NIIT Technologies

Downside Risk To Stock Limited, Given Improved Prospects

 

   THE stock of mid-tier IT company, NIIT Technologies, has fallen significantly in the recent stock market downturn. Given a gradual improvement in the company's performance over the past three quarters and its current level of valuations, the downside risk to its stock looks limited.

   In the past one month, the stock has lost 12% compared with over 1% fall in the benchmark Sensex. The stock has been witnessing weakness since the company's fourth quarter results. Though its quarterly performance was decent, it could not spark a fresh rally in shares.

   The stock has not earned returns over the past six months, thus closely mirroring the Sensex. During the period, the benchmark fell by nearly 3% whereas the stock lost just over 2%. Over a one-year duration, the stock has earned 62% returns. It has outperformed the Sensex, which gained 13% during the period.

   NIIT Technologies offers IT services to its global clients in verticals such as banking, financial services and insurance, transportation, and retail. In FY10, it earned more than two-thirds of its total revenue of Rs 914 crore from the US, European, the Middle East and African markets.

   The company had faced turbulence in FY09 due to the slowdown in global tech spend following the credit crisis in the US and European financial markets. NIIT Tech's performance in the past three quarters indicates that this phase of uncertainty is now over. The company has improved its operating margin by over 400 basis points to 22% in FY10 from the year-ago level. This was on account of cost rationalisation and up-tick in its order book.

   Going ahead, the company is expected to continue its growth momentum, given the revival in new client additions and higher order book. It has bagged orders worth Rs 124 crore in the fourth quarter, much higher than in any of the past four quarters. Its order book executable in next one year is $147 million (nearly Rs 700 crore).

   At the Tuesday's close of Rs 171.4, NIIT Tech's stock is currently trading at eight times its trailing 12-month earnings per share. The downside may remain limited, given its improved prospects.