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NIIT Technologies Ugly Duckling
Creating its own differentiated strategy
Key points
Strong recovery in its focus verticals: NIIT Technologies Ltd (NTL), a mid-sized IT
services company, has built strong domain expertise in niche industry verticals like
insurance, travel, manufacturing & retail. With the recent surveys/channel checks
showing signs of a revival in IT spending and the demand environment getting more
broad based, the IT spending in these lagging sectors is likely to catch up in 2011.
Moreover, the company has the advantage of a well-balanced geographical mix of
revenues from North America, Europe and the Asia-Pacific.
Non-linear revenues—the growth engine: NTL is one of the few mid-cap Indian IT
services vendors that have over the years built up a strong non-linear revenue
platform through organic and inorganic initiatives. Currently, NTL derives around
27% of its total revenues from its non-linear initiatives like managed services and IP
asset-based services rather than commoditisable time & material (T&M) kind of
pricing model. In the last six quarters, NTL’s non-linear revenues have grown at a
faster rate (much ahead of the blended 4.8% growth at the company’s level) and
would turn out to be a game changer for the company in the coming years.
Building strong footprints in the domestic IT arena: Over the last couple of years,
NTL has increased its focus on the burgeoning Indian IT market and is building its
footprints in the domestic IT space. Recently, NTL was awarded a prestigious
“Intranet Prahari” project for the Border Security Force (BSF) valued at Rs228
crore involving the complete turnkey implementation of IT solutions across the
entire force, which is a strong testimony to NTL’s growing acceptance in the domestic
IT space. As a matter of fact, excluding the BSF deal, India’s share in the
overall revenues has grown to 16% from 8% two years back. The company is also an
active player in the APDRP projects and the other system integration projects in
the government space.
Niche player, attractive valuation: With its strong domain expertise in a few niche
verticals and competitive advantage in terms of significant contribution from its
non-linear initiatives, NTL is well placed to benefit from the overall improvement
in the demand environment. Consequently, we expect the company to show a steady
growth of 19% CAGR in its net profit over FY2010-13. Moreover, the company has
healthy cash on the books with minimal debt which leaves scope for further acceleration
in growth through inorganic initiatives and act as another re-rating trigger
for the stock. We initiate coverage on NTL with a Buy recommendation and 12-
month price target of Rs285 (8x FY2013 earnings of Rs35.6 per share).
Company background
In 2004 NTL was spun off the information technology (IT)
services division of NIIT, which holds a 24% stake in the
company currently. NTL provides application development
and management services, managed services, and package
implementation and business process outsourcing (BPO)
services in the banking financial services and insurance
(BFSI), travel, transportation & logistics, retail &
manufacturing and government industry verticals. As of
December 2010, NTL had about 5,358 employees across
offices in North America, Europe, Asia and Australia. North
America contributes about 35% of its total revenues;
Europe, the Middle East and Africa together contribute
about 35% followed by Asia Pacific and India with 14%
and 16% contributions respectively. The major clients of
the company include British Airways, Singapore Airlines,
Holcim Group, Emirates, Toyota Motors, DB Systel, Tesco,
Cathay Pacific and Myanmar Air.
The company has over the years done three acquisitions:
It acquired Room Solutions, UK in 2006-07 and Softec
Gmbh, Germany in 2007-08. The acquisitions were carried
out mainly to gain entry into the industry solutions
business in the insurance and airline space. In December
2010, NTL also acquired a healthcare platform “Preferr”
focused on automation of health record. Besides, NTL
has entered into a partnership with Hitachi Information
Systems, Japan to jointly offer cloud computing services
and with ESRI Inc for geospatial information systems (GIS)
services.
Management team
Rajendra Singh Pawar, chairman and managing director,
is the co-founder of the NIIT group. He is a B-Tech with
about 38 years of experience in the IT field. He is part of
a panel of six experts in the newly constituted Prime
Minister’s National Council on Skill Development, chaired
by the prime minister of India.
Arvind Thakur, CEO and joint managing director, a B-Tech
from IIT, started his career as an industrial engineer with
Bharat Heavy Electricals. He joined NIIT in 1985 as a
member of the core team and has since then been handling
key organisational roles.
Business of the company
NTL is a focused player in the BFSI, travel, transportation
and logistics, retail & distribution and government
industry verticals. It offers application development
management (ADM), managed, cloud computing,
packaged implementation and BPO services.
Investment arguments
Well placed to capture the recovery in the niche
verticals
NTL is focused mainly on four key verticals: BFSI, travel,
transportation & logistics, and retail & manufacturing.
Over the years, NTL has built strong domain expertise in
its niche industry verticals. With our recent surveys/
channel checks showing signs of a revival in IT spending
and with the demand environment getting more broadbased,
the IT spending in these lagging sectors especially
travel, transportation & logistics and manufacturing is
likely to catch up in 2011. This will result in strong business
visibility in the coming years. Moreover, the company has
the advantage of a well-balanced geographical mix of
revenues from its North American, European and Asia-
Pacific operations.
Over the years, NTL has built differentiated services in
its focus verticals. The company was named the number
1 service provider in the travel industry for two years in a
row (2008 and 2009) in the Datamonitor Black Book of
Outsourcing. NTL’s cargo handling solution has seen
success over the last one year with wins across South
East Asia.
BFSI: Leading the growth from the front
Over the years NTL has built strong domain expertise in
the BFSI space, with its offers including both services and
solutions. The BFSI vertical contributes around 41% of the
total revenues of the company with more than 60 active
accounts. In the last six quarters, the BFSI vertical has
shown a 3.3% compounded quarterly growth rate (CQGR)
with the revenue reaching Rs117.2 crore in Q3FY2011.
Going forward, we expect the BFSI vertical to drive the
growth led by both services and solutions (Room Solutions)
businesses in FY2012 and FY2013.
As per Gartner Forecast Worldwide IT Spending, 2007-
2013, released in October 2009, the spending in the
banking and financial services vertical would grow at
a compounded annual growth rate (CAGR) of 3% over
2008-2013 to reach a size of $157 billion; the insurance
vertical would grow at 2.7% to $59 billion; the retail
vertical would grow at 3% to $67 billion; and the travel
& transportation vertical would grow at a CAGR of
2.7% to $33 billion in the same period. The TPI data
regarding the total contract value of the deal signed
also shows that there has been traction in the retail,
BFSI and travel & transportation industries. We believe
that the strong domain expertise of NTL in these
industry verticals will enable it to capture the strong
demand upcycle.
Travel and transportation: Better tomorrow in the offing
The travel, transportation and logistics vertical contributes
around 32% of the total revenues of the company with more
than 60 active clients. NTL is a strategic partner of
International Air Transport Association (IATA) in the travel
& transportation offering space. In the last six quarters,
the travel and transportation vertical has shown a 6.1%
CQGR with the revenue reaching Rs91.5 crore in
Q3FY2011. With the overall business visibility improving
in the global travel industry, we expect this vertical to
also drive the company’s growth in the coming quarters.
The travel and transportation vertical had suffered a
slump in 2008 and 2009 with the global recession setting
in. However, 2010 saw the sector getting back on its
feet with the future looking much better. The recent
IATA data on the global airline industry indicates a
better business visibility for CY2011 with a 6% yearon-
year (Y-o-Y) growth in the revenues.
Manufacturing and retail: Still not out of the woods
The manufacturing and retail vertical contributes around
9% of the total revenues of the company with more than
ten active clients. As per the management’s indication,
the manufacturing and retail vertical is still showing some
weakness and is expected to lag behind the other two
verticals in terms of growth in the medium term. In the
last six quarters, it has shown a negative CQGR of 1.1% in
revenues to Rs25.7 crore in Q3FY2011. The recent PMI
data shows a strong revival in the manufacturing sector
in both the USA and Europe with the monthly PMI touching
around 57; a reading above 50% indicates that the
manufacturing economy is generally expanding.
Government: Domestic spending on an upswing
The government industry vertical contributes around 10%
of the total revenues of NTL. In the government space,
NTL is witnessing traction in the execution of the turnkey
solutions for various government departments involving
application development, complete infrastructure set-up
including data centre, roll-out and training across multiple
locations, and facilitation of historical data capture
Non-linear revenues—the growth engine
NTL is one of the few mid-cap Indian IT services vendors
that have over the years built up a strong non-linear
revenue platform through both organic and inorganic
initiatives. Currently, NTL derives around 27% of its total
revenues from its non-linear initiatives like managed
services and intellectually property (IP)-based services
rather than commoditisable time and material (T&M) kind
of pricing model. In the last six quarters, NTL’s revenues
from the non-linear initiatives recorded an impressive CQGR
of 5.6%, which was much ahead of the blended 4.8% growth
at the overall company’s level. We believe NTL’s non-linear
initiatives would be a game changer for the company in the
coming years.
NTL has been undertaking non-linear initiatives to lower
its dependence on headcount to grow revenues. The share
of its non-linear revenues has increased from 18% in
FY2007 to 26% in FY2010. The company has forayed into
managed services, IP/platform-based services, cloud
computing and GIS services.
Offerings in non-linear space
Managed services: NTL offers remote infrastructure
management services, production support and managed
security services. This business has grown at a fast clip
for the company since its inception in 2007. The company
provides these services from its data centres across the
UK, India and Thailand, and the revenues from these
managed services grew by 47% in FY2008 and by 34% in
FY2009, and contributed about 13% of NTL’s revenues in
FY2010.
Platform based offering
Room Solutions: Room Solutions, a 100% subsidiary of
NTL, offers integrated technology solutions to the general
insurance industry in the UK and Europe. It was acquired
in May 2006 for around $25 million. Room Solutions offers
solutions in the areas of policy administration, Internet
enabled front-office administration, risk exposure
management, business intelligence and financial
accounting. The company also provides asset schedule
services as well as offers professional support and
maintenance, consultancy, and training services. It was
formerly known as Room Underwriting Systems.
The company was founded in 1990 and is based in London.
In the insurance space, through its acquisition of Room
Solutions, UK NTL has strengthened its position across
the insurance vertical in the life insurance, pension,
annuity, non-life insurance, policy administration, claims
management and re-insurance areas. According to industry
reports, Room Solutions is one of the seven dominant
players in the European market for General Insurance
Policy Administration Systems in terms of the largest
number of installations.
Other platforms
Through acquisitions and partnerships, NTL has acquired
IPs/platforms which have furthered its drive towards nonlinear
initiatives: “Monalisa” (an airline revenue
accounting platform acquired through the acquisition of
Softec GMBH) and “COSYS Intelligent Solutions” (CIS) to
help air cargo ground handling agents improve their cargo
handling capabilities. NTL has a strategic partnership with
Singapore Airport Terminal Services (SATS) to globally
market and implement the state-of-the-art CIS.
Platform-based offerings contribute around 14% to the
total revenues of NTL
Recently, the company acquired a healthcare platform
“Preferr”, which enables providers to meet federal
guidelines for electronic health records. It enables
seamless collaboration between all providers, namely
physicians, hospitals, diagnostic facilities and
laboratories. Though, in the short term it would not
contribute to the revenues, there could be traction in
the medium to long term.
Cloud computing: Still at nascent stage
NTL has forayed into the cloud computing space through
a partnership with Hitachi Information Systems. The
services would be offered from NTL’s data centre in Bangkok
to Hitachi’s clients in Japan. NTL expects to start generating
revenues from this business from Q3FY2011. The company
has already started work in the cloud initiative with a couple
of engagements in the testing space.
As per Gartner Inc, worldwide cloud services revenue
is forecast to reach $68.3 billion in 2010, showing a
16.6 % increase from the 2009 revenue of $58.6 billion.
By 2014, the cloud computing industry is expected to
show a strong growth with the worldwide cloud services
revenue projected to reach $148.8 billion. Gartner Inc
estimates that over the course of the next five years,
enterprises will spend $112 billion cumulatively on
software as a service (SaaS), platform as a service
(PaaS) and infrastructure as a service (IaaS) combined.
By 2012, 20% of businesses will not own any IT assets.
By 2012, 80% of Fortune 1000 enterprises will be using
some level of cloud computing services and 30% will
use a cloud computing system and/or application
infrastructure services
Building strong footprint in the domestic IT arena
Over the last couple of years, NTL has increased its focus
on the burgeoning Indian IT market and built its footprints
in the domestic IT space. Recently, NTL was awarded a
prestigious “Intranet Prahari” project for the BSF valued
at Rs228 crore. It involves the complete turnkey
implementation of IT solutions across the entire force
and is a strong testimony to NTL’s growing acceptance in
the domestic IT space. As a matter of fact, excluding the
BSF deal, India’s share in the overall revenues of NTL has
grown to 16% from 8% two years back and the
government’s share in the overall revenues has increased
from about 3% in Q2FY2010 to 10% in Q3FY2011. NTL is
also an active player in the Accelerated Power
Development and Reform Programme (APDRP) projects
as well as the other system integration projects in the
government space
NIIT GIS
NIIT GIS Ltd (ESRI India; an 88.99% subsidiary of NTL)
provides end-to-end GIS-based solutions ranging from
software products, application development, training,
data conversion and technical support. NIIT GIS today
enjoys market leadership in the field of GIS with the
largest installation base across different vertical segments
in India, Nepal and Bhutan. It was formed in 1996 as a
joint venture between ESRI Inc (the USA) and NTL. The
US-based ESRI Inc is the world leader in the GIS mapping
and solutions space, and produces and markets the famous
ArcGIS package.
The GIS segment is also witnessing traction with the
mapping of cities and towns being done by
municipalities. NTL recently delivered a project named
“OneMap” for the government of Singapore to map the
entire country. The Indian GIS market is witnessing a
major transformation, with increasing government
spends on projects like APRDP-R and National Land
Records Modernisation Programme (NLRMP).
The GIS revenues of NTL have shown good traction as can
be seen from the revenues of the first nine months of
FY2011—the same are much higher than that recorded in
the same period of FY2010.
Excluding the BSF deal, the government’s share in the
overall revenues of NTL has increased from about 3% in
Q2FY2010 to 10% in Q3FY2011. India’s contribution to
NTL’s revenues has also increased from 8% in Q1FY2009
to 16% in Q3FY2011 (excluding the BSF order).
According to Gartner Inc, the domestic IT services market
is expected to grow at a CAGR of 17.1% from $6.2 billion
in 2009 to $13.7 billion in 2014 driven by large government
spending in areas such as e-governance and defence
projects. Also, Gartner Inc expects IT-managed services
to grow in areas like data centre, virtualisation, business
continuity/disaster recovery, security and networks as
many domestic organisations would be focusing on IT
infrastructure efficiency.
Financials positives
We expect NTL’s consolidated revenues to grow at a CAGR
of 15% over FY2010-13 to Rs1,598.2 crore by FY2013. The
non-linear revenues are expected to grow at a rate higher
than the company’s average growth over FY2010-13.
Healthy balance sheet
NTL has a healthy balance sheet and cash reserves. The
company has been consistently generating strong cash
flows except for in Q3FY2011, which was marred by the
high booking of bought-out revenues in the last two
quarters which took the DSO days to around 100 days in
Q2FY2011 from the average 72 days in the earlier quarters.
Going forward, we expect NTL to generate healthy cash
flows in FY2012 and FY2013 as the major capital
expenditure in the special economic zone (SEZ) expansion
will be over in FY2011.
NTL has an impressive dividend pay-out policy having
distributed close to 30% of its profits as dividends in the
last three years.
Risks and concerns
Currency volatility
The rupee has been volatile and appreciated in the near
term. In the event of continuous appreciation of the rupee
vis-à-vis the US Dollar there could be a revision in our
earnings estimates for the company.
Supply-side constraints
Over the last few quarters, the IT sector has faced supplyside
constraints which have led to higher attrition. NTL
has already provided two salary hikes in FY2011; as its
attrition rate is still running high at around 18%, we expect
NTL to face high wage inflation in FY2012.
Slower than expected recovery in Europe
Europe has had a bumpy ride and its recovery has been
slow. Any delay in resolving the European crisis might have
an impact on the performance of the company as Europe,
the Middle East and Africa together contribute about 35%
of the revenues of the company.
Tax holiday set to expire by March 2011
The full tax holiday enjoyed by NTL under the Software
Technology Parks of India scheme is set to expire on March
2011; on account of this the effective tax incidence of
the company will increase to around 27% in FY2012 from
the current level of 10%. This would be despite the
commissioning of its Noida SEZ facility in Q1FY2012 as
getting new incremental business from the SEZ facility
will take some time.
Q3FY2011 results: Impressive margin performance
NTL reported an impressive financial performance for
Q3FY2011 with its earnings before interest, tax,
depreciation and amortisation (EBITDA) margin improving
by 240 basis points QoQ to 20.4% on the back of lower
bought-out sale and higher offshoring. The BSF bought-out
sale was down at Rs14.8 crore from Rs53.7 crore in the
previous quarter. Also, the offshore contribution to the
revenues improved to 43% from 41% in the previous quarter.
The operating revenues of NTL were down 7.4% QoQ at
Rs300.6 crore and excluding the BSF bought-outs the same
were up 5.5% at Rs285.7 crore. The net profit for the
quarter grew at 9.9% QoQ to Rs47.8 crore.
Valuation: Niche player, attractive valuation
With its strong domain expertise in a few niche verticals
and competitive advantage in terms of significant
contribution from its non-linear initiatives, NTL is well
placed to benefit from the overall improvement in the
demand environment. Consequently, we expect the
company to show a steady growth of 19% CAGR in its net
profit over FY2010-13. Moreover, the company has healthy
cash on the books with minimal debt which leaves scope
for further acceleration in growth through inorganic
initiatives and act as another re-rating trigger for the
stock. We initiate coverage on NTL with a Buy
recommendation and 12-month price target of Rs285 (8x
FY2013 earnings of Rs35.6 per share).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� �
NIIT Technologies Ugly Duckling
Creating its own differentiated strategy
Key points
Strong recovery in its focus verticals: NIIT Technologies Ltd (NTL), a mid-sized IT
services company, has built strong domain expertise in niche industry verticals like
insurance, travel, manufacturing & retail. With the recent surveys/channel checks
showing signs of a revival in IT spending and the demand environment getting more
broad based, the IT spending in these lagging sectors is likely to catch up in 2011.
Moreover, the company has the advantage of a well-balanced geographical mix of
revenues from North America, Europe and the Asia-Pacific.
Non-linear revenues—the growth engine: NTL is one of the few mid-cap Indian IT
services vendors that have over the years built up a strong non-linear revenue
platform through organic and inorganic initiatives. Currently, NTL derives around
27% of its total revenues from its non-linear initiatives like managed services and IP
asset-based services rather than commoditisable time & material (T&M) kind of
pricing model. In the last six quarters, NTL’s non-linear revenues have grown at a
faster rate (much ahead of the blended 4.8% growth at the company’s level) and
would turn out to be a game changer for the company in the coming years.
Building strong footprints in the domestic IT arena: Over the last couple of years,
NTL has increased its focus on the burgeoning Indian IT market and is building its
footprints in the domestic IT space. Recently, NTL was awarded a prestigious
“Intranet Prahari” project for the Border Security Force (BSF) valued at Rs228
crore involving the complete turnkey implementation of IT solutions across the
entire force, which is a strong testimony to NTL’s growing acceptance in the domestic
IT space. As a matter of fact, excluding the BSF deal, India’s share in the
overall revenues has grown to 16% from 8% two years back. The company is also an
active player in the APDRP projects and the other system integration projects in
the government space.
Niche player, attractive valuation: With its strong domain expertise in a few niche
verticals and competitive advantage in terms of significant contribution from its
non-linear initiatives, NTL is well placed to benefit from the overall improvement
in the demand environment. Consequently, we expect the company to show a steady
growth of 19% CAGR in its net profit over FY2010-13. Moreover, the company has
healthy cash on the books with minimal debt which leaves scope for further acceleration
in growth through inorganic initiatives and act as another re-rating trigger
for the stock. We initiate coverage on NTL with a Buy recommendation and 12-
month price target of Rs285 (8x FY2013 earnings of Rs35.6 per share).
Company background
In 2004 NTL was spun off the information technology (IT)
services division of NIIT, which holds a 24% stake in the
company currently. NTL provides application development
and management services, managed services, and package
implementation and business process outsourcing (BPO)
services in the banking financial services and insurance
(BFSI), travel, transportation & logistics, retail &
manufacturing and government industry verticals. As of
December 2010, NTL had about 5,358 employees across
offices in North America, Europe, Asia and Australia. North
America contributes about 35% of its total revenues;
Europe, the Middle East and Africa together contribute
about 35% followed by Asia Pacific and India with 14%
and 16% contributions respectively. The major clients of
the company include British Airways, Singapore Airlines,
Holcim Group, Emirates, Toyota Motors, DB Systel, Tesco,
Cathay Pacific and Myanmar Air.
The company has over the years done three acquisitions:
It acquired Room Solutions, UK in 2006-07 and Softec
Gmbh, Germany in 2007-08. The acquisitions were carried
out mainly to gain entry into the industry solutions
business in the insurance and airline space. In December
2010, NTL also acquired a healthcare platform “Preferr”
focused on automation of health record. Besides, NTL
has entered into a partnership with Hitachi Information
Systems, Japan to jointly offer cloud computing services
and with ESRI Inc for geospatial information systems (GIS)
services.
Management team
Rajendra Singh Pawar, chairman and managing director,
is the co-founder of the NIIT group. He is a B-Tech with
about 38 years of experience in the IT field. He is part of
a panel of six experts in the newly constituted Prime
Minister’s National Council on Skill Development, chaired
by the prime minister of India.
Arvind Thakur, CEO and joint managing director, a B-Tech
from IIT, started his career as an industrial engineer with
Bharat Heavy Electricals. He joined NIIT in 1985 as a
member of the core team and has since then been handling
key organisational roles.
Business of the company
NTL is a focused player in the BFSI, travel, transportation
and logistics, retail & distribution and government
industry verticals. It offers application development
management (ADM), managed, cloud computing,
packaged implementation and BPO services.
Investment arguments
Well placed to capture the recovery in the niche
verticals
NTL is focused mainly on four key verticals: BFSI, travel,
transportation & logistics, and retail & manufacturing.
Over the years, NTL has built strong domain expertise in
its niche industry verticals. With our recent surveys/
channel checks showing signs of a revival in IT spending
and with the demand environment getting more broadbased,
the IT spending in these lagging sectors especially
travel, transportation & logistics and manufacturing is
likely to catch up in 2011. This will result in strong business
visibility in the coming years. Moreover, the company has
the advantage of a well-balanced geographical mix of
revenues from its North American, European and Asia-
Pacific operations.
Over the years, NTL has built differentiated services in
its focus verticals. The company was named the number
1 service provider in the travel industry for two years in a
row (2008 and 2009) in the Datamonitor Black Book of
Outsourcing. NTL’s cargo handling solution has seen
success over the last one year with wins across South
East Asia.
BFSI: Leading the growth from the front
Over the years NTL has built strong domain expertise in
the BFSI space, with its offers including both services and
solutions. The BFSI vertical contributes around 41% of the
total revenues of the company with more than 60 active
accounts. In the last six quarters, the BFSI vertical has
shown a 3.3% compounded quarterly growth rate (CQGR)
with the revenue reaching Rs117.2 crore in Q3FY2011.
Going forward, we expect the BFSI vertical to drive the
growth led by both services and solutions (Room Solutions)
businesses in FY2012 and FY2013.
As per Gartner Forecast Worldwide IT Spending, 2007-
2013, released in October 2009, the spending in the
banking and financial services vertical would grow at
a compounded annual growth rate (CAGR) of 3% over
2008-2013 to reach a size of $157 billion; the insurance
vertical would grow at 2.7% to $59 billion; the retail
vertical would grow at 3% to $67 billion; and the travel
& transportation vertical would grow at a CAGR of
2.7% to $33 billion in the same period. The TPI data
regarding the total contract value of the deal signed
also shows that there has been traction in the retail,
BFSI and travel & transportation industries. We believe
that the strong domain expertise of NTL in these
industry verticals will enable it to capture the strong
demand upcycle.
Travel and transportation: Better tomorrow in the offing
The travel, transportation and logistics vertical contributes
around 32% of the total revenues of the company with more
than 60 active clients. NTL is a strategic partner of
International Air Transport Association (IATA) in the travel
& transportation offering space. In the last six quarters,
the travel and transportation vertical has shown a 6.1%
CQGR with the revenue reaching Rs91.5 crore in
Q3FY2011. With the overall business visibility improving
in the global travel industry, we expect this vertical to
also drive the company’s growth in the coming quarters.
The travel and transportation vertical had suffered a
slump in 2008 and 2009 with the global recession setting
in. However, 2010 saw the sector getting back on its
feet with the future looking much better. The recent
IATA data on the global airline industry indicates a
better business visibility for CY2011 with a 6% yearon-
year (Y-o-Y) growth in the revenues.
Manufacturing and retail: Still not out of the woods
The manufacturing and retail vertical contributes around
9% of the total revenues of the company with more than
ten active clients. As per the management’s indication,
the manufacturing and retail vertical is still showing some
weakness and is expected to lag behind the other two
verticals in terms of growth in the medium term. In the
last six quarters, it has shown a negative CQGR of 1.1% in
revenues to Rs25.7 crore in Q3FY2011. The recent PMI
data shows a strong revival in the manufacturing sector
in both the USA and Europe with the monthly PMI touching
around 57; a reading above 50% indicates that the
manufacturing economy is generally expanding.
Government: Domestic spending on an upswing
The government industry vertical contributes around 10%
of the total revenues of NTL. In the government space,
NTL is witnessing traction in the execution of the turnkey
solutions for various government departments involving
application development, complete infrastructure set-up
including data centre, roll-out and training across multiple
locations, and facilitation of historical data capture
Non-linear revenues—the growth engine
NTL is one of the few mid-cap Indian IT services vendors
that have over the years built up a strong non-linear
revenue platform through both organic and inorganic
initiatives. Currently, NTL derives around 27% of its total
revenues from its non-linear initiatives like managed
services and intellectually property (IP)-based services
rather than commoditisable time and material (T&M) kind
of pricing model. In the last six quarters, NTL’s revenues
from the non-linear initiatives recorded an impressive CQGR
of 5.6%, which was much ahead of the blended 4.8% growth
at the overall company’s level. We believe NTL’s non-linear
initiatives would be a game changer for the company in the
coming years.
NTL has been undertaking non-linear initiatives to lower
its dependence on headcount to grow revenues. The share
of its non-linear revenues has increased from 18% in
FY2007 to 26% in FY2010. The company has forayed into
managed services, IP/platform-based services, cloud
computing and GIS services.
Offerings in non-linear space
Managed services: NTL offers remote infrastructure
management services, production support and managed
security services. This business has grown at a fast clip
for the company since its inception in 2007. The company
provides these services from its data centres across the
UK, India and Thailand, and the revenues from these
managed services grew by 47% in FY2008 and by 34% in
FY2009, and contributed about 13% of NTL’s revenues in
FY2010.
Platform based offering
Room Solutions: Room Solutions, a 100% subsidiary of
NTL, offers integrated technology solutions to the general
insurance industry in the UK and Europe. It was acquired
in May 2006 for around $25 million. Room Solutions offers
solutions in the areas of policy administration, Internet
enabled front-office administration, risk exposure
management, business intelligence and financial
accounting. The company also provides asset schedule
services as well as offers professional support and
maintenance, consultancy, and training services. It was
formerly known as Room Underwriting Systems.
The company was founded in 1990 and is based in London.
In the insurance space, through its acquisition of Room
Solutions, UK NTL has strengthened its position across
the insurance vertical in the life insurance, pension,
annuity, non-life insurance, policy administration, claims
management and re-insurance areas. According to industry
reports, Room Solutions is one of the seven dominant
players in the European market for General Insurance
Policy Administration Systems in terms of the largest
number of installations.
Other platforms
Through acquisitions and partnerships, NTL has acquired
IPs/platforms which have furthered its drive towards nonlinear
initiatives: “Monalisa” (an airline revenue
accounting platform acquired through the acquisition of
Softec GMBH) and “COSYS Intelligent Solutions” (CIS) to
help air cargo ground handling agents improve their cargo
handling capabilities. NTL has a strategic partnership with
Singapore Airport Terminal Services (SATS) to globally
market and implement the state-of-the-art CIS.
Platform-based offerings contribute around 14% to the
total revenues of NTL
Recently, the company acquired a healthcare platform
“Preferr”, which enables providers to meet federal
guidelines for electronic health records. It enables
seamless collaboration between all providers, namely
physicians, hospitals, diagnostic facilities and
laboratories. Though, in the short term it would not
contribute to the revenues, there could be traction in
the medium to long term.
Cloud computing: Still at nascent stage
NTL has forayed into the cloud computing space through
a partnership with Hitachi Information Systems. The
services would be offered from NTL’s data centre in Bangkok
to Hitachi’s clients in Japan. NTL expects to start generating
revenues from this business from Q3FY2011. The company
has already started work in the cloud initiative with a couple
of engagements in the testing space.
As per Gartner Inc, worldwide cloud services revenue
is forecast to reach $68.3 billion in 2010, showing a
16.6 % increase from the 2009 revenue of $58.6 billion.
By 2014, the cloud computing industry is expected to
show a strong growth with the worldwide cloud services
revenue projected to reach $148.8 billion. Gartner Inc
estimates that over the course of the next five years,
enterprises will spend $112 billion cumulatively on
software as a service (SaaS), platform as a service
(PaaS) and infrastructure as a service (IaaS) combined.
By 2012, 20% of businesses will not own any IT assets.
By 2012, 80% of Fortune 1000 enterprises will be using
some level of cloud computing services and 30% will
use a cloud computing system and/or application
infrastructure services
Building strong footprint in the domestic IT arena
Over the last couple of years, NTL has increased its focus
on the burgeoning Indian IT market and built its footprints
in the domestic IT space. Recently, NTL was awarded a
prestigious “Intranet Prahari” project for the BSF valued
at Rs228 crore. It involves the complete turnkey
implementation of IT solutions across the entire force
and is a strong testimony to NTL’s growing acceptance in
the domestic IT space. As a matter of fact, excluding the
BSF deal, India’s share in the overall revenues of NTL has
grown to 16% from 8% two years back and the
government’s share in the overall revenues has increased
from about 3% in Q2FY2010 to 10% in Q3FY2011. NTL is
also an active player in the Accelerated Power
Development and Reform Programme (APDRP) projects
as well as the other system integration projects in the
government space
NIIT GIS
NIIT GIS Ltd (ESRI India; an 88.99% subsidiary of NTL)
provides end-to-end GIS-based solutions ranging from
software products, application development, training,
data conversion and technical support. NIIT GIS today
enjoys market leadership in the field of GIS with the
largest installation base across different vertical segments
in India, Nepal and Bhutan. It was formed in 1996 as a
joint venture between ESRI Inc (the USA) and NTL. The
US-based ESRI Inc is the world leader in the GIS mapping
and solutions space, and produces and markets the famous
ArcGIS package.
The GIS segment is also witnessing traction with the
mapping of cities and towns being done by
municipalities. NTL recently delivered a project named
“OneMap” for the government of Singapore to map the
entire country. The Indian GIS market is witnessing a
major transformation, with increasing government
spends on projects like APRDP-R and National Land
Records Modernisation Programme (NLRMP).
The GIS revenues of NTL have shown good traction as can
be seen from the revenues of the first nine months of
FY2011—the same are much higher than that recorded in
the same period of FY2010.
Excluding the BSF deal, the government’s share in the
overall revenues of NTL has increased from about 3% in
Q2FY2010 to 10% in Q3FY2011. India’s contribution to
NTL’s revenues has also increased from 8% in Q1FY2009
to 16% in Q3FY2011 (excluding the BSF order).
According to Gartner Inc, the domestic IT services market
is expected to grow at a CAGR of 17.1% from $6.2 billion
in 2009 to $13.7 billion in 2014 driven by large government
spending in areas such as e-governance and defence
projects. Also, Gartner Inc expects IT-managed services
to grow in areas like data centre, virtualisation, business
continuity/disaster recovery, security and networks as
many domestic organisations would be focusing on IT
infrastructure efficiency.
Financials positives
We expect NTL’s consolidated revenues to grow at a CAGR
of 15% over FY2010-13 to Rs1,598.2 crore by FY2013. The
non-linear revenues are expected to grow at a rate higher
than the company’s average growth over FY2010-13.
Healthy balance sheet
NTL has a healthy balance sheet and cash reserves. The
company has been consistently generating strong cash
flows except for in Q3FY2011, which was marred by the
high booking of bought-out revenues in the last two
quarters which took the DSO days to around 100 days in
Q2FY2011 from the average 72 days in the earlier quarters.
Going forward, we expect NTL to generate healthy cash
flows in FY2012 and FY2013 as the major capital
expenditure in the special economic zone (SEZ) expansion
will be over in FY2011.
NTL has an impressive dividend pay-out policy having
distributed close to 30% of its profits as dividends in the
last three years.
Risks and concerns
Currency volatility
The rupee has been volatile and appreciated in the near
term. In the event of continuous appreciation of the rupee
vis-à-vis the US Dollar there could be a revision in our
earnings estimates for the company.
Supply-side constraints
Over the last few quarters, the IT sector has faced supplyside
constraints which have led to higher attrition. NTL
has already provided two salary hikes in FY2011; as its
attrition rate is still running high at around 18%, we expect
NTL to face high wage inflation in FY2012.
Slower than expected recovery in Europe
Europe has had a bumpy ride and its recovery has been
slow. Any delay in resolving the European crisis might have
an impact on the performance of the company as Europe,
the Middle East and Africa together contribute about 35%
of the revenues of the company.
Tax holiday set to expire by March 2011
The full tax holiday enjoyed by NTL under the Software
Technology Parks of India scheme is set to expire on March
2011; on account of this the effective tax incidence of
the company will increase to around 27% in FY2012 from
the current level of 10%. This would be despite the
commissioning of its Noida SEZ facility in Q1FY2012 as
getting new incremental business from the SEZ facility
will take some time.
Q3FY2011 results: Impressive margin performance
NTL reported an impressive financial performance for
Q3FY2011 with its earnings before interest, tax,
depreciation and amortisation (EBITDA) margin improving
by 240 basis points QoQ to 20.4% on the back of lower
bought-out sale and higher offshoring. The BSF bought-out
sale was down at Rs14.8 crore from Rs53.7 crore in the
previous quarter. Also, the offshore contribution to the
revenues improved to 43% from 41% in the previous quarter.
The operating revenues of NTL were down 7.4% QoQ at
Rs300.6 crore and excluding the BSF bought-outs the same
were up 5.5% at Rs285.7 crore. The net profit for the
quarter grew at 9.9% QoQ to Rs47.8 crore.
Valuation: Niche player, attractive valuation
With its strong domain expertise in a few niche verticals
and competitive advantage in terms of significant
contribution from its non-linear initiatives, NTL is well
placed to benefit from the overall improvement in the
demand environment. Consequently, we expect the
company to show a steady growth of 19% CAGR in its net
profit over FY2010-13. Moreover, the company has healthy
cash on the books with minimal debt which leaves scope
for further acceleration in growth through inorganic
initiatives and act as another re-rating trigger for the
stock. We initiate coverage on NTL with a Buy
recommendation and 12-month price target of Rs285 (8x
FY2013 earnings of Rs35.6 per share).
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