY; EBIDTA margins went down by 180 bps YoY. Q4FY14 was exceptional in terms of Sales and EBIDTA. In Q4FY14, while the sales grew by 17% QoQ, EBIDTA grew by a whopping 860 bps QoQ to 15.5%. This was mainly on the back of one time license revenues during that quarter. Post the appointment of new CEO Mr Sunil Bhatia in 2011, company has changed its strategy towards focusing on solutions and on inorganic growth which has resulted in increasing its local presence in the US and Singapore by opening up new centres. At CMP, the stock is trading at 8.2x/6.3x its FY15E/FY16E expected earnings. We continue to be positive about the stock and recommend BUY for long term.

Revenues for the quarter have grown by 13% YoY; however fell by 18% QoQ since Q4 was an extraordinary quarter due to onetime license sales.

EBIDTA margins were down 180 bps YoY at 6% on the back investments made by the company to fuel future growth. Company is hiring senior professionals in sales and marketing team.

Forex loss came in at 0.14 crore against a loss of Rs.3.8 crore.

Tax rate was lower 19% against 23% in Q4FY14 and 25% in Q1FY14.

Pat was lower by 24% YoY on the back of lower sales.

Company broadly provides following services for its Global clients:

Business Application: Currently, company is developing applications and solutions for its Travel and Hospitality sector customers. Lately company has moved up the value chain and has created mobile applications to enhance customer experience.

Product Engineering: Company provides engineering services for Medical, Pharma, Manufacturing, Travel BFSI sectors. It has been instrumental in 1800+ product releases and competes with large cap IT company’s.

Professional services: HP has been an important customer since inception for Blue Star Info and it has successfully been trying to add more value for the company. The current engagement has lower margins and we believe is a drag for overall margins of the company.

Business Analytics: The company has made a acquisition in 2013 which is in the BI space and is well geared up to tap the $ 13.8 bn BI and Analytical market.

CMP Rs.170

Target Price Rs.243

Sector IT Software products

Stock Details

BSE Code 532346

NSE Code BLUESTINFO

Bloomberg Code BLSI IN

Market Cap (Rs cr) 158

Free Float (%) 46.1%

52- wk HI/Lo (Rs) 172/58

Avg. volume BSE (Quarterly)

5636

Face Value (Rs) 10

Dividend (FY 14) 40%

Shares o/s (Crs) 1.04

Relative Performance 1Mth 3Mth 1Yr

Blue Star Info 17.3% 50.0% 1.2%

Sensex 2.2% 19.6% 33%

Shareholding Pattern 30-June-14

Promoters Holding 53.9%

Institutional (Incl. FII) 3.0%

Corporate Bodies 2.7%

Public & others 40.5%

Kavita Vempalli (+91 22 3926 8173) Research Analyst kavita.vempalli@nirmalbang.com

Year Net Sales Growth % EBITDA Margin % PAT EPS PE EV/EBITDA ROE %

FY13A 187.1 48.5% 9.2 4.9% 5.0 4.8 35.4 15.4 5.8%

FY14A 270.2 44.4% 25.3 9.2% 15.9 14.3 11.9 6.4 16.8%

FY15E 345.9 28.0% 32.3 9.3% 23.1 20.8 8.2 4.6 21.0%

FY16E 435.8 26.0% 41.7 9.5% 30.0 27.0 6.3 3.2 22.7%

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Blue Star Infotech Ltd

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Quarterly Analysis

Source: Nirmal Bang Securities, Company

Q1FY15 Result Analysis (in Rs Crs.) Q1FY15 Q4FY14 Q-o-Q Q1FY14 Y-o-Y

Sales 64.5 78.8 -18.2% 56.9 13.3%

Employee Benefit Expenses 47.8 43.7 9.4% 45.8 4.3%

Cost of Product/Licenses 4.5 12.0 (62.7%) 3.2 38.1%

Travel Expenses 2.5 2.5 0.8% 1.4 76.3%

Other Expenses 5.8 8.4 (31.2%) 4.3 36.4%

EBITDA 3.9 12.2 (68.1%) 2.1 82.3%

Margin 6.0% 15.5% (944)bps 7.8% (174)bps

Depreciation & Amortization 1.0 1.1 (8.2%) 0.7 41.3%

Finance charges 0.2 0.9 (76.7%) 0.0 5786.5%

Other income 1.3 0.3 307.5% 1.5 (12.8%)

Forex gain/loss 0.1 3.8 0.0

Income before taxes 3.8 6.7 (43.05%) 2.9 31%

Margin 5.9% 8.5% (259)bps 5.1% 80 bps

Income taxes 0.7 1.5 (52.7%) 1.3 -45.1%

Minority Interest (0.0) 1.0 0.0 #DIV/0!

Net income 3.1 6.1 (49.69%) 1.6 94%

Margin 4.8% 7.8% (300)bps 2.8% 199 bps

EPS Rs. 2.7 4.1 (32.84%) 3.9 (30.47%)

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Financials

Profitability (Rs. In Cr) FY13 FY14 FY15E FY16E Financial Health (Rs. In Cr) FY13 FY14 FY15E FY16E

Revenues 187.1 270.2 345.9 435.8 EQUITY & LIABILITIES

% change 48.5% 44.4% 28.0% 26.0% Share Capital 10.4 10.4 10.4 10.4

EBITDA 9.2 25.3 32.3 41.7 Reserves & Surplus 78.9 90.2 109.5 134.5

EBITDA margin (%) 4.9% 9.2% 9.3% 9.5% Minority Interest 0.0 2.1 3.6 4.1

Depn & Amort 2.9 3.8 4.5 4.7 Non-Current Liabilities

Operating income 6.2 21.5 27.9 37.0 Net Deferred Tax Liabilites 1.6 1.0 1.0 1.0

Interest 0.1 1.0 2.2 2.2 Other Long Term Liabilities 3.3 6.3 7.0 7.6

Other Income 6.6 5.6 6.5 7.5 Long Term Provisions 0.9 1.7 1.9 2.1

Forex Hedging Cost 5.4 4.1 0.0 0.0 Current Liabilities

PBT 7.3 21.8 32.1 42.3 Short Term Borrowings 0.1 4.5 2.5 0.0

PBT Margins (%) 3.9% 8.1% 9.3% 9.7% Trade Payables 20.3 22.1 32.3 40.6

Tax 2.3 5.9 9.0 12.3 Other Current Liabilities 6.1 9.1 10.1 10.7

Tax rate% 32.0% 27.1% 28.0% 29.0% Short Term Provisions 3.0 5.5 6.9 8.6

PAT 5.0 15.9 23.1 30.0 TOTAL 124.6 152.9 185.0 219.7

M.I 0.0 1.0 1.5 2.0 Non Current Assets

PAT after MI 5.0 14.9 21.6 28.0 Fixed Assets

EPS 4.8 14.3 20.8 27.0 Tangible 20.6 20.1 21.1 22.1

Quarterly (Rs. In Cr) June.13 Sep.13 Dec.13 Mar.14 Intangible 1.2 2.0 2.1 2.2

Revenue 56.9 67.2 67.4 78.8 CWIP 0.6 2.2 4.0 6.0

EBITDA 4.6 3.8 4.7 12.2 Goodwill 1.6 17.9 17.9 17.9

Dep & Amortisation 0.7 1.2 0.8 1.1 Non Current Investments 2.4 0.0 0.0 0.0

Op Income 3.9 2.6 3.9 11.1 Long term Loans and Advances 18.2 23.6 21.2 19.1

Interest 0.0 0.0 0.1 0.9 Others 0.5 0.6 0.6 0.6

Other Inc. 1.5 2.2 1.5 0.3 Current Assets

Forex Gain/(Loss) 0.0 0.0 (0.4) (3.8) Current Investments 1.1 0.0 0.0 0.0

PBT 5.4 4.8 4.9 6.7 Trade Receivables 44.6 61.0 76.9 94.4

Tax 1.3 1.7 1.4 1.5 Cash and Bank Balances 28.7 21.0 37.0 53.3

Tax rate 24.5% 34.7% 28.5% 22.8% Short Term Loans and Advances 3.7 3.0 2.7 2.4

PAT 4.1 3.2 3.5 5.2 Other Current Assets 1.4 1.6 1.6 1.7

PAT Margins % 7.2% 4.7% 5.2% 6.6% TOTAL 124.6 152.9 185.0 219.7

M.I 0.00 0.09 0.00 0.96

PAT after M.I 4.08 3.06 3.52 4.22 Cash Flow (Rs. In Cr) FY13 FY14 FY15E FY16E

EPS 3.9 2.9 3.4 4.1 Operating

Performance Ratios FY13 FY14 FY15E FY16E OP before WC 9.2 25.3 32.3 41.7

EBITDA margin (%) 4.9% 9.2% 9.3% 9.5% Change in WC (3.0) (11.0) 0.1 (3.5)

PAT margin (%) 2.6% 5.8% 6.7% 6.9% Tax (2.3) (5.9) (9.0) (12.3)

ROE (%) 5.8% 16.8% 21.0% 22.7% CF from Operation 3.9 8.3 23.5 25.9

ROCE (%) 7.4% 18.1% 23.3% 25.7% Investment

Capex (3.7) (5.6) (4.8) (5.0)

Valuation Ratios FY13 FY14 FY15E FY16E Other Income & Investments 10.8 9.1 6.5 7.5

Price Earnings (x) 35.39 11.87 8.17 6.30 Total Investment 7.0 3.6 1.7 2.5

Price / Book Value (x) 1.70 1.51 1.27 1.05 Financing

EV / Sales 0.76 0.60 0.43 0.30 Change in Borrowing 0.1 4.4 (2.0) (2.5)

EV / EBITDA 15.44 6.42 4.59 3.18 Dividend paid (1.7) (3.4) (5.0) (6.5)

Interest Paid (0.1) (1.0) (2.2) (2.2)

Per Share Data FY13 FY14 FY15E FY16E Extraordinary & Others (3.3) (19.4) 0.0 (0.9)

Reported EPS 4.8 14.3 20.8 27.0 Total Financing (5.0) (19.5) (9.2) (12.1)

BV per share 85.9 96.9 115.4 139.5 Net Chg. in Cash 5.9 -7.7 16.0 16.3

Cash EPS 27.6 20.2 35.6 51.3 Cash at beginning 22.8 28.7 21.0 37.0

Dividend per share 0.2 0.5 0.7 0.9 Cash at end 28.67 21.01 36.99 53.29

Source: Company data, Research

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Blue Star Infotech Ltd

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Disclaimer:

This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The information, analysis and

estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This

document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for

general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the contents stated

herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This

document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affil iates and their employees

may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or

perform investment banking or other services for any company mentioned in this document.

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