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  • Stock Recommendation | NIIT TECHNOLOGIES LTD – ACCUMULATE – Target Price : 1258

    Publish date: OCTOBER 19, 2018

    NIIT Tech reported strong 5.3% QoQ dollar revenue growth and sustainable margin expansion of about 216bps QoQ. Company has been consistently winning large deals (>TCV USD 20mn) against Tier I vendors which is aiding the strong revenue visibility. Overall it was a robust quarter by the company with improved demand outlook and healthy deal wins. Company intends to grow in double digit in FY19 with better profitability v/s FY18.

    NIIT Tech reported revenue growth of 5.3% QoQ in dollar terms, ahead of our estimate of 4.3% QoQ. Similarly EBITDA margins at ~18% was also ahead of our estimates. Growth across verticals and benefits of continued large deals signed at the beginning of the year and during the quarter will power the revenue growth in FY19E. The improvement in margins was on account of growth across verticals and implementation of automation platform for delivery. PAT increased by 66.6% YoY to Rs.1.1bn.

    Management has guided for a strong FY19 and expects organic CC revenue growth to be at least double digit. Also, margins are expected to expand further aided by strong deal momentum (higher digital wins) and process changes.

    NIIT Tech continues to win USD100mn + deal during the quarter with 12 month executable order rising to USD 363mn from USD 347mn in previous quarter. Fresh order intake of USD 160mn was secured during the quarter which included 10 new logos. This included two engagements in excess of USD 20mn, one from BFS customer and the other came from an existing client in Insurance space in US. Three deals of more than USD 10mn each were too secured during the quarter.

    We have marginally upgraded our revenue estimate for FY19/FY20E given the strong execution and healthy order intake, and believe the changes made in strengthening of its leadership and sales team would further boost the deal momentum in FY19. We expect USD revenues to grow at CAGR of ~12% over FY18-20. We maintain ACCUMULATE with a revised target price of Rs.1258 (Rs.1185 earlier).

    NIIT Tech reported a 5.3% sequential growth in revenue in USD terms to USD 131mn v/s our estimate of USD 129.5mn. Similarly EBITDA margin at 18% was also ahead of our estimates, a rise of 216bps sequentially. Excluding the currency benefits, margins improved by about 180bps YoY led by improved operating metrics and automation. Management expects 18% to be a threshold limit for operating margins going forward. The growth has been quiet broad based during the quarter with BFS growing 6.2%, insurance 11.2% and T&T 9.2% sequentially. Even client mix wise the growth was not concentrated from only Top clients during the quarter. Company has increased the contribution of digital to revenues, aided by acquisitions of Incessant and RuleTek. Digital revenues for the company are growing at 30-40% CAGR and are also at higher margins, thus aiding margins as well. Digital contributes 28% of total revenue reflecting a sequential growth of 11.6% and YoY growth of 38%. We believe this provides enhanced revenue visibility and would result in a steady revenue growth going forward. As indicated in previous quarters increased focus on automation initiatives through its platform are yielding results with rationalization of SG&A expenses. SG&A expenses were 16.8% of revenue as compared to 18.2% in previous quarter.

    NIIT Tech has inducted several new leaders from Tier I under the leadership of Mr. Sudhir Singh. Company has restructured to a vertical led organization from a geographical led organization. It has also restructured its rewards and incentive structure in line with the large deal wins. Company now has dedicated units for cloud, robotics process automation, and data services, besides changing the front end sales to better leverage on its deep expertise in the travel, insurance and wealth management verticals.

    During FY18, the company increased its focus to win large deals, which has yielded positive results for the company. Company won deals worth USD160mn during the quarter. It added 10 new clients during the quarter v/s 9 new clients in the previous quarter. The company has doubled new logo acquisition on a YoY basis and has set 10 new logo acquisition per quarter as the new benchmark. The client addition has been across geographies with 5 in USA, 3 in EMEA and 2 in ROW. Company added 2 USD 20mn + clients during the quarter. According to the restructured incentive scheme a large deal win will now earn an employee bonus that is worth 4x more than that obtained earlier. Company faced slower growth after 1HY16 with slower than expected deal closures due to client specific challenges and delay in ramp ups. Executable order stands at USD 363mn at end of 2QFY19.

    Insurance which contributed 28.8% of total revenue grew by 11.2% QoQ. This was led by growth in key accounts in US. Company also signed deals worth USD 24mn with existing customers in US. BFS which contributed 16.2% of revenue grew by 6.2% QoQ led by growth in top accounts in US and Europe. It added 2 new accounts in this vertical. Overall the company is seeing strong growth from both Europe and US geographies and has hired a new head (Ex Infosys) for the Europe geography. The third vertical Travel and Transport which contributed 26.9% of revenue grew by 9.2% QoQ backed by strong orders and growth in top accounts in US and Europe. Company indicated the T&T vertical comprises of airports and hospitality which is 60% of the vertical revenue in addition to airline business (remaining 40%). Though the macro indicators are not too positive for the airline sector with rise in crude prices amidst other factors, the short to medium term outlook remains robust with focus on newer digital engagements.

    Company made significant investment in strengthening its front end, sales and its delivery capability. All vertical heads have been brought from Tier 1 organizations.

    SG&A expenses would remain at these levels in absolute dollar terms. As a percentage of revenue it is going down due to acceleration in revenue. There will not be any material change in the SG&A expenditure. Company will continue to invest in capability without impacting the margins.

    In May 2019 NIIT Tech will acquire full stake in Incessant and increase its stake in Ruletekupto 80%.

    The revenue and Margin profile of various subsidiaries were : NIITL – Rs.491mn, Margin -28% ; GIS – Rs.351mn Margin- 23%; Incessant – Rs.1244mn, Margin – 25.5%; Proyecta – Rs. 205mn.

    The various operating metrics were as follows : Cash and bank balance- Rs.7556mn, DSO stood at 73 days and capex during the quarter was at Rs.119mn. Company expects a capex of Rs.730-750 mn for the full financial year.

    NIIT Technologies is a leading IT solutions organisation with customers across North America, Europe, Middle East, Asia and Australia. Company offers comphrehensive end to end software solutions and services in Application Development, Managed Services, Cloud Computing, and Business Process Outsourcing. It primarily caters to companies across banking and financial, insurance, travel and transportation, manufacturing and government sector.

    BUY - We expect the stock to deliver more than 12% returns over the next 12 months
    ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months
    REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months
    SELL - We expect the stock to deliver negative returns over the next 12 months
    NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.
    SUBSCRIBE - We advise investor to subscribe to the IPO.
    RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA - Not Available or Not Applicable. The information is not available for display or is not applicable
    NM - Not Meaningful. The information is not meaningful and is therefore excluded.
    NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.

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