Stock Review: NIIT Technologies

 

Growth in the travel and BFSI segments, large government engagements and revival in the US and APAC are likely to boost NIIT Tech going ahead

 

Delhi-based NIIT Technologies has reported a nearly 9% CAGR growth in its topline as well as bottomline over the past four years. During FY11, the company has witnessed improved traction in BFSI and travel and transportation segments. Strong orders intake and increased hiring reflect the growth momentum recorded by the company.

BUSINESS

NIIT Technologies was incorporated as an independent organisation in 2004 after its de-merger with NIIT. The Delhi-based mid-tier company offers IT solutions to its vast customer base spread across North America, Europe, Middle East, Asia and Australia. It offers services in application development and maintenance, managed services, cloud computing and business process outsourcing space to organisations across verticals. While the travel and transportation segment contributes 29% to the company's overall business, financial services and insurance contributes 37%. Of the balance, the government segment contributes 18%, manufacturing and distribution form 8% and the other segments contribute to the rest.

GROWTH DRIVERS

Healthy traction in the travel and transport space and the BFSI segment led the growth last fiscal. Also, improved momentum in the domestic business on account of large government engagements including with the Border Security Force (BSF), which is spread over a period of five years, was outstanding. The company expects a similar momentum to continue across geographies in the coming quarters as well.

   Also, the management expects the recovery trend to continue with the US and West Europe and the manufacturing segment going ahead. This is evident from the company's order book size that stands 15% higher at $169 million at the beginning of FY12 as against the start of the previous year. The maximum order intake was during the March 2011 quarter when fresh orders at $116 million were more than double the total number of orders during the previous quarter.

FINANCIALS

NIIT Tech has been reporting decent revenue as well as profit growth over the past few quarters. The March 2011 quarter results were also broadly in-line with the street's expectations.

   The company posted a 5% sequential jump in its consolidated revenues at 315 crore. The growth was driven by a 9% volume growth in Europe, 7% in the US and 13% in Asia Pacific.

   Geographically, APAC contribution, which account for 15% to the company's overall business, grew 12.5% to 48 crore and the US and Europe forming 35% of the total revenue together, a rise of 5% each to 110.5 crore each. Vertical wise, the travel and transportation segment, which forms nearly 34% of the company's overall business, was the key growth driver during the quarter. It reported a 12% sequential increase in the total revenues at 107 crore.

   Despite a broad-based growth, the company's operating profit margin remained more or less flat against the previous quarter at 19.9%. During FY12, a 13% offshore salary hike and a 3% at onsite are likely to act as headwinds for margins in the coming quarters.

   However, improved efficiency introduced in the system is likely to curtail margin pressure. The company operates at a utilisation level of above 80% that is on the higher side as compared to that of
large industry peers.

   During the quarter, the company witnessed a 420 bps drop at 11.4% sequentially in the effective tax rate in relation to net sales.

   This led to a 5% growth in the company's bottomline at 51 crore. However, the company expects the effective tax rate for FY12 at 26-27%, which is likely to impact the company's bottom line negatively.

VALUATIONS

At the current market price of 185, the stock is trading at nearly six times its earnings for the trailing 12 months. The valuations seem to be cheap compared to other mid-tier IT companies, which are trading at a priceto-earnings multiple of 6-8.

   Robust growth in the travel space and BFSI, large government engagements domestically as well as growth in the US and APAC are likely to boost the company in the coming quarters.

   However, since over 80% of the company's overall business comprises exports, inflation, increase in interest rates and exchange rates can act as a headwind going ahead.