3i INFOTECH: Banking on Products

Many banks in India, both Indian and international, have set up IT
subsidiaries to leverage India's information technology skills with
considerable success. Starting with Citibank, almost all major foreign banks set
up IT shops in India as captives. Indian banks too like ICICI, IDBI and Canara
Bank have followed suit. Encouraged by the success of Citibank's IT arms COSL
and CITIL, some like IDBI and ICICI also motivated their subsidiaries to seek
third party business with some success.

One of the problems that these subsidiaries faced while seeking banking
clients was the potential conflict of interest because of their ownership
structure. To avoid these problems, the banks have been pursuing a strategy of
finding new investors for their subsidiaries and dilute their own holdings.
Mumbai based 3i Infotech is the new avtar of ICICI Infotech which after a name
change and IPO, is trying hard to rework its image as an arm of the bank.

Formerly known as ICICI Infotech and set up in 1993 as a captive back office
processing company for the ICICI Group, 3i Infotech is a software product and
services company catering to the needs of the banking, finance, retail and
distribution, e-governance, dairy, manufacturing and fashion/apparel industries.
The company's scope of business expanded in 1999 when it began targeting non-ICICI
Group clients with IT services, BPO and Infrastructure Management Services.

3i Infotech has developed products in the area of Banking, Insurance and ERP.
One of them is KASTLE, a treasury management solution covering foreign exchange,
money and equity markets and their related derivative instruments. PINNACLE is
another product in the Asset Liability Management space facilitating
identification of sources of risk and their measurement while NEWTON is a core
banking solution.

3i Infotech entered the capital market in April 2005 with a public issue of 2
crore equity shares of face value of Rs 10 each at an offer price of Rs 100 per
share. The chairman of the company is Hoshang N Sinor and the managing director
and CEO is V Srinivasan. 3i Infotech's current equity stands at Rs 52.8 crore
with promoters holding 54%, institutional investors holding 18%, the Indian
public holding 19% and the balance 9% of the stake is held by others. 3i
Infotech has its presence across 4 continents in 30 countries serving customers
like Dow Jones, GlaxoSmithKline, Panasonic and Emirates Bank.

3i Infotech closed the year ended March 2005 with healthy revenues of Rs
289.2 crore as compared to Rs 229.2 crore in the previous year, up 26%. Net
profits for the same period were Rs 32.1 crore as compared to a loss of Rs 11.8
crore in the previous fiscal. The company earned 45% of its annual revenues from
sale of products amounting to Rs 128.8 crore, registering a 78% jump as compared
to Rs 72.4 crore last year. Revenues form services rendered amounted to Rs 160.4
crore, up mere 2% as against Rs 156.7 crore in the previous fiscal contributing
55%.

The company bagged ten orders worth $4.3 mn for its banking suite solutions
like Kastle, Risk Free, Triton and Newton from India, Sri Lanka, Kazakhstan,
United Arab Emirates, Malaysia and Nepal. The company also entered into a
strategic alliance with Eurobase systems, a software and services supplier in
the banking and insurance to integrate 3i's product Kastle to provide an
integrated STP solution for bank's treasury needs.

3i Infotech's performance for the quarter ended June 2005 was impressive
with revenues amounting to Rs 88.5 crore as compared to Rs 63 crore a 40% growth
on y-o-y basis. Revenues for India contributed a major chunk of 53% amounting to
Rs 46.7 crore followed by USA contributing 23% of the revenues earned during the
quarter at Rs 20.3 crore, where as EMEA contributed 18% amounting to Rs 16.2
crore followed by the Asia Pacific region contributing the balance 6% at Rs 5.3
crore. Revenues form services rendered contributed 55% and as far as revenues
from the sale of BFSI and ERP products is concerned the contribution was 33% and
12%, respectively. The net profit of the company for the same period amounted to
Rs 10.3 crore up 66% as compared to Rs 6.2 crore in the same quarter last year.
The ICICI group, 3i Infotech's largest client contributed 23% of the total
revenues earned during the quarter with its top ten clients contributing 34% of
the total revenues. Forty new clients were added during the quarter taking the
tally of active clients to 516.

During
the quarter, 3i Infotech entered into a marketing alliance with a US based
business governance solutions provider, Axena Incorporated to provide and
implement the SOAx toolkit in order to facilitate compliance with the provisions
of the Sarbanes-Oxley Act. With this alliance, the former can market and
implement Axena's SOAx toolkit across Europe, Africa, Middle East and the Asia
Pacific regions.

Going ahead, 3i infotech estimates to earn revenues in the region of Rs 360
crore to Rs 375 crore for fiscal 2006, a 25% to 30% increase over the previous
year. The company aims to embark on a rapid growth trajectory, which could
entail investments in inorganic acquisitions. 3i Infotech plans to focus on the
products business as it expects to grow sharply on the back of new product
launches in banking and insurance space. The services segment is expected to
remain stable. While there is a lack of clear strategy on client mining,
specialised offerings and growth targets, ICICI will provide stable revenues.

3i Infotech currently trades at Rs 121, discounting the March 2006 EPS by 14
times and March 2007 EPS by nine times. Considering its significant product
related revenues and improving profitability we believe that the share would
outperform many of its peers. BUY

Sushanto Mitra he
author is the founder of Technology Capital Partners The views reflected here
are of the author and not of this publication. No liability is accepted for
losses based on the information presented here