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NIIT TECHNOLOGIES LTD (NIITT)
PRICE: RS.196 RECOMMENDATION: BUY
TARGET PRICE: RS.276 FY12E P/E: 6X
We view the acquisition of Proyecta Sistemas de Informacion S.A. (Proyecta)
by NIITT as a good strategic step. It will likely enhance the presence of NIITT
in the European region and will also give it access to large accounts, which
can be scaled in the future. The valuations accorded to Proyecta are also not
demanding and we expect little impact on the EPS of NIITT. We have
tweaked our FY12E estimates. Our FY12E EPS stands at Rs.32.6 (Rs.32.5). Our
DCF - based price target stands at Rs.276 (Rs.280), based on FY12 earnings.
At our TP, our FY12 earnings will be discounted by about 8.5x which, we
believe, is undemanding. We maintain BUY. NIITT has been achieving
consistent revenue growth and margins over the past few quarters.
Acquisition of Proyecta
n NIITT has announced the acquisition of Proyecta Sistemas de Informacion S.A.
(Proyecta), a software services company headquartered in Madrid.
n NIIT Technologies, UK will acquire 100% stake in Proyecta and the company will
be run as a subsidiary by the present management team of that company.
n Proyecta currently has about 100 consultants which service clients predominantly
in Spain.
n It operates in BFSI and Travel segments where it has large accounts like Iberia,
Merill Lynch, Santander, etc.
n Proyecta had revenues of about $10mn in the previous fiscal with EBIT margins
of about 10%.
n While Travel vertical formed about 68% of revenues, BFSI contributed about
23% with the balance contributed by other verticals.
A good strategic acquisition
n We opine that, Proyecta will be a good strategic fit for the company.
n NIITT has been focusing on BFSI and Travel & Transportation verticals, where it
has developed significant capabilities. Proyecta is present in these very verticals
and will add to NIITT's capabilities. Proyecta provides services like Business Intelligence
and Web and Mobility applications and has strong relationships for these
services.
n The acquisition will also enable NIIT Technologies to enhance its European footprint
with Proyecta's experience in servicing large companies in the Travel and
Financial Services segments. The acquisition also provides a gateway to NIITT to
the traditional Spanish speaking countries in Latin America.
n NIITT can also get a foothold in the large accounts of Proyecta and cross sell its
services to them.
Financials - no major impact
n Proyecta had revenues of about $10mn in the previous fiscal with EBIT margins
of about 10%.
n According to the management, FY12 may see a marginal de-growth due to the
acquisition but margins are expected to be maintained.
n For the future, NIITT expects Proyecta to report a 14 - 15% rise in revenues.
n It also plans to improve margins through higher revenues, providing higher value
added services and eventually, off-shoring and cost control.
n NIITT will pay $7mn for the acquisition. Of this, about 80% will be paid upfront
and the balance as earn-outs over the next couple of years, we understand.
n We have made marginal changes to our projections and have consolidated
Proyecta's financials WEF mid-August.
n We arrive at a marginally changed EPS of Rs.32.6 for NIITT in FY12.
Significant order wins in the recent past
n Organically, NIITT has signed two significant deals in the past few weeks with
Eurostar and Morris Communications which will start contributing to revenues
WEF 2Q.
n The company is forming a JV with Morris, to which the business, assets and
some employees will be transferred. The JV will outsource work to NIITT, which
will recruit off-shore employees to service this business.
n These deals are non-linear in nature and should increase the proportion of revenues
from non-linear revenues in FY12. We expect these to also give some
cushion to the margins of the company in the medium - to - long term.
n In 2Q, there will be a one-time integration expense in the JV with Morris, which
may impact NIITT's margins also. However, this will be a one-off expense and
we have not considered this in our projections. The net impact on NIITT will be
much lower, we believe.
Non-linear initiatives
n Non-linear initiatives have continued to scale in the past few quarters for NIITT.
n Non-linear initiatives formed 27% of overall revenues in 1QFY12 v/s 27% QoQ.
However, with revenues from new deals like Eurostar flowing in from 2Q, we
expect non-linear revenues to grow as a proportion of revenues over the next
few quarters.
n NIIT's non-linear services can broadly be divided into three parts - managed services
(11% of revenues), platforms and related solutions (26% of revenues) and
cloud services.
n The company has various platforms for the insurance vertical - Subscribe
(ROOM), airlines vertical (revenue accounting) and cargo business (through partners).
n The platform based services should gather steam in the future quarters (with
ROOM's platform gaining traction) while the IMS business is expected to contribute
for the whole fiscal.
n ROOM's revenues have scaled up during the quarter. ROOM is more into the
non-life market, which had not been impacted significantly.
n The company has plans of introducing ROOM's platform to the US markets. This
is expected to be done by implementing the PF at the Bermuda location of an
existing European client.
n We expect the entry into US to be slow because of the need to incorporate
changes required by different regulations.
n The company has also launched the SaaS initiative and the Cloud initiative recently.
Initially, it had planned to offer only infrastructure outsourcing services.
n It has announced a partnership with Hitachi Information Systems, Ltd., Japan
FY10 to offer Cloud services.
n Initially, non-critical applications like HR, Payroll, etc will be offered by NIITT on
Cloud.
n The company has now set up a platform to provide services to co-operative
banks and has already gained its first client.
Foray into Healthcare through cloud - based platform
n During FY11, the company acquired a cloud based referral management platform
to initiate its foray into the lucrative healthcare segment in the US.
n The platform called "Preferr" (Patient Referral System)" enables seamless collaboration
between all providers namely physicians, hospitals, diagnostic facilities,
and laboratories.
n The platform enables providers to meet federal guidelines for Electronics Health
Record meaningful use criteria.
n This will be offered to clients on a SAS basis, thereby adding to non-linear revenues.
About 300 doctors are already using this PF, we believe.
n These non-linear initiatives are expected to help the company restrict impact on
margins due to salary hikes and potential rupee appreciation, if any.
Valuations and recommendation
n We have made suitable changes in the DCF model.
n In our DCF model, we have incorporated a benign operating environment in our
near term assumptions for the company.
n A WACC of 15% and terminal growth of 2% leads us to a fair value of Rs.276
(Rs.280) for the stock, based on FY12 estimates.
n At those levels the stock will quote at about 8.5x FY12 earnings, which is reasonable,
in our view.
n We maintain a BUY.
n The company may have net cash of about Rs.50 per share by FY12 end, as per
our estimates.
Concerns
n Rupee appreciation beyond our assumed levels could provide a downward bias
to our earnings estimates.
n A delayed recovery in major global economies could impact growth prospects of
NIITT.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NIIT TECHNOLOGIES LTD (NIITT)
PRICE: RS.196 RECOMMENDATION: BUY
TARGET PRICE: RS.276 FY12E P/E: 6X
We view the acquisition of Proyecta Sistemas de Informacion S.A. (Proyecta)
by NIITT as a good strategic step. It will likely enhance the presence of NIITT
in the European region and will also give it access to large accounts, which
can be scaled in the future. The valuations accorded to Proyecta are also not
demanding and we expect little impact on the EPS of NIITT. We have
tweaked our FY12E estimates. Our FY12E EPS stands at Rs.32.6 (Rs.32.5). Our
DCF - based price target stands at Rs.276 (Rs.280), based on FY12 earnings.
At our TP, our FY12 earnings will be discounted by about 8.5x which, we
believe, is undemanding. We maintain BUY. NIITT has been achieving
consistent revenue growth and margins over the past few quarters.
Acquisition of Proyecta
n NIITT has announced the acquisition of Proyecta Sistemas de Informacion S.A.
(Proyecta), a software services company headquartered in Madrid.
n NIIT Technologies, UK will acquire 100% stake in Proyecta and the company will
be run as a subsidiary by the present management team of that company.
n Proyecta currently has about 100 consultants which service clients predominantly
in Spain.
n It operates in BFSI and Travel segments where it has large accounts like Iberia,
Merill Lynch, Santander, etc.
n Proyecta had revenues of about $10mn in the previous fiscal with EBIT margins
of about 10%.
n While Travel vertical formed about 68% of revenues, BFSI contributed about
23% with the balance contributed by other verticals.
A good strategic acquisition
n We opine that, Proyecta will be a good strategic fit for the company.
n NIITT has been focusing on BFSI and Travel & Transportation verticals, where it
has developed significant capabilities. Proyecta is present in these very verticals
and will add to NIITT's capabilities. Proyecta provides services like Business Intelligence
and Web and Mobility applications and has strong relationships for these
services.
n The acquisition will also enable NIIT Technologies to enhance its European footprint
with Proyecta's experience in servicing large companies in the Travel and
Financial Services segments. The acquisition also provides a gateway to NIITT to
the traditional Spanish speaking countries in Latin America.
n NIITT can also get a foothold in the large accounts of Proyecta and cross sell its
services to them.
Financials - no major impact
n Proyecta had revenues of about $10mn in the previous fiscal with EBIT margins
of about 10%.
n According to the management, FY12 may see a marginal de-growth due to the
acquisition but margins are expected to be maintained.
n For the future, NIITT expects Proyecta to report a 14 - 15% rise in revenues.
n It also plans to improve margins through higher revenues, providing higher value
added services and eventually, off-shoring and cost control.
n NIITT will pay $7mn for the acquisition. Of this, about 80% will be paid upfront
and the balance as earn-outs over the next couple of years, we understand.
n We have made marginal changes to our projections and have consolidated
Proyecta's financials WEF mid-August.
n We arrive at a marginally changed EPS of Rs.32.6 for NIITT in FY12.
Significant order wins in the recent past
n Organically, NIITT has signed two significant deals in the past few weeks with
Eurostar and Morris Communications which will start contributing to revenues
WEF 2Q.
n The company is forming a JV with Morris, to which the business, assets and
some employees will be transferred. The JV will outsource work to NIITT, which
will recruit off-shore employees to service this business.
n These deals are non-linear in nature and should increase the proportion of revenues
from non-linear revenues in FY12. We expect these to also give some
cushion to the margins of the company in the medium - to - long term.
n In 2Q, there will be a one-time integration expense in the JV with Morris, which
may impact NIITT's margins also. However, this will be a one-off expense and
we have not considered this in our projections. The net impact on NIITT will be
much lower, we believe.
Non-linear initiatives
n Non-linear initiatives have continued to scale in the past few quarters for NIITT.
n Non-linear initiatives formed 27% of overall revenues in 1QFY12 v/s 27% QoQ.
However, with revenues from new deals like Eurostar flowing in from 2Q, we
expect non-linear revenues to grow as a proportion of revenues over the next
few quarters.
n NIIT's non-linear services can broadly be divided into three parts - managed services
(11% of revenues), platforms and related solutions (26% of revenues) and
cloud services.
n The company has various platforms for the insurance vertical - Subscribe
(ROOM), airlines vertical (revenue accounting) and cargo business (through partners).
n The platform based services should gather steam in the future quarters (with
ROOM's platform gaining traction) while the IMS business is expected to contribute
for the whole fiscal.
n ROOM's revenues have scaled up during the quarter. ROOM is more into the
non-life market, which had not been impacted significantly.
n The company has plans of introducing ROOM's platform to the US markets. This
is expected to be done by implementing the PF at the Bermuda location of an
existing European client.
n We expect the entry into US to be slow because of the need to incorporate
changes required by different regulations.
n The company has also launched the SaaS initiative and the Cloud initiative recently.
Initially, it had planned to offer only infrastructure outsourcing services.
n It has announced a partnership with Hitachi Information Systems, Ltd., Japan
FY10 to offer Cloud services.
n Initially, non-critical applications like HR, Payroll, etc will be offered by NIITT on
Cloud.
n The company has now set up a platform to provide services to co-operative
banks and has already gained its first client.
Foray into Healthcare through cloud - based platform
n During FY11, the company acquired a cloud based referral management platform
to initiate its foray into the lucrative healthcare segment in the US.
n The platform called "Preferr" (Patient Referral System)" enables seamless collaboration
between all providers namely physicians, hospitals, diagnostic facilities,
and laboratories.
n The platform enables providers to meet federal guidelines for Electronics Health
Record meaningful use criteria.
n This will be offered to clients on a SAS basis, thereby adding to non-linear revenues.
About 300 doctors are already using this PF, we believe.
n These non-linear initiatives are expected to help the company restrict impact on
margins due to salary hikes and potential rupee appreciation, if any.
Valuations and recommendation
n We have made suitable changes in the DCF model.
n In our DCF model, we have incorporated a benign operating environment in our
near term assumptions for the company.
n A WACC of 15% and terminal growth of 2% leads us to a fair value of Rs.276
(Rs.280) for the stock, based on FY12 estimates.
n At those levels the stock will quote at about 8.5x FY12 earnings, which is reasonable,
in our view.
n We maintain a BUY.
n The company may have net cash of about Rs.50 per share by FY12 end, as per
our estimates.
Concerns
n Rupee appreciation beyond our assumed levels could provide a downward bias
to our earnings estimates.
n A delayed recovery in major global economies could impact growth prospects of
NIITT.
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