Execution furloughs weigh… • NIIT Technologies :: ICICI Securities, report

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Execution furloughs weigh…
• NIIT Technologies reported its Q3FY15 earnings that were generally
in line with our estimates. Growth was led by government business
• Rupee revenues grew 1.2% QoQ (| 595.3 crore) and were in line with
our 1% QoQ growth and | 594 crore estimate
• EBITDA margins came in at 14.5% (51 bps QoQ improvement), also
in line with our 14.6% (up 63 bps) estimate led by revenue growth
and productivity initiatives
• Reported PAT of | 48.2 crore was marginally above our | 45.9 crore
estimate led by lower depreciation and taxes relative to estimate
Adjusting dollar revenue estimates lower on ailing execution…
We expect NIIT Technologies (NTL) to deliver FY14-16E dollar revenue
CAGR of 6.6% (7.5% earlier), below its FY09-14 average of 12.3%. The
tepid growth estimate can be attributed to weakness in 1) insurance
business in the US and 2) uneven growth in top 10 customers. Recall, Q1
saw ramp-downs in two BFSI clients (one top 5 likely) in the US. NTL
expects insurance recovery in FY16E but also hopes a new large logo win
with a US insurer in Q3 may partially offset the ongoing weakness and
that growth trajectory could improve with each quarter. That said, we are
adjusting our FY15E $ revenue estimates lower. We now expect dollar
revenues to grow 2.4% YoY vs. 5% earlier led by 1) lofty Q4 asking rate
(17.6% QoQ growth), 2) ailing execution, 3) weakness in insurance, top 10
customers. Interestingly, growth moderation is despite 12% YoY growth
in next 12 month executable order book to $296 million ($298 million as
of Q3FY14). Finally, though, we are adjusting our $ revenue estimates
lower, change in rupee assumption helps maintain our | estimates.
Healthy bookings continue to be the only silver lining…
From a bookings perspective, NTL secured new orders worth $109 million
in Q3 taking the LTM backlog to $480 million as on Q3FY15 with $296
million executable over next 12 months. Assuming conservative next 12
month revenue to order book conversion ratio of 1.4x over Q4FY14
ending order book of $290 million, implies revenues of ~$400 million for
FY15E, YoY growth of ~4%. However, weak execution continues to be a
reason for our lower estimate.
Margins in line with estimates; 16% exit rate goal for FY15E continues…
EBITDA margins increased 51 bps QoQ to 14.5% in line with our 63 bps
up and 14.6% estimate led by revenue growth and productivity initiatives.
Recall, FY14 margins declined 41 bps YoY primarily led by 1) higher
contribution from lower margin purchase-for-resale (PFR) hardware
business, 2) weakness in the insurance business and 3) moderating
revenue growth. Note, the management continues to guide an FY15E exit
rate of 16% and sustainable margin band of 16-17%. We continue to
expect FY15E margins to decline 35 bps YoY to 14.9%, led by impact of
client ramp-downs, large deal transition cost partially offset by lower
hardware revenue contribution, offshoring and pyramid correction.
Maintain HOLD on execution furloughs…
We expect NTL to report revenue, earnings CAGR of 7%, 6% in FY14-16E
(average 15.5% EBITDA margins in FY15-16E), vs. 19%, 15% reported in
FY09-14 (average 17.8%). Though NTL has restructured its 1) sales
function, 2) execution efforts under the COO and continues to win healthy
order bookings, perceptible outcomes are a couple of quarters away
given ailing execution & dictate our HOLD rating. We continue to value
NTL at ~8x its FY16E EPS of | 42.5 to arrive at a target price of | 350.

LINK
http://content.icicidirect.com/mailimages/IDirect_NIITTech_Q3FY15.pdf