NIIT Technologies (NIIT Tech) reported revenues/margin above PLe/Consensus
expectation. However, on the margin front, it disappointed due to the weakness in
GIS and insurance business. Improving revenue momentum in GIS, project ramp-up
in Morris would give the much needed revenue impetus along with margin
expansion in CY13. We retain our ‘BUY’ rating with target price of Rs350.
! Revenue growth steady, margin disappoints: NIIT Tech reported revenue
growth of 2.9% QoQ to Rs5,144m (PLe: Rs5,126m, Cons: Rs5,035m) and 4.4% on
constant currency basis. EBITDA margin contracted by 115bps to 15.8% (PLe:
16.5%, Cons: 16.1%), mainly due to softness in GIS, Insurance business and
Transition costs associated with a large engagement. However, on account of
increase in other income (revaluation of foreign currency assets & liabilities),
PAT improved by 30% QoQ to Rs560m (PLe: Rs 592m, Cons: Rs545m).
! Recovery in GIS business and revenue, post transition, to give upside: The cost
associated with large project from Morris-related transition has impacted
margin by 40bps in the quarter. We expect revenue ramp-up in Q4FY13. GIS
business delivered operating margin of -7% compared to traditionally ~20%+
due to cost over-run in a APDRP contract. The management expects margin to
be recouped by Q1FY14, as Q4 is seasonally a strong quarter for GIS.
! Conference call highlights: 1) Margins declined significantly in GIS business in
Q3FY13~(7)% (Q2FY13~1%, Q1FY13~15%) 2) Q3FY13 Revenue – Room: Rs337m,
Morris: Rs303m, Projecta: Rs144m, GIS: Rs197m, CCTNS: Rs266m 3) Hedges:
US$47.9m (@Rs56.71) 4) Sabre BPO revenue: ~Rs52m (margin: ~8-9%) 5) BFS
vertical will continue to remain soft 6) Non-linear revenue: 21% 7) DSO: 76days
8) FCF for Q3FY13: ~Rs550m 9) Volume: US: 1%, Europe: 5.7% QoQ 10) Added
four new clients, CCTNS pilot phase went live in the last week of December
! Valuation & Recommendation: NIIT Tech has made investments in the business
and now is the time to reap. Positive IATA commentary, project ramp-up in GIS,
and Morris ramp-up would give revenue growth with margin impetus. NIIT Tech
is currently trading at 7.2x FY13 estimates with EPS CAGR of 13% (FY12-14E).
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