Why Intellect Design’s stock price is falling

Intellect Design does not directly offer IT services like Infosys or TCS. It manufactures software products for banking and financial services companies (BFSI). It offers several products for basic banking, retail banking, corporate transaction banking, insurance, central banking, and risk and cash management.

Over the past five trading sessions, Intellect Design Arena’s stock price is down more than 15%. The stock saw a sharp drop of 14% yesterday after the company’s earnings release.

However, the stock is down around 45% on a year-to-date (YTD) basis. The recent results are therefore not the only factor driving down the stock.

Let’s find out why Intellect Design stocks are under intense pressure.

#1 Weak balance sheet in the September 2022 quarter

For growth stocks, the low results are a major obstacle. A product company like Intellect Design is considered a growth stock because it must first make heavy investments to develop a new product.

Once the product gains traction with reputable customers in the coming years, then and only then the company is able to earn good revenue from it.

In July 2022, Tanla Platforms announced weak quarterly results and muted projections. Tanla Platforms saw a steep drop over the next couple of days.

A similar situation is playing out with Intellect Design, it seems. The stock fell 14% on Monday after reporting weak quarterly results. Yesterday, the stock fell another 2% and hit a new 52-week low.

On Monday, the company released its second quarter results, where net profit reached 457m against a profit of 688m in the June 2022 quarter. This following a decline in total revenue which 5,384m against 5,511 m in June 2022.

The company’s margin contracted by 10%, which was the main reason for the drop.

High inflation in the European market hit the company as it slowed down decisions. Travel, talent and taxes also affected profit margins.

Silver lining, management is confident of hitting its 20% target this fiscal year.

#2 Rising interest rates

Central banks around the world have raised interest rates to control rising inflation. This has created a major problem for growth stocks like Intellect Design.

All growth stocks like Paytm, Zomato, etc. have been under pressure due to rising interest rates.

Growth stocks have placed a high bet on the future. Their current results may not show high returns, but they have big plans for the future. Growth stocks are those that spend a lot right now in order to get the profits in the future.

Therefore, their future cash flows should be quite huge. But as interest rates rise, these cash flows are discounted at higher rates. As a result, valuations of growth stocks fall.

When valuations fall, investors tend to shy away from those stocks and as a result, the stock price falls.

#3 Rising salary costs

As mentioned by the company in the latest quarterly results, with the surge in demand for technology professionals post-Covid, Intellect Design has struggled to acquire and retain talent.

With the return to growth, the demand for top talent has also increased. So the company has built some bench strength over this period and will factor in an escalating cost of talent while simultaneously preparing for the next growth spurt.

The company’s managing director, Arun Jain, said in an interview:

“Three ‘T’s have an impact on our PAT margins. One is travel, which wasn’t there last year; talent and taxation. However, travel stabilized in both quarters. There will therefore be no additional travel costs.

Yet, year over year, there is a substantial increase in travel costs, which is impacting margin and tax costs of 26% are significantly higher than 16% last year. »

How Intelct Design Has Been Faring Lately

Post-covid, the stock rallied strongly over the next two years and broke out of the range significantly.

The Covid-19 pandemic has redefined the way we think and the way we live. This has forced organizations to digitize their processes and services, not only to thrive, but also to survive.

Take a look at Intellect Design’s stock price chart over the past five years.

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Intellectual design.

In 2022 however, the title remained under pressure. It is down 45% in 2022.

Intellect Design has a maximum of 52 weeks of 986 hit on April 7, 2022 and a 52-week low of 422 affected yesterday.

Intellectual design.

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Intellectual design.

Here is a table comparing the company with its peers. Data is as of March 2022.

Comparative analysis.

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Comparative analysis.

About Intellectual Design

Intellect Designs develops and delivers digital financial technology products for the BFSI domain.

Within IT services and solutions, BFSI is the largest vertical, contributing more than 50% of the company’s revenue. On average, banks and financial institutions spend around 7-8% of their revenue on IT, which is the highest of any vertical.

The company was listed on the Bombay Stock Exchange and the National Stock Exchange in December 2014.

You can now compare Intellect with its peers:

Intellect Design vs. Newgen Software

Disclaimer: This article is provided for informational purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from equitymaster.com

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About Octavia A. Dorr

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