Description

Intelligroup (ITIG) is an under-the-radar turnaround story that has been in the making since a new CEO took control in 2005. While industry headwinds have held back top line growth this year, investors are getting a 20%+ free cash flow yield that builds up cash on the balance sheet while they wait for things to turn.     

ITIG provides consulting, business process outsourcing, and application management services using an offsite/onsite delivery model. The company differentiates itself through its expertise and proprietary solutions targeted at different stages of the ERP life cycle, particularly in relation to SAP, which accounts for 70% of its revenues.

The company has a presentation which gives a good overview of what they do for those interested: http://www.intelligroup.com/ig_presentations.html

Some History:

Scroll through the news items for company in 2004/2005 and you will see news headlines like:

"Intelligroup Announces SEC Investigation"

"Intelligroup Securities to be Delisted from Nasdaq Market"

"Intelligroup Announces Departure of Chief Operating Officer"

Not surprisingly, the stock price went from $15 in early 2000 to less than $1 after it was de-listed from the Nasdaq in 2004. Progress behind the scenes started that year, when some smart money Indian venture capitalists from Softbank and Venture Tech took control of the company through a series of private placements. Together, they invested a total of $25mm, representing a purchase of over 60% of the company done in two separate transactions. They replaced the old board and kept all but one member of the senior management team. More importantly, through contacts at Wipro, they reached out to Vikram Gulati - a young, rising, and more importantly restless star within Wipro who had grown Wipro's EAS group from $20mm to $160mm within 4 years. (see: "Why Vivik Paul left Wipro" http://www.rediff.com/money/2005/jul/08bspec.htm).

Enter Vikram Gulati:

Vikram joined Intelligroup as CEO in 2005 and made his number one priority team and culture. He has built one of the most talented management teams for a sub $100mm market cap you will find by cutting loose the non-performers and bringing in, one by one, many of his high performance colleagues from Wipro who were interested in "building their own legacy." Vikram will tell you that the most important aspect he brought to bear at Intelligroup was the "if you can't measure it, you can't measure it" mentality. There is now a strict adherence to data and process that was nonexistent before he arrived.

"He is a humble leader who makes everyone around him feel that they have important ideas to contribute. His style is to deliberate on important matters, seek the counsel of his extended team, and then move forward on making the hard decisions. His sharp eye on results and numbers has helped Intelligroup focus on the most important aspects of the business, especially when it comes to customer satisfaction."  - Employee at ITIG

 The change in every day "blocking and tackling" is apparent from the numbers before and after Vikram took over.

Note that in 2007, Intelligroup posted its first positive EPS since 1998 with earnings of 7 cents. While top line growth has stalled in 2009 (a year Vikram says is "disappointing"), the earnings growth hasn't with the latest quarter coming in at 8 cents a share or 32 cents annualized.

While the company won't give guidance, Vikram noted on the last conference call that he expects the utilization rate (which helps drive operating margins) to stay in the 78% range for the remainder of the year which means margins should hold in the 9-10% range. Additionally, once the capex headwinds stabilize (CFO said they noticed things were already getting better on the latest call), there should be significant operating leverage given the heavy investment in the sales force which management believes is sufficient for a $250mm revenue run rate.

Price target:

With $20mm of cash on the balance sheet, the company has an enterprise value around $70mm.

Run rate free cash flow generation I put somewhere in the $13mm to $20mm range depending on a few assumptions. This gives you a yield anywhere in the 20% to 30% range. I think a halving of this yield, or doubling of stock price seems reasonable.

Additionally, I think a buy-out is a good possibility here given the private equity involvement. I do not know the price they are willing to sell the whole company; what I do know is that they won't do it at the current level (see share buyback in   

Catalyst

Continued free cash flow generation

If the stock stays above $2 for 30 days, it will move off the bulletin board and onto the AMEX

Wise deployment of 20mm cash balance