Stock Review: NIIT Tech

EVEN AS the big boys of the Indian information technology (IT) sector keep talking of delinking revenue growth and headcount, it's the midcap companies that are acting on this plan faster. While it's a well-known fact that IT services' companies cannot keep growing their headcount beyond a point, the top IT companies have become victims of their own success, which compels them to do more of what they are good at.

No wonder the smaller companies are doing better at the non-linear initiatives. While application development and management remains the mainstay, what analysts like is the diversification into intellectual property (IP) assets. So, don't be surprised to learn that NIIT Technologies has deployed the cargo-handling systems across some major airports in the Asia Pacific region (Beijing, Taiwan and Hong Kong), in partnership with Singapore Airport Terminal Services (SATS). Similarly, in the commercial insurance market, the company has a sizeable share in the Lloyd's insurance market in London. The company is following a two-pronged approach when it comes to development and management of such technology. In some sectors, it has developed IP assets to offer platform-based services, and where it does not have, it partners with owners of IP assets, as is the case with SATS. The company has developed industry expertise in verticals such as travel, insurance, manufacturing and healthcare.

Like most midcap companies, analysts have been worried about the volatility in the quarterly revenues. However, over the last few quarters, this has stabilised.

IMPRESSIVE OPERATIONAL PERFORMANCE NIIT Technologies has reported a strong top line growth of 8.9 per cent quarter-on-quarter to $68.9 million. The IT services revenues grew 9.3 per cent sequentially to $50.5 million, driven by a 7.8 per cent volume growth. The management believes that it is confident of improving margins on the back of its non-linear initiatives, NIIT Technologies is among the few midcap IT companies, which has shown tremendous consistency in their earnings performance in the last few quarters, says Sharekhan. In the three preceding quarters, it has shown a 9.4 per cent compounded quarterly growth rate (CQGR) in revenues and a 7.2 per cent CQGR in net profit. However, some analysts believe the company needs scale to manage different cycles in the business. While the management acknowledges that it needs scale, it believes in being a preferred partner for its clients, that's big enough.