Multi Baggers

NIIT Technologies

Company Overview:

NIIT Technologies Ltd is a mid cap IT firm servicing clients globally. It was spun off from NIIT Group (NIIT Ltd) in 2004. NIIT Ltd was incorporated in 1981 by Rajendra S Pawar and Vijay K Thadani who were old friends in IIT Delhi. It offers services in Application Development and Maintenance, Managed Services, IP Asset or Platform Solutions, and Business Process Outsourcing to organizations in the Financial Services, Travel & Transportation, Manufacturing/Distribution, Healthcare and Government sectors.

The promoters hold 31.37% stock and FIIs are the second biggest investors with ownership of 27.09%. Mutual funds & UTI own 15.83% and 14.87% stake is held by retail investors (general public) while private corporate bodies have ownership of 8.57%. The remaining 2.27% is owned by banks, financial institutions, NRIs, OCBs and others.

Financial Analysis:

Sluggish top-line growth: - The revenue in dollar terms dropped by 0.9% QoQ due to decline in revenue growth from transportation, finance, insurance & banking but revenue in term of rupee increased by 0.9% QoQ.

Dipped margins - Net sales (Rs.) grew by 15.4% YoY while rise in EBITDA was only 4.1% YoY leading the EBITDA margin to reduce by 156bps.

Fall in Net Income - PAT dropped by 5.8% QoQ and by 7.6% YoY mainly due to higher effective tax rate.

Positives:

In spite of the tepid results for the last quarter, we like the stock because of the following reasons -

Inflating order book implies comfort on growth outlook: The Company reported a healthy order intake (up 32%QoQ) which gives a good revenue visibility for the foreseeable future and will aid the margins to recoup in the upcoming quarters. This was the 2nd successive quarter of US$100mn+ intake.

Large deals in the pipeline: Currently the company is following 4-5 large deals of which, three deals are from new customers (Size: $10-15m) and two from existing customers (Size: $20m+).

Currency to support Margins: In Q2FY14, currency is likely to provide support to the margin with further expansion in H2FY14 as the revenue picks up.

Strong Management Guidance: Management is positive and expects India/Government business to drive further growth in F14 with the ramp up in the AP Finance Department and Airport Authority of India deals.

Contract with US media firm Morris: About 2 years ago company made a 5-year contract with Morris. It is a 60:40 joint venture for NIIT Technologies. This contract provides NIIT an advantage in case immigration bill comes into effect.

Revenue as well as Margins likely to improve: The wage hike has already been accounted for in 1QFY14. So wages expense is expected to remain flat. Revenue is projected to grow due to anticipated higher contract realization. Also, the recent recovery in US and acceleration in manufacturing is likely to aid revenue growth and margin expansion.

Investment Risk:

US immigration bill: The immigration bill is most probably going to impact margins of Indian IT companies. Currently 34% employees of US workforce are US citizens and 6% employees are green card holders.

Weak and uncertain macros: Global slowdown has affected the IT industry. In case the slowdown persists longer, the IT expenditure of the businesses is going to get hit.

Valuations:

Two quarters of strong order intake and an improving executable order book provide good revenue visibility. As the earnings and margins are already bottomed out and are anticipated to improve on the back of growing order book and slower growth of expenses, the stock is recommended as a "Buy". The stock currently trades for Rs 243 and 6.8x FY14E EPS and target price of Rs 340 values it at 8.85x FY14E EPS.