 "3i Infotech sells US subsidiary, cleanup ahead of sale?")
Over the past one week, 3i Infotech share price rose 10.67% when the BSE IT sector index fell 1%. The street anticipates a complete sale by existing shareholders led by ICICI Bank (20.33%). Previous media reports suggest that IBM could be interested. However, 3i Infotech management has not commented on a potential sale of the entire business.
The company ramped up acquisitions to double revenue over the past four years. 3i Infotech borrowed to achieve scale in revenue. As interest rates rose sharply in India, the company’s unsecured debt of Rs 1,266 crore did it in.
[caption id=“attachment_10715” align=“alignleft” width=“380” caption=“The street anticipates a complete sale by existing shareholders.Reuters”]
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The US-based Global Billing and Payments unit bought four years ago was sold on Monday for USD 137m. Companies in the space do not take such hard decisions to give up revenue generating subsidiaries. Also, 3i Infotech is a company and not a private equity fund. The idea of buying the US entity four years ago was to grow the business. The company disposed off the business that made an operating profit of USD 24m at 5.5 times multiple.
“We want to reduce the bank borrowing. So whatever we will get will go towards reducing the bank borrowing. That will also bring down our debt/equity ratio considerably and reduce the leverage”, V Srinivasan, said in an interview with CNBC TV-18.
While this may be the most appropriate thing, it will not have a major impact on its debt position.(Total loans stood at Rs 2,534 crore at the end of March 2011.) 3i Infotech’s market cap is Rs 956 crore.
What is worrying is the fact that FCCB’s to the tune of USD 90 million are due in July 2012. The management expects to refinance this by taking in further debt on its balance sheet.
Impact Shorts
More Shorts3i Infotech is struggling with a large loan on its balance sheet. Its debt to equity ratio stood at 2.1 times at the end of March 2011, significantly higher than most of its peers. This was visible on its interest cost which reported a sharp jump over the previous year, thereby impacting margins.