NIIT Technologies - 2Q disappoints on revenues and order book - Religare

NITEC's Q2FY14 revenues de-grew 1% QoQ in US$ terms to 97.3mn and EBIT margins improved 74bps QoQ to 12.4%. Growth disappointment was driven by de-growth in India, while order bookings also remained lackluster. Management indicated an improving margin/growth profile through the year, however we expect growth for FY14 to remain below industry. While the stock is cheap (7x FY14 P/E), a more consistent execution and recovery in growth in needed for further re-rating. Retain HOLD with a TP of Rs 300.

- Revenues and order book disappoint: Revenues came in below expectations at Rs 5.8bn, up 8.4% QoQ, below expectations. Growth was driven by US and Europe, but India government business. New orders came in weak at US$ 84mn, taking the 12-m executable order book to US$ 248mn, down from US$ 263mn in 1Q. Net profit stood at Rs 624mn (up 45% YoY), better than estimates on the higher other income.

- Margins recovery muted, DSO days remain high: EBIT margins recovered by 74bps QoQ to 12.4% vs. our expectations of a 12.7%, despite INR tailwind. Margin performance is disappointing considering 300bps QoQ utilization improvement, better revenue mix and strong INR tailwinds. Further DSO days increased QoQ and remain high at 100 days. While the management is indicating a pick-up but we need to see consistent execution and improvement in collection in India business before turning constructive.

- Valuations and view: NITEC currently trades at 7x FY14 P/E, at the midpoint of the current mid-cap IT trading range (5-10x). We value the stock at 7x to arrive at our Dec'14 price target of Rs 300. We retain our FY14 estimates but cut our FY15 EPS by 3%. Overall US$ growth assumptions (US$ Rev 2-yr CAGR at 8%) for NITEC remain at the lower end of our coverage and valuations re-rating from current levels requires pick-up in growth and margins.

Source : Equity Bulls

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