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NIIT TECHNOLOGIES
PRICE: RS.202 RECOMMENDATION: BUY
TARGET PRICE: RS.280 FY12E P/E: 6.2X
NIITT's 1QFY12 results were almost in line with estimates. While the volume
growth beat our estimates, margins were marginally lower than what we
had assumed. The 10% revenue growth in international business was a
positive surprise. Volume growth in international business was at 7%. This
is the seventh successive quarter of high volume growth. Average
realizations remained stable. EBIDTA margins, excluding the BSF order, were
lower by about 220bps due to the salary revisions given during the quarter.
PAT was lower QoQ largely due to higher taxes in absence of the tax cover
WEF FY12. Non-linear revenues continued to grow at the company average
and formed about 27% of revenues. Acquisition of a healthcare platform in
the previous quarter is a step further in the direction of non-linear revenues.
ROOM revenues are also showing consistent growth. The order bookings
were high at $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 on the back of slightly lower EBIDTA margins.
Our FY12E EPS stands at Rs.32.5 (Rs.33.2). Our DCF - based price target
stands unchanged at Rs.280, based on FY12 earnings. At our TP, our FY12
earnings will be discounted by about 8.6x 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 5% QoQ (excluding bought-outs for BSF
deal)….
n Revenues grew by 5% on a sequential basis, excluding the bought-outs for the
BFS deal.
n During 1QFY11, NIITT had started executing the BSF project. The initial phase
involves building the infrastructure and the same was carried out during FY11.
n The revenues of 4QFY11 included about Rs.34mn of bought out components towards
this.
…led by 7% volume growth in international business
n According to the management, volumes grew by about 1.7% QoQ (7.8% in
4QFY11). However, the international business saw a high growth of 7% in volumes.
Currency fluctuations helped overall growth rates (2.3%) during the quarter
whereas average realizations were marginally changed.
n The 7% volume growth in international business is encouraging and would in all
probability be better than the growth rates of larger peers.
n Within clients, revenues from the Top 5 grew by 12% on a QoQ basis, which is
very encouraging.
Broad-based growth
n What is more encouraging is that the revenue growth was experienced across
clients, geographies, verticals.
n All the geographies grew in INR terms with US and EMEA growing by 11% QoQ.
Revenues from India de-grew by 23%, which was along expected lines in a seasonally
weak quarter for India revenues.
n Revenues from USD and EMEA grew by 9% QoQ in the previous quarter, which
was also much better than the growth reported by larger peers.
n Among verticals, Financial Services and Travel & Transportation grew by 8%
QoQ.
n The company experienced strong recovery with clients and also added about
$86mn of new business during the quarter.
n ROOM Solutions, which has now been named NIIT Insurance Technologies Ltd,
saw revenue of Rs.387mn (Rs.367mn) with consolidated margins at 28% (26%).
n ROOM's margins have remained at high levels in line with higher revenues and
the non-linear nature of these revenues.
n Manufacturing saw revenues rise by 20% QoQ after falling QoQ by 15% in the
previous quarter. The vertical has been the last to recover and is yet to see large
deal flows.
Macro scene improving
n The company has witnessed an overall improvement in the macro scene, especially
in USA and in India.
n 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 have seen further improvement
in 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.
Significant order wins
n NIITT has signed two significant deals in the past few weeks with Eurostar and
Morris Communications which will start contributing to revenues WEF 2Q.
n The company is forming a JV with Morris, to which the business, assets and
some employees will be transferred. The JV will outsource work to NIITT, which
will recruit off-shore employees to service this business.
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.
n In 2Q, there will be a one-time integration expense in the JV with Morris, which
may impact NIITT's margins also. However, this will be a one-off expense and
we have not considered this in our projections. The net impact on NIITT will be
much lower, we believe.
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 1QFY12 v/s 27% QoQ.
However, with revenues from new deals like Eurostar flowing in from 2Q, 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
(11% of revenues), platforms and related solutions (26% 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
Foray into Healthcare through cloud - based platform
n During FY11, the company acquired a cloud based referral management platform
to initiate its foray into the lucrative healthcare segment in the US.
n The platform called "Preferr" (Patient Referral System)" enables seamless collaboration
between all providers namely physicians, hospitals, diagnostic facilities,
and laboratories.
n The platform enables providers to meet federal guidelines for Electronics Health
Record meaningful use criteria.
n This will be offered to clients on a SAS basis, thereby adding to non-linear revenues.
About 300 doctors are already using this PF, we believe.
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.
High addition to employees; attrition moderates; salary hikes
given
n Attrition moderated slightly to about 15.8% during the quarter (17% QoQ).
n NIITT added 459 (448) employees on a net basis during the quarter, which is the
highest for the company in any single quarter.
n We believe that, attrition will remain high because of the general buoyancy in
the sector and aggressive hiring / salary increments by larger peers.
n Utilisation rates fell to about 80.5% v/s 84% in the previous quarter
Margins lower
n EBIDTA margins were lower at about 18.5%, on the back of salary hikes given
during the quarter.
n The company has 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 will be 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.10.1mn (loss of Rs.56mn) during the quarter,
largely due to translation gains.
Future prospects
n For FY12, we expect volumes to grow by 28%, similar to what was reported in
FY11. We need to watch out for the evolving macro scenario in the developed
economies.
n We have assumed the rupee to average 44.5 / USD in FY12.
n EBIDTA margins are expected to by higher due to higher non-linear revenues and
absence of bought outs. The pyramid effect and expected rise in pricing are the
other levers for margin improvement.
n We have increased 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 5% to Rs.1.91bn, translating into EPS
of Rs.32.5
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 Rs.280
for the stock, based on FY12 estimates.
n At those levels the stock will quote at about 8.6x FY12 earnings, which is reasonable,
in our view.
n We maintain a BUY.
n The company may have net cash of about Rs.64 per share by FY12 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
PRICE: RS.202 RECOMMENDATION: BUY
TARGET PRICE: RS.280 FY12E P/E: 6.2X
NIITT's 1QFY12 results were almost in line with estimates. While the volume
growth beat our estimates, margins were marginally lower than what we
had assumed. The 10% revenue growth in international business was a
positive surprise. Volume growth in international business was at 7%. This
is the seventh successive quarter of high volume growth. Average
realizations remained stable. EBIDTA margins, excluding the BSF order, were
lower by about 220bps due to the salary revisions given during the quarter.
PAT was lower QoQ largely due to higher taxes in absence of the tax cover
WEF FY12. Non-linear revenues continued to grow at the company average
and formed about 27% of revenues. Acquisition of a healthcare platform in
the previous quarter is a step further in the direction of non-linear revenues.
ROOM revenues are also showing consistent growth. The order bookings
were high at $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 on the back of slightly lower EBIDTA margins.
Our FY12E EPS stands at Rs.32.5 (Rs.33.2). Our DCF - based price target
stands unchanged at Rs.280, based on FY12 earnings. At our TP, our FY12
earnings will be discounted by about 8.6x 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 5% QoQ (excluding bought-outs for BSF
deal)….
n Revenues grew by 5% on a sequential basis, excluding the bought-outs for the
BFS deal.
n During 1QFY11, NIITT had started executing the BSF project. The initial phase
involves building the infrastructure and the same was carried out during FY11.
n The revenues of 4QFY11 included about Rs.34mn of bought out components towards
this.
…led by 7% volume growth in international business
n According to the management, volumes grew by about 1.7% QoQ (7.8% in
4QFY11). However, the international business saw a high growth of 7% in volumes.
Currency fluctuations helped overall growth rates (2.3%) during the quarter
whereas average realizations were marginally changed.
n The 7% volume growth in international business is encouraging and would in all
probability be better than the growth rates of larger peers.
n Within clients, revenues from the Top 5 grew by 12% on a QoQ basis, which is
very encouraging.
Broad-based growth
n What is more encouraging is that the revenue growth was experienced across
clients, geographies, verticals.
n All the geographies grew in INR terms with US and EMEA growing by 11% QoQ.
Revenues from India de-grew by 23%, which was along expected lines in a seasonally
weak quarter for India revenues.
n Revenues from USD and EMEA grew by 9% QoQ in the previous quarter, which
was also much better than the growth reported by larger peers.
n Among verticals, Financial Services and Travel & Transportation grew by 8%
QoQ.
n The company experienced strong recovery with clients and also added about
$86mn of new business during the quarter.
n ROOM Solutions, which has now been named NIIT Insurance Technologies Ltd,
saw revenue of Rs.387mn (Rs.367mn) with consolidated margins at 28% (26%).
n ROOM's margins have remained at high levels in line with higher revenues and
the non-linear nature of these revenues.
n Manufacturing saw revenues rise by 20% QoQ after falling QoQ by 15% in the
previous quarter. The vertical has been the last to recover and is yet to see large
deal flows.
Macro scene improving
n The company has witnessed an overall improvement in the macro scene, especially
in USA and in India.
n 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 have seen further improvement
in 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.
Significant order wins
n NIITT has signed two significant deals in the past few weeks with Eurostar and
Morris Communications which will start contributing to revenues WEF 2Q.
n The company is forming a JV with Morris, to which the business, assets and
some employees will be transferred. The JV will outsource work to NIITT, which
will recruit off-shore employees to service this business.
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.
n In 2Q, there will be a one-time integration expense in the JV with Morris, which
may impact NIITT's margins also. However, this will be a one-off expense and
we have not considered this in our projections. The net impact on NIITT will be
much lower, we believe.
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 1QFY12 v/s 27% QoQ.
However, with revenues from new deals like Eurostar flowing in from 2Q, 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
(11% of revenues), platforms and related solutions (26% 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
Foray into Healthcare through cloud - based platform
n During FY11, the company acquired a cloud based referral management platform
to initiate its foray into the lucrative healthcare segment in the US.
n The platform called "Preferr" (Patient Referral System)" enables seamless collaboration
between all providers namely physicians, hospitals, diagnostic facilities,
and laboratories.
n The platform enables providers to meet federal guidelines for Electronics Health
Record meaningful use criteria.
n This will be offered to clients on a SAS basis, thereby adding to non-linear revenues.
About 300 doctors are already using this PF, we believe.
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.
High addition to employees; attrition moderates; salary hikes
given
n Attrition moderated slightly to about 15.8% during the quarter (17% QoQ).
n NIITT added 459 (448) employees on a net basis during the quarter, which is the
highest for the company in any single quarter.
n We believe that, attrition will remain high because of the general buoyancy in
the sector and aggressive hiring / salary increments by larger peers.
n Utilisation rates fell to about 80.5% v/s 84% in the previous quarter
Margins lower
n EBIDTA margins were lower at about 18.5%, on the back of salary hikes given
during the quarter.
n The company has 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 will be 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.10.1mn (loss of Rs.56mn) during the quarter,
largely due to translation gains.
Future prospects
n For FY12, we expect volumes to grow by 28%, similar to what was reported in
FY11. We need to watch out for the evolving macro scenario in the developed
economies.
n We have assumed the rupee to average 44.5 / USD in FY12.
n EBIDTA margins are expected to by higher due to higher non-linear revenues and
absence of bought outs. The pyramid effect and expected rise in pricing are the
other levers for margin improvement.
n We have increased 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 5% to Rs.1.91bn, translating into EPS
of Rs.32.5
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 Rs.280
for the stock, based on FY12 estimates.
n At those levels the stock will quote at about 8.6x FY12 earnings, which is reasonable,
in our view.
n We maintain a BUY.
n The company may have net cash of about Rs.64 per share by FY12 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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