Buy Intellect Design Arena - Impressive deal wins: AnandRathi Research

We initiate coverage on Intellect Design Arena, with a Buy rating and a target of Rs. 230. Intellect has built an impressive sales team in key regions. While this would raise costs in the short run, Intellect is now beginning to see benefits in terms of greater number of deal wins and the resultant revenue acceleration. We expect margins to improve as non-linearity of the product business plays out.

Impressive deal wins. This, we believe, is the most important variable in predicting Intellect's performance. The company won 56 deals in FY15 and another 13 in Q1 FY16, signalling strong demand for its products and hinting at its well-oiled sales engine. Over the last few quarters, it has built a strong local sales team hired from competitors and clients, reflected in its higher S&M costs ($35m projected for FY16 for 270 people).

Amid greater expenditure in BFSI. Industry reports suggest that competition is compelling banks to consider investing more in technology - both in core banking and channel systems. Currently, investments are being made in channel systems (user interfaces) but are now expected to start in core banking as well to fully support digital banks. Various industry experts estimate a ~4.6% increase in spending in 2015 (market size estimates (source: Celent): US $62.2bn, Europe $64.3bn, APAC $70.3bn).

Revenue scaled up to ensure profitability. Intellect delivered an impressive Q1, with 17% qoq revenue growth. It maintained its guidance of 22-26%, which now looks conservative (1% CQGR to achieve it). We reckon it can report 28% growth in FY16 and turn EBITDA positive by Q4 FY16.

Valuation. We initiate coverage, with a target of Rs. 230 (2x FY18 revenues) reflecting optimism about management execution capability and attractive market dynamics. Risks. Great dependence on discretionary spending.

Source : Equity Bulls

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