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NIIT TECHNOLOGIES LTD (NIITT)
PRICE: RS.211 RECOMMENDATION: BUY
TARGET PRICE: RS.300 FY13E P/E: 5.4X
NIITT's operating results for 3QFY12 were broadly in line with our
estimates. Organic volumes (excluding Proyecta and hardware revenues)
grew by about 3% QoQ (8% in 2Q), we believe. The lower growth was
likely due to the seasonality impact. While the volume growth was broadly
in-line, margins rose more than anticipated. Revenues from USA and EMEA
grew by 17% and 20%, respectively, we opine. This growth follows eight
successive quarters of high volume growth for the company. Average
realizations remained stable. EBIDTA margins were almost flat excluding the
impact of one-time integration costs in 2Q. The gains from currency were
set off by the relatively lower margins on revenues from Morris and
Proyecta, apart from lower utilization rates. The company had a translation
gain of about Rs.164mn during the quarter. Non-linear revenues (including
Morris) grew faster than company average and formed about 30% (27% in
2Q) of revenues. The order bookings were at $75mn, including a large deal
extension. On the macro front, the management has indicated challenges,
but expects the order book to help sustain decent revenue growth. The
company is bidding for a few larger orders in the $10mn - $50mn range. We
have tweaked our FY12E and FY13E estimates. Our FY12E EPS stands at
Rs.34.6 and FY13E EPS at Rs.39.1 (Rs.37 earlier), largely due to changes in
currency assumptions. Our DCF - based price target stands unchanged at
Rs.300, based on FY13 earnings. At our TP, our FY13 earnings will be
discounted by about 7.6x 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 17% QoQ….
n Revenues grew by 17% on a sequential basis. The growth was helped by hardware
revenues, additional revenues from the Morris deal and also the full quarter
consolidation of Proyecta. Proyecta's financials were consolidated for 1.5 months
in 2Q.
n Excluding the hardware and Proyecta revenues, the growth was about 3%, we
believe. Rupee depreciation helped the revenues grow by 8.9%.
n The JV with Morris (consolidated line-by-line basis) had started realizing revenues
from September 2011 and contributed about Rs.243mn to the revenues v/s
Rs.75mn for 2Q.
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 Hardware revenues were about Rs.89mn for the quarter.
…led by volume growth
n The organic growth of 3% was led by volumes. Average realisations were almost
flat on a QoQ basis.
n The average realized exchange rate for NIITT was at Rs.50.7. The company had
significant currency gains (8.9%) credited to revenues.
n Within clients, revenues from the Top 10 grew by 17% on a QoQ basis.
Broad-based growth, but concerns persist
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 17% and
20% QoQ. All verticals grew with T&T reporting a 23% rise. Financial Services
reported an 8% growth.
n The management has indicated that, BFSI is the most challenged sector for the
company, due to the economic slowdown.
n It has also indicated that, with insurers suffering losses, business for ROOM may
get impacted in the form of lower spending on licenses. This may impact
ROOM's revenues for the next 2 - 3 quarters.
Strong order book addition
n The company added about $75mn ($200mn) of new business during the quarter.
In 2Q, the additions were the highest on the back of the deals from Morris
($85mn) and Police Department in India ($45mn), which were won by the company.
n The deal from the Police Department will have about 65% of hardware component.
The deal started giving revenues in 3Q itself. We have not accounted for
this deal in our FY13 projections and the early revenues may be largely from
hardware supply.
n NIITT had started executing the Eurostar deal and the first milestone was delivered
in 2Q.
n ROOM Solutions, which has now been named NIIT Insurance Technologies Ltd,
saw revenue of Rs.426mn (Rs.398mn) with consolidated margins at 27% (27%).
n ROOM's margins have remained at high levels in line with higher revenues and
the non-linear nature of these revenues.
n However, as mentioned above, revenue growth may be impacted over the next
2 - 3 quarters.
Macro scene volatile; no major 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.
n The overall budgets of the clients may be flattish in CY12, we understand.
n The off-shore component in budgets is expected to increase and this move towards
off-shoring should help Indian vendors.
n Travel & Transportation (T&T) vertical continues to see demand. The retail vertical
has also seen traction.
n BFSI is seeing spends towards regulatory compliance and also discretionary
spend. However, the vertical is the most challenged for NIITT, in the current
phase of global slowdown.
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, non-linearity may help
margins
n The two large deals signed by NIITT in 1HFY12, have started contributing to revenues.
n The Morris JV earned revenues of Rs.243mn during the quarter and Eurostar also
brought in revenues.
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 FY13. 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 25% of overall revenues in 3QFY12 v/s 27% QoQ.
The fall is because Morris revenues are not considered as non-linear, till they
start earning margins (1QFY13). Including Morris, non-linear revenues were
about 30% of revenues in 3Q.
n With revenues from new deals like Morris and Eurostar scaling up WEF FY13, 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 also expected to
contribute more.
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 in various other European
markets.
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 The company has already won some customers in Asia Pac and the practice
should scale up over the next few quarters.
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 12.5% during the quarter (13.4% QoQ). We believe
this is positive and will continue to watch this data closely in the future
quarters.
n NIITT added 245 (468) employees on a net basis during the quarter.
n Utilisation rate fell by about 200bps to 80% v/s 82% in the previous quarter
Margins flat excluding one-time related to Morris JV
n EBIDTA margins were flat QoQ, excluding the impact of one-time legal and professional
expenses of $2.5mn incurred in the Morris JV.
n Margins were flat despite a 180bps push from rupee depreciation.
n We believe that, apart from the lower utilization rates, lower margins from hardware,
Proyecta and Morris (almost no margins), impacted overall profitability.
n The Morris JV is currently not making any margins as it is providing services at
cost till the business transfer is completed. This is expected to continue till
1QFY13 after which, we expect normalized margins from this business.
n We assume that, Proyecta business had about 9% EBIDTA margins in 3Q.
n 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 have helped NIITT in restricting impact on margins in the
past.
Exchange rate movement
n NIITT had forex gain of about Rs.164mn (gain of Rs.90mn) during the quarter,
largely due to translation benefits.
Future prospects
n We make changes to our FY12 and FY13 earnings estimates.
n We expect volumes to grow by 17% YoY in FY13 with average realisations remaining
stable.
n Rupee is assumed to average 49 / USD in FY13E. Margins are expected to be
almost stable YoY (excluding one-time expense of Rs.119mn in FY12) due to
lower profitability initially in new projects from Morris and Eurostar as well as
salary increments.
n PAT is, thus, expected to grow to Rs.2.33bn, leading to an EPS of Rs.39.1.
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 13% and terminal growth of 2% leads us to a fair value of 300 for
the stock, based on FY13 estimates.
n At those levels the stock will quote at about 7.6x FY13 earnings, which is reasonable,
in our view.
n We maintain a BUY.
n The company may have net cash of about Rs.36 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.211 RECOMMENDATION: BUY
TARGET PRICE: RS.300 FY13E P/E: 5.4X
NIITT's operating results for 3QFY12 were broadly in line with our
estimates. Organic volumes (excluding Proyecta and hardware revenues)
grew by about 3% QoQ (8% in 2Q), we believe. The lower growth was
likely due to the seasonality impact. While the volume growth was broadly
in-line, margins rose more than anticipated. Revenues from USA and EMEA
grew by 17% and 20%, respectively, we opine. This growth follows eight
successive quarters of high volume growth for the company. Average
realizations remained stable. EBIDTA margins were almost flat excluding the
impact of one-time integration costs in 2Q. The gains from currency were
set off by the relatively lower margins on revenues from Morris and
Proyecta, apart from lower utilization rates. The company had a translation
gain of about Rs.164mn during the quarter. Non-linear revenues (including
Morris) grew faster than company average and formed about 30% (27% in
2Q) of revenues. The order bookings were at $75mn, including a large deal
extension. On the macro front, the management has indicated challenges,
but expects the order book to help sustain decent revenue growth. The
company is bidding for a few larger orders in the $10mn - $50mn range. We
have tweaked our FY12E and FY13E estimates. Our FY12E EPS stands at
Rs.34.6 and FY13E EPS at Rs.39.1 (Rs.37 earlier), largely due to changes in
currency assumptions. Our DCF - based price target stands unchanged at
Rs.300, based on FY13 earnings. At our TP, our FY13 earnings will be
discounted by about 7.6x 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 17% QoQ….
n Revenues grew by 17% on a sequential basis. The growth was helped by hardware
revenues, additional revenues from the Morris deal and also the full quarter
consolidation of Proyecta. Proyecta's financials were consolidated for 1.5 months
in 2Q.
n Excluding the hardware and Proyecta revenues, the growth was about 3%, we
believe. Rupee depreciation helped the revenues grow by 8.9%.
n The JV with Morris (consolidated line-by-line basis) had started realizing revenues
from September 2011 and contributed about Rs.243mn to the revenues v/s
Rs.75mn for 2Q.
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 Hardware revenues were about Rs.89mn for the quarter.
…led by volume growth
n The organic growth of 3% was led by volumes. Average realisations were almost
flat on a QoQ basis.
n The average realized exchange rate for NIITT was at Rs.50.7. The company had
significant currency gains (8.9%) credited to revenues.
n Within clients, revenues from the Top 10 grew by 17% on a QoQ basis.
Broad-based growth, but concerns persist
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 17% and
20% QoQ. All verticals grew with T&T reporting a 23% rise. Financial Services
reported an 8% growth.
n The management has indicated that, BFSI is the most challenged sector for the
company, due to the economic slowdown.
n It has also indicated that, with insurers suffering losses, business for ROOM may
get impacted in the form of lower spending on licenses. This may impact
ROOM's revenues for the next 2 - 3 quarters.
Strong order book addition
n The company added about $75mn ($200mn) of new business during the quarter.
In 2Q, the additions were the highest on the back of the deals from Morris
($85mn) and Police Department in India ($45mn), which were won by the company.
n The deal from the Police Department will have about 65% of hardware component.
The deal started giving revenues in 3Q itself. We have not accounted for
this deal in our FY13 projections and the early revenues may be largely from
hardware supply.
n NIITT had started executing the Eurostar deal and the first milestone was delivered
in 2Q.
n ROOM Solutions, which has now been named NIIT Insurance Technologies Ltd,
saw revenue of Rs.426mn (Rs.398mn) with consolidated margins at 27% (27%).
n ROOM's margins have remained at high levels in line with higher revenues and
the non-linear nature of these revenues.
n However, as mentioned above, revenue growth may be impacted over the next
2 - 3 quarters.
Macro scene volatile; no major 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.
n The overall budgets of the clients may be flattish in CY12, we understand.
n The off-shore component in budgets is expected to increase and this move towards
off-shoring should help Indian vendors.
n Travel & Transportation (T&T) vertical continues to see demand. The retail vertical
has also seen traction.
n BFSI is seeing spends towards regulatory compliance and also discretionary
spend. However, the vertical is the most challenged for NIITT, in the current
phase of global slowdown.
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, non-linearity may help
margins
n The two large deals signed by NIITT in 1HFY12, have started contributing to revenues.
n The Morris JV earned revenues of Rs.243mn during the quarter and Eurostar also
brought in revenues.
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 FY13. 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 25% of overall revenues in 3QFY12 v/s 27% QoQ.
The fall is because Morris revenues are not considered as non-linear, till they
start earning margins (1QFY13). Including Morris, non-linear revenues were
about 30% of revenues in 3Q.
n With revenues from new deals like Morris and Eurostar scaling up WEF FY13, 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 also expected to
contribute more.
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 in various other European
markets.
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 The company has already won some customers in Asia Pac and the practice
should scale up over the next few quarters.
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 12.5% during the quarter (13.4% QoQ). We believe
this is positive and will continue to watch this data closely in the future
quarters.
n NIITT added 245 (468) employees on a net basis during the quarter.
n Utilisation rate fell by about 200bps to 80% v/s 82% in the previous quarter
Margins flat excluding one-time related to Morris JV
n EBIDTA margins were flat QoQ, excluding the impact of one-time legal and professional
expenses of $2.5mn incurred in the Morris JV.
n Margins were flat despite a 180bps push from rupee depreciation.
n We believe that, apart from the lower utilization rates, lower margins from hardware,
Proyecta and Morris (almost no margins), impacted overall profitability.
n The Morris JV is currently not making any margins as it is providing services at
cost till the business transfer is completed. This is expected to continue till
1QFY13 after which, we expect normalized margins from this business.
n We assume that, Proyecta business had about 9% EBIDTA margins in 3Q.
n 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 have helped NIITT in restricting impact on margins in the
past.
Exchange rate movement
n NIITT had forex gain of about Rs.164mn (gain of Rs.90mn) during the quarter,
largely due to translation benefits.
Future prospects
n We make changes to our FY12 and FY13 earnings estimates.
n We expect volumes to grow by 17% YoY in FY13 with average realisations remaining
stable.
n Rupee is assumed to average 49 / USD in FY13E. Margins are expected to be
almost stable YoY (excluding one-time expense of Rs.119mn in FY12) due to
lower profitability initially in new projects from Morris and Eurostar as well as
salary increments.
n PAT is, thus, expected to grow to Rs.2.33bn, leading to an EPS of Rs.39.1.
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 13% and terminal growth of 2% leads us to a fair value of 300 for
the stock, based on FY13 estimates.
n At those levels the stock will quote at about 7.6x FY13 earnings, which is reasonable,
in our view.
n We maintain a BUY.
n The company may have net cash of about Rs.36 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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