NIIT Technologies- FOCUS ON NICHE BUSINESS VERTICALS :: IFCI research

FOCUS ON NICHE BUSINESS VERTICALS
Successful execution of large deals; strong deal visbility ahead
NIIT Tech has successfully implemented the large BSF contract worth Rs 2,280mn in FY11. This provides it impetus to win more new deals in the Indian government vertical. NIIT Tech has won various large deals from clients like Eurostar and Morris, which provide strong revenue visibility.Fresh order intake in Europe and APAC was at USD 151mn and USD 136mn respectively in FY12

��

Niche verticals will continue to outperform
NIIT Tech derives ~72% of its revenues from the travel and BFSI verticals. It has been the only mid-tier IT company with high exposure to the transport vertical. Air traffic is expected to grow 3.2%YoY in CY12 despite uncertainty globally. Revenue from travel/transport and BFSI verticals have grown at a CAGR of 27% and 10% (FY09-12) respectively, led by strong volumes.
Non linear initiatives offer competitive advantage
NIIT Tech dervives 26% of its revenues from non linear services which is expected to grow to 37% in FY14 led by growth in cloud, IP and managed services. Increased focus towards non linear services has led to higher revenue per employee which has grown from USD 11,800 to USD 12,000.
Efficient client focus
NIIT Tech has large marquee clients like British Airways, Sabre, Toyota and ING Insurance, which the company has been servicing for over 10 years. NIIT Tech derives 45% of its revenues from key top 10 clients and this provides immesnse scope for client mining. It currently has six clients which contribute more than 1USD mn to its revenues.
Valuation
We initiate coverage on the stock with a BUY recommendation and a target price of Rs 360 based on 7.5x FY14E earnings.



Valuation
NIIT tech has traded at an average PER of 5.2x (FY09-13). It is currently trading at 6.8x based on our FY14E earnings. The company has also traded at high PER multiples during FY07, due to the strong double-digit revenue growth in that year. The company has recently won large deals across various verticals, which has led to revenue growth of 35%YoY and 28%YoY in FY11 and FY12 respectively. We expect margins for NIIT Tech to improve led by higher non-linear business. EPS is expected to grow at a CAGR of 14.5% (FY11-14E) based on our estimate.
We thereby assign a target PER of 7.5x for FY14 and initiate coverage on the stock with a BUY recommendation and a target price of Rs 360.