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We initiate coverage on NIIT Technologies (NIIT Tech) with BUY recommendation
and target price of Rs313, implying an upside of 30%, based on 8x average of
FY13-14E EPS. We believe that the company’s recent large deal wins and strong
executable order book lend increased revenue visibility to it among mid-cap IT
peers amid current global macro uncertainties. Improvement in margins of these
large deals led by increased offshoring and non-occurrence of transition costs
would aid margin performance in FY13E, besides the traditional margin levers.
Whereas the stock has historically traded at ~7x one year forward EPS owing to
perceived low revenue visibility and quality of earnings, we believe the stock is
likely to re-rate on the back of (a) improved revenue visibility (9MFY12 fresh order
bookings up 140% YoY and 12-month executable order book up 80% YoY), (b)
consistent industry-leading performance – revenue and PAT registered 31% and
26% CAGR over FY10-12E, (c) change in business mix – increase in the share of
so-called non-linear revenue from 25% to 30% over the next one year, (d)
maintenance / improvement in EBITDA margin from the current level of 17-18%,
and (e) the company turning FCF positive in FY13E.
Large order wins and strong order book lend better revenue visibility amid
current global macro uncertainties. NIIT Tech 9MFY12 fresh order bookings are up
140% YoY to US$360mn and the 12-month executable order book is up 80% YoY to
US$245mn. Historically, the company has been booking revenue in the ratio of 1.8-
2x its orderbook and our FY13E revenue estimate of US$392mn conservatively
factors this ratio at 1.6x.
Strategy to focus on select verticals paying off: Long-term (10-15 years)
relationship with key clients and domain execution capabilities in select verticals of
travel and transportation and insurance (60%+ of revenue) provide stickiness to its
annuity-based revenue.
Margins to sustain at current level, despite factoring wage inflation and impact of
rupee appreciation, if any. Increased offshoring and non-occurrence of transition
costs in some of the recent large deals would cushion margin erosion in FY13E.
Higher proportion of non-linear revenue (IP-based revenue plus IMS), change in
employee pyramid, and rationalisation of S,G&A costs are other margin levers.
Valuations at 6.4xFY13E P/E and 3.8xEV/E undemanding, given healthy
sustainable 17-18% EBITDA margin, consistent +20% RoE and ex-cash RoEs of
30% and attractive dividend yield of 3.1% (Rs7.5-8/share). We factor in
revenue/EBITDA CAGR of 15% and EPS CAGR of 10% over FY12-14E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We initiate coverage on NIIT Technologies (NIIT Tech) with BUY recommendation
and target price of Rs313, implying an upside of 30%, based on 8x average of
FY13-14E EPS. We believe that the company’s recent large deal wins and strong
executable order book lend increased revenue visibility to it among mid-cap IT
peers amid current global macro uncertainties. Improvement in margins of these
large deals led by increased offshoring and non-occurrence of transition costs
would aid margin performance in FY13E, besides the traditional margin levers.
Whereas the stock has historically traded at ~7x one year forward EPS owing to
perceived low revenue visibility and quality of earnings, we believe the stock is
likely to re-rate on the back of (a) improved revenue visibility (9MFY12 fresh order
bookings up 140% YoY and 12-month executable order book up 80% YoY), (b)
consistent industry-leading performance – revenue and PAT registered 31% and
26% CAGR over FY10-12E, (c) change in business mix – increase in the share of
so-called non-linear revenue from 25% to 30% over the next one year, (d)
maintenance / improvement in EBITDA margin from the current level of 17-18%,
and (e) the company turning FCF positive in FY13E.
Large order wins and strong order book lend better revenue visibility amid
current global macro uncertainties. NIIT Tech 9MFY12 fresh order bookings are up
140% YoY to US$360mn and the 12-month executable order book is up 80% YoY to
US$245mn. Historically, the company has been booking revenue in the ratio of 1.8-
2x its orderbook and our FY13E revenue estimate of US$392mn conservatively
factors this ratio at 1.6x.
Strategy to focus on select verticals paying off: Long-term (10-15 years)
relationship with key clients and domain execution capabilities in select verticals of
travel and transportation and insurance (60%+ of revenue) provide stickiness to its
annuity-based revenue.
Margins to sustain at current level, despite factoring wage inflation and impact of
rupee appreciation, if any. Increased offshoring and non-occurrence of transition
costs in some of the recent large deals would cushion margin erosion in FY13E.
Higher proportion of non-linear revenue (IP-based revenue plus IMS), change in
employee pyramid, and rationalisation of S,G&A costs are other margin levers.
Valuations at 6.4xFY13E P/E and 3.8xEV/E undemanding, given healthy
sustainable 17-18% EBITDA margin, consistent +20% RoE and ex-cash RoEs of
30% and attractive dividend yield of 3.1% (Rs7.5-8/share). We factor in
revenue/EBITDA CAGR of 15% and EPS CAGR of 10% over FY12-14E.
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