NIIT Technologies - In-line Performance; Forex loss haunted net margin: Maintain Buy - IndiaNivesh

Q2 FY13 Result Highlights

NIIT Technologies (NIIT Tech) Q2FY13 result was largely in-line with street estimates; however slightly below our expectations. During the quarter, reported revenue grew by 6.5%qoq and 34.8%yoy to Rs.5,001 mn (INSPL/Bloom est: Rs.5,164mn/Rs.4,976mn). The revenue growth was lead by higher volumes from U.S. (+6.0%qoq) and Europe (+3.5%qoq), partially offset by RoW. EBITDA margin went up 96bps qoq (INSPL est: 91bps expansion) to 17%, on account of moderation in employee cost after salary hike in last quarter and forex benefit. However, due to increase in competitive intensity, management expect some pressure on EBITDA margin front going-ahead. As a result, during FY13, we estimate nearly 45bps yoy (to 16.6%) contraction in EBITDA margin. During the quarter, NIIT Tech reported forex loss of Rs.151 mn v/s Rs.174 mn and Rs.90mn of forex gain in Q1FY13/Q2FY12. Resultant, net profit de-grew by 25.2%qoq and 5.9% yoy to Rs.431mn (INSPL est: Rs512mn). Ex forex losses, adj.net profit increased 44.8% qoq and 58.2% yoy to Rs.582 mn v/s Rs.402mn in Q1FY13 and Rs.368 mn in Q2FY12. Tax rate during the quarter went down to 24.5% from 29.5% in Q1FY13 and 25.9% in Q2FY12. Management estimate tax rate to be in the range of 26-27% for current fiscal.

Key Takeaway

Fresh order intake - highest over past four quarters

- NIIT Tech demonstrated health fresh order intake of $93 mn v/s $83mn in Q1FY13, highest over past four quarters and historical average range. During the quarter, the company added three new clients one in BFSI/ Transport/ IMS, respectively. The fresh order intake also includes $20 mn deal from Morris, which will be largely onsite initially. NIIT Tech's 12M executable order book stood at $253mn (v/s $240mn in Q1FY13), up 5.4% qoq and 9.1% yoy. Given the current order book and deal pipeline, we do not see any material pressure over revenue growth and margin in medium-term. Top5/Top10/20 clients (Top20 64% of overall revenue) demonstrated healthy growth 13.6%/16.4%/13.6% qoq, respectively. During the quarter, the company hired 173 employees (net) v/s 82 in Q1FY13 and 468 in Q2FY12. Net hiring includes 61 employees of Saber Holding Philippines, Development Center acquired during the quarter. LTM attrition rate was at 12.7% (v/s 12.4% in Q1FY13 and 13.4% in Q2FY12). Utilization level during the quarter inched up to 79.8% v/s 79% in Q1FY13 and 82% in Q2FY12. The company's intention to hire large number of fresher during 2HFY13 could resist the utilization at current levels.

Growth Delivered by Key Geography/Vertical/Practice

- Revenue growth in Q2FY13 was from key geography, vertical and practice. Transportation, BFSI and others grew by 11.8% qoq, 3.4% qoq and 35.5% qoq, respectively. However, Manufacturing (down 8.7% qoq) and Government (down 33.4% qoq) delivered negative performance. Despite concerns over pickup in ROOM solution business BFSI vertical posted favourable performance. In term of geography, baring India (down 11.3% qoq), rest all performed well (US +12.4% qoq, APAC +6.5% qoq and EMEA +6.5% qoq). NIIT Tech's key practice ADM (64% of Rev) grew by 11.7% qoq followed by System Integration and BPO to 6.5% each, partially offset by IP Assets and Managed Services down 11.3% and 2.4% qoq, respectively.

Morris, Proyecta, ROOM, and GIS Update

- Morris/Proyecta/ROOM contributed 5.3% (to Rs264mn v/s Rs230mn in Q1FY13), 2.5% (to Rs127 mn v/s Rs142 mn in Q1FY13) and 7.3% ( to Rs366 mn v/s Rs415mn in Q1FY13) to overall revenue. GIS revenue during the quarter was Rs2.29 mn with mere 1% margin (v/s 13% in Q1FY13). Management expect GIS margin to turnaround during 2HFY13. ROOM solution margin was 19% (v/s 23% historical average) due to less traction in new license registration. Morris JV currently had 230 employees, offshore 100 (v/s 92 in Q1FY13) and 123 onsite. Going forward, management intend to increase the offshore employee base in order to expand the margin from JV. Proyecta acquisition integrated well and could see some cross-selling benefits going-ahead. Increase demand for healthcare and risk platform we expect healthy nonliner revenue growth over medium-to-long-term. During the quarter, nonlinear contribution was 21% (v/s 24% in Q1FY13) of overall revenue.

Valuation & Outlook

At the CMP of Rs.286, the stock is trading at 7.8x FY13E and 6.6x FY14E earnings estimates, which is at 22%/34% discount relative to 10.0x Tire-II IT companies average. We like the company's current quarter performance aided by sizeable fresh order intake and strong 12M executable order book. In addition, company is also seeing a good traction in winning large size deals (won large deal from Morris Communication during the quarter). Three to four large deals still remains in pipeline. The reinforcement of sales team & strengthening of service line is also yielding desired result (above industry revenue growth). Further, its investment in future technology like analytics, mobility and platform looks positive. We maintain our BUY rating with the target price of Rs.345 on NIIT Tech.

Source : Equity Bulls

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