RBS: 3Q11 results NIIT Technologies - Gathering pace

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NIIT Technologies 
Gathering pace 
NIIT Tech reported strong US dollar revenues (ex bought-outs and FX), up over
7% yoy for the second straight quarter. We raise FY11/12F revenues 3-4% on
increased headcount guidance and strength in the GIS and ROOM Solutions
businesses. We think the stock offers good value at 7x FY11F EPS. Buy.
3Q11 results: business momentum intact; margins surprised on the upside
NIIT Techís 3Q11 US dollar revenues (ex-hedging loss) were down 5.4% to US$67.7m (RBS
est US$67.3m) despite lower-than-expected bought-outs. Ex bought-outs, US dollar
revenues were up 7.2%, driven by GIS (11.4%) and ROOM Solutions (13.0%) while core
IT/BPO revenues grew 6.1%. In terms of verticals, Transportation (+10.7% qoq) and
Government (+19.1%) led growth, while BFSI revenues grew 4.6%. The EBITDA margin (exhedging) was up 143bp to 22.0% (RBS est 19.0%) despite offshore wage hikes of around
5%. This was driven by lower bought-outs (-72% qoq), offshoring (+200bp) and utilisation
(+100bp). PAT was up 9.9% qoq to Rs478m (RBS est Rs400m), driven by a lower FX loss of
Rs60m (vs Rs119m in 2Q11) and a tax rate of 15.5% (RBS 3Q11 est and 2Q11 at 18%).
Increased manpower intake/guidance is good news; order booking bears watching
NIIT Tech added 364 to its headcount in 3Q11 (a 7.3% qoq increase), ahead of its guidance
of 200 net adds per quarter. In this context, management upgraded the quarterly headcount
addition target to 300, citing better demand visibility. Order intake was sluggish at US$50m
(down 13% yoy), which management attributed to a large order signing slipping to 4Q11.
Management expects robust order intake in 4Q11 on the back of this, which we believe will
be a key metric with which to assess demand prospects.

The stock remains good value at 7x FY12F EPS: Buy maintained with a Rs276 TP
We raise FY12F/13F EPS by 1%/5%, factoring in 3%/4% upgrades to our US dollar revenue
forecasts but taking a more conservative view on salary hikes (an unscheduled selective
wage hike has been announced for 4Q11) and raising tax rate forecasts 200bp in each year,
factoring in a potentially slower start-up of the Noida SEZ. We still value the stock at 9.3x
FY12F EPS (a 17% implied P/E discount to peers) with a slightly higher target price of Rs276
on the earnings revisions. We believe that, with the Border Security Force (BSF) flowthrough revenue impact largely in the past, a seasonally strong 4Q11 could drive the shares.


Reiterate Buy
We raise our EPS for FY12/13F 1%/5%, building in 3%/4% higher US dollar revenue
forecasts and conservative wage cost and tax assumptions. We view the stock as still deep
value at 7x FY12F EPS. A seasonally strong 4Q11 result could be a catalyst, in our view.
We raise our FY12/13F US dollar revenue forecasts by 3%/4%, building in the strong 7.2% yoy
3Q11 revenue growth (ex bought-outs) as well as increasing confidence in the demand outlook
reflected in managementís raised quarterly hiring target of 300 (vs 200 previously). Continued
momentum in the GIS and ROOM Solutions businesses also underpin our revenue upgrades.
Our EBITDA margin forecasts for FY12/13F are adjusted by -37bp/+5bp, despite 1%/2% lower
Rs/US$ forecasts, as we take a more conservative view on salary costs (an unscheduled
selective wage hike was announced for 4Q11) and on tax rates (+200bp) factoring in the
potentially slower-than-expected start-up of the Noida SEZ.
Consequently, our EPS estimates for FY12/13F are raised 1%/5%


Buy reiterated with a slightly higher target price of Rs276 (from Rs274 previously)
We raise our target price to Rs276 (from Rs274), continuing to value the stock at 9.3x FY12F
EPS. At our target price, the stock is valued at a 17% discount to peer group (5% discount
previously) as headline revenue growth prospects for NIIT Tech are lower than for the peer group,
in our opinion, given that revenue from the most recent BSF contract will have largely flowed
through by end-FY11, while sharp hikes in the tax rate restrain our EPS growth estimates.
Nevertheless, we believe the stock offers good value, trading at 7x FY12F EPS and at a 37%
discount to peer group valuations. We expect a seasonally strong 4Q11 result to be a key catalyst
in lowering the discount relative to the peer group.