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NIIT TECHNOLOGIES LTD (NIITT)
PRICE: RS.227 RECOMMENDATION: BUY
TARGET PRICE: RS.300 FY13E P/E: 6.2X
NIITT's 2QFY12 results were above estimates. Organic volumes grew by
about 8% QoQ, we believe. While the volume growth beat our estimates,
margins were marginally lower than what we had assumed. Revenues from
USA and EMEA grew by 7% and 10%, respectively, we opine. This is the
eighth successive quarter of high volume growth for the company. Average
realizations remained stable. EBIDTA margins were lower by about 46bps
due to the relatively lower margins on revenues from Morris and Proyecta.
One time legal / professional expenses of Rs.119mn also impacted
profitability. Excluding these, margins were marginally higher QoQ. The
company had a translation gain of about rs.90mn during the quarter. Nonlinear
revenues continued to grow at the company average and formed
about 27% of revenues. ROOM revenues are also showing consistent
growth. The order bookings were high at $200 ($86mn), indicating a
conducive macro scene. The company is bidding for a few larger orders in
the $10mn - $50mn range. We have tweaked our FY12E estimates. Our FY12E
EPS stands at Rs.31.6 (30.9). We introduce our FY13E estimates. EPS for
FY13E stands at Rs37. Our DCF - based price target stands at Rs.300, based
on FY13 earnings (Rs276 based on FY12E earnings). At our TP, our FY13
earnings will be discounted by about 8x which, we believe, is
undemanding. We maintain BUY. NIITT has been achieving consisting
revenue growth and margins over the past few quarters.
Revenues grew by 13% QoQ….
n Revenues grew by 13% on a sequential basis. Excluding Proyecta, the revenue
growth was at 10.6% QoQ. Proyecta's financials were consolidated for 1.5
months.
n The JV with Morris (consolidated line-by-line basis) started realizing revenues (1M
in 2Q), and contributed about 2% to the revenue growth (about Rs.75mn).
n The company has formed a JV with Morris, to which the business, assets and
some employees of Morris have been transferred. The JV will outsource work to
NIITT, which will recruit off-shore employees to service this business.
n Excluding both these deals, revenues grew by about 8.3%, largely on the back
of higher volumes.
…led by volume growth
n According to the management, the revenue growth was almost entirely brought
about by volumes. Thus, existing business saw about 8% volume growth.
n The average realized exchange rate for NIITT was at Rs.45.08. The company had
marginal gains (0.4%) from hedging gains (credited to revenues). Average realizations
were marginally changed.
n The 8% volume growth is encouraging and would in all probability be better
than the growth rates of larger peers.
n Within clients, revenues from the Top 20 grew by 11% on a QoQ basis, which is
very encouraging.
Broad-based growth
n What is more encouraging is that the revenue growth was experienced across
geographies and verticals.
n All the geographies grew in INR terms with US and EMEA growing by 13% and
16% QoQ, Even after excluding Proyecta and Morris revenues, the growth was
strong, we believe. respectively. Revenues from India grew strongly by 23%
QoQ, which was along expected lines (seasonality).
n All verticals grew strongly with T&T reporting a 16% rise and Manufacturing
growing by 13% QoQ. Financial Services reported a 7% growth.
Strong order book addition
n The company experienced strong recovery with clients and also added about
$200mn ($86mn) of new business during the quarter. This was the highest addition
in one quarter, we understand.
n The company bagged the Morris deal ($85mn) and also added nearly $45mn
orders from the Police Department in India. This will have about 65% of hardware
component. The deal should start giving revenues in 3Q itself. We have not
accounted for this deal in our projections and the early revenues may be largely
from hardware supply.
n NIITT has also started executing the Eurostar deal and the first milestone has
been delivered. The revenues are expected to start scaling up once the second
milestone is delivered in 3Q.
n ROOM Solutions, which has now been named NIIT Insurance Technologies Ltd,
saw revenue of Rs.398mn (Rs.387mn) with consolidated margins at 27% (28%).
n ROOM's margins have remained at high levels in line with higher revenues and
the non-linear nature of these revenues.
Macro scene volatile; no impact on company, as yet
n The company has witnessed volatility in the overall macro scene, especially in
USA and Europe.
n While there are delays in decision making, the company has not seen any
project cancellations. The overall spending on IT is on the rise over the past few
quarters.
n The off-shore component in budgets has increased and this move towards offshoring
is helping Indian vendors who are receiving larger order-flows.
n BFSI and Travel & Transportation (T&T) verticals continues to see demand. The
retail vertical has also seen traction.
n BFSI is seeing continued spends towards regulatory compliance and also discretionary
spend.
n Within T&T, the airlines vertical has seen a re-emergence of spending. According
to the management, IATA expects the passenger traffic to grow by about 6% in
CY11 and the cargo traffic also by about 6%.
n For Manufacturing and Distribution, the focus is still on supply chain and customers
but significant deal flows are yet to start.
Large deals have started contributing
n The two large deals signed by NIITT in the previous quarter, have started contributing
to revenues.
n The Morris JV earned revenues of Rs.75mn during the quarter and Eurostar's first
milestone has been delivered.
n The scale-ups have started earlier than expected and we expect further scale ups
in the quarters to come.
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 to give some
cushion to the margins of the company in the medium - to - long term.
Non-linear initiatives
n Non-linear initiatives have continued to scale in the current quarter.
n Non-linear initiatives formed 27% of overall revenues in 2QFY12 v/s 27% QoQ.
However, with revenues from new deals like Eurostar scaling up WEF 2HFY12,
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
(13% of revenues), platforms and related solutions (14% 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.
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.
Attrition moderates
n Attrition moderated to about 13.4% during the quarter (15.8% QoQ). We believe
this is positive and will continue to watch this data closely in the future
quarters.
n NIITT added 468 (459) employees on a net basis during the quarter.
n Utilisation rate improved by about 200bps to 82% v/s 80% in the previous quarter
Margins lower
n EBIDTA margins were lower at about 15.8%, on the back of lower profitability in
new projects (Morris and Proyecta) and also the one-time legal and professional
expenses of $2.5mn incurred in the Morris JV.
n Excluding the one time expenses, margins were marginally down. If we remove
proyecta and Morris, margins improved marginally QoQ.
n The Morris JV is currently not making any margins as it is providing services at
cost levels till the business transfer is completed. This is expected to continue till
1QFY13 after which, we expect normalized margins from this business.
n We understand that, Proyecta business had about 8 - 9% EBIDTA margins in 2Q.
In 1Q, the company had given average salary hikes of 13% for offshore employees
and 3% for onsite employees for FY12. As compared to staggered rise in
previous years, all employees were covered by the rise WEF 1QFY12.
n Non-linear revenues formed 27% of the quarter revenues and also helped in restricting
impact on margins.
Exchange rate movement
n NIITT had forex gain of about Rs.90mn (gain of Rs.10.1mn) during the quarter,
largely due to translation gains.
Future prospects
n For FY12, we expect revenues to grow by 23%. We need to watch out for the
evolving macro scenario in the developed economies.
n We have assumed the rupee to average 47.75 / USD in 2HFY12.
n EBIDTA margins are expected to be lower due to the one time expenses of
rs.119mn and also the salary increments. Higher non-linear revenues and absence
of bought outs may nullify the impact to some extent.
n We have assumed the tax rate to 26% of PBT as STPI unit benefits are expected
to expire WEF FY12.
n Consequently, PAT is expected to rise by 3% to Rs.1.88bn.
n We introduce FY13 earnings estimates for NIITT.
n We expect volumes to grow by 18% YoY with average realisations remaining
stable.
n Rupee is assumed to average 46.5 / USD in FY13E. Margins are expected to be
lower YoY (excluding one-time expense of Rs.119mn in FY11) due to lower profitability
in new projects from Morris and Eurostar as well as salary increments
and rupee appreciation.
n PAT is, thus, expected to grow to Rs.2.16bn, leading to an EPS of Rs.36.4.
Valuations and recommendation
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 300
(Rs.276) for the stock, based on FY13 estimates.
n At those levels the stock will quote at about 8x FY13 earnings, which is reasonable,
in our view.
n We maintain a BUY.
n The company may have net cash of about Rs.65 per share by FY13 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.227 RECOMMENDATION: BUY
TARGET PRICE: RS.300 FY13E P/E: 6.2X
NIITT's 2QFY12 results were above estimates. Organic volumes grew by
about 8% QoQ, we believe. While the volume growth beat our estimates,
margins were marginally lower than what we had assumed. Revenues from
USA and EMEA grew by 7% and 10%, respectively, we opine. This is the
eighth successive quarter of high volume growth for the company. Average
realizations remained stable. EBIDTA margins were lower by about 46bps
due to the relatively lower margins on revenues from Morris and Proyecta.
One time legal / professional expenses of Rs.119mn also impacted
profitability. Excluding these, margins were marginally higher QoQ. The
company had a translation gain of about rs.90mn during the quarter. Nonlinear
revenues continued to grow at the company average and formed
about 27% of revenues. ROOM revenues are also showing consistent
growth. The order bookings were high at $200 ($86mn), indicating a
conducive macro scene. The company is bidding for a few larger orders in
the $10mn - $50mn range. We have tweaked our FY12E estimates. Our FY12E
EPS stands at Rs.31.6 (30.9). We introduce our FY13E estimates. EPS for
FY13E stands at Rs37. Our DCF - based price target stands at Rs.300, based
on FY13 earnings (Rs276 based on FY12E earnings). At our TP, our FY13
earnings will be discounted by about 8x which, we believe, is
undemanding. We maintain BUY. NIITT has been achieving consisting
revenue growth and margins over the past few quarters.
Revenues grew by 13% QoQ….
n Revenues grew by 13% on a sequential basis. Excluding Proyecta, the revenue
growth was at 10.6% QoQ. Proyecta's financials were consolidated for 1.5
months.
n The JV with Morris (consolidated line-by-line basis) started realizing revenues (1M
in 2Q), and contributed about 2% to the revenue growth (about Rs.75mn).
n The company has formed a JV with Morris, to which the business, assets and
some employees of Morris have been transferred. The JV will outsource work to
NIITT, which will recruit off-shore employees to service this business.
n Excluding both these deals, revenues grew by about 8.3%, largely on the back
of higher volumes.
…led by volume growth
n According to the management, the revenue growth was almost entirely brought
about by volumes. Thus, existing business saw about 8% volume growth.
n The average realized exchange rate for NIITT was at Rs.45.08. The company had
marginal gains (0.4%) from hedging gains (credited to revenues). Average realizations
were marginally changed.
n The 8% volume growth is encouraging and would in all probability be better
than the growth rates of larger peers.
n Within clients, revenues from the Top 20 grew by 11% on a QoQ basis, which is
very encouraging.
Broad-based growth
n What is more encouraging is that the revenue growth was experienced across
geographies and verticals.
n All the geographies grew in INR terms with US and EMEA growing by 13% and
16% QoQ, Even after excluding Proyecta and Morris revenues, the growth was
strong, we believe. respectively. Revenues from India grew strongly by 23%
QoQ, which was along expected lines (seasonality).
n All verticals grew strongly with T&T reporting a 16% rise and Manufacturing
growing by 13% QoQ. Financial Services reported a 7% growth.
Strong order book addition
n The company experienced strong recovery with clients and also added about
$200mn ($86mn) of new business during the quarter. This was the highest addition
in one quarter, we understand.
n The company bagged the Morris deal ($85mn) and also added nearly $45mn
orders from the Police Department in India. This will have about 65% of hardware
component. The deal should start giving revenues in 3Q itself. We have not
accounted for this deal in our projections and the early revenues may be largely
from hardware supply.
n NIITT has also started executing the Eurostar deal and the first milestone has
been delivered. The revenues are expected to start scaling up once the second
milestone is delivered in 3Q.
n ROOM Solutions, which has now been named NIIT Insurance Technologies Ltd,
saw revenue of Rs.398mn (Rs.387mn) with consolidated margins at 27% (28%).
n ROOM's margins have remained at high levels in line with higher revenues and
the non-linear nature of these revenues.
Macro scene volatile; no impact on company, as yet
n The company has witnessed volatility in the overall macro scene, especially in
USA and Europe.
n While there are delays in decision making, the company has not seen any
project cancellations. The overall spending on IT is on the rise over the past few
quarters.
n The off-shore component in budgets has increased and this move towards offshoring
is helping Indian vendors who are receiving larger order-flows.
n BFSI and Travel & Transportation (T&T) verticals continues to see demand. The
retail vertical has also seen traction.
n BFSI is seeing continued spends towards regulatory compliance and also discretionary
spend.
n Within T&T, the airlines vertical has seen a re-emergence of spending. According
to the management, IATA expects the passenger traffic to grow by about 6% in
CY11 and the cargo traffic also by about 6%.
n For Manufacturing and Distribution, the focus is still on supply chain and customers
but significant deal flows are yet to start.
Large deals have started contributing
n The two large deals signed by NIITT in the previous quarter, have started contributing
to revenues.
n The Morris JV earned revenues of Rs.75mn during the quarter and Eurostar's first
milestone has been delivered.
n The scale-ups have started earlier than expected and we expect further scale ups
in the quarters to come.
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 to give some
cushion to the margins of the company in the medium - to - long term.
Non-linear initiatives
n Non-linear initiatives have continued to scale in the current quarter.
n Non-linear initiatives formed 27% of overall revenues in 2QFY12 v/s 27% QoQ.
However, with revenues from new deals like Eurostar scaling up WEF 2HFY12,
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
(13% of revenues), platforms and related solutions (14% 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.
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.
Attrition moderates
n Attrition moderated to about 13.4% during the quarter (15.8% QoQ). We believe
this is positive and will continue to watch this data closely in the future
quarters.
n NIITT added 468 (459) employees on a net basis during the quarter.
n Utilisation rate improved by about 200bps to 82% v/s 80% in the previous quarter
Margins lower
n EBIDTA margins were lower at about 15.8%, on the back of lower profitability in
new projects (Morris and Proyecta) and also the one-time legal and professional
expenses of $2.5mn incurred in the Morris JV.
n Excluding the one time expenses, margins were marginally down. If we remove
proyecta and Morris, margins improved marginally QoQ.
n The Morris JV is currently not making any margins as it is providing services at
cost levels till the business transfer is completed. This is expected to continue till
1QFY13 after which, we expect normalized margins from this business.
n We understand that, Proyecta business had about 8 - 9% EBIDTA margins in 2Q.
In 1Q, the company had given average salary hikes of 13% for offshore employees
and 3% for onsite employees for FY12. As compared to staggered rise in
previous years, all employees were covered by the rise WEF 1QFY12.
n Non-linear revenues formed 27% of the quarter revenues and also helped in restricting
impact on margins.
Exchange rate movement
n NIITT had forex gain of about Rs.90mn (gain of Rs.10.1mn) during the quarter,
largely due to translation gains.
Future prospects
n For FY12, we expect revenues to grow by 23%. We need to watch out for the
evolving macro scenario in the developed economies.
n We have assumed the rupee to average 47.75 / USD in 2HFY12.
n EBIDTA margins are expected to be lower due to the one time expenses of
rs.119mn and also the salary increments. Higher non-linear revenues and absence
of bought outs may nullify the impact to some extent.
n We have assumed the tax rate to 26% of PBT as STPI unit benefits are expected
to expire WEF FY12.
n Consequently, PAT is expected to rise by 3% to Rs.1.88bn.
n We introduce FY13 earnings estimates for NIITT.
n We expect volumes to grow by 18% YoY with average realisations remaining
stable.
n Rupee is assumed to average 46.5 / USD in FY13E. Margins are expected to be
lower YoY (excluding one-time expense of Rs.119mn in FY11) due to lower profitability
in new projects from Morris and Eurostar as well as salary increments
and rupee appreciation.
n PAT is, thus, expected to grow to Rs.2.16bn, leading to an EPS of Rs.36.4.
Valuations and recommendation
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 300
(Rs.276) for the stock, based on FY13 estimates.
n At those levels the stock will quote at about 8x FY13 earnings, which is reasonable,
in our view.
n We maintain a BUY.
n The company may have net cash of about Rs.65 per share by FY13 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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