NIIT Technologies - Services business refocus to aid margins... - ICICIdirect

NIIT Tech's (NTL) Q3FY14 earnings gave insights on its execution strategy to achieve the aspirational $1 billion revenue goal in the next five years. The company seems to have streamlined its corporate agenda and has identified key verticals, geographies and services to achieve sustainable above-industry-average growth. NTL will focus on 1) scaling up the US business, 2) becoming a preferred vendor in its largest verticals, BFSI and travel, 3) driving and consolidating its presence in the IMS space and 4) large deal focus, similar to $300 million won in Q3. However, 90% of this win was renewal while 10% was new-scope. NTL needs several such new-scope deals to improve its order intake run-rate given government business defocus may pressurise order book growth in FY15E.

Result summary

Q3FY14 dollar revenues declined 0.8% QoQ to $94.8 million and were below our $95.7 million (+0.2%) estimate led by lower hardware (PFR) revenues while services business grew 3.6% in constant currency. Rupee revenues were flat QoQ (Rs. 587.3 crore) and below our 1.3% QoQ (Rs. 595 crore) growth estimate. EBITDA margins came in at 16.3% (+121 bps QoQ), above our 15.4% estimate, led by a mix shift towards services revenues. Reported PAT of Rs. 53.1 crore was below our Rs. 54.4 crore estimate led by lower revenue and other income loss vs. profit estimate.

NTM executable order backlog rises 6.9% QoQ

Fresh order intake of $377 million (US: $320 million, EMEA: $43 million, RoW: $14 million) in Q3 was led by the $300 million renewal and vendor consolidation contract from a top BFSI client in the US. This takes the next 12 month executable order backlog to $265 million (vs. $248 million in Q2). However, normalised Q3 fresh order intake stands at $107 million as 90% of it was renewal while only 10% was new-scope.

Services business refocus & likely improving margin profile dictates BUY

We estimate NIIT Tech will report revenue, EPS CAGR of 15.1% each over FY13-15E (average 16.2% EBITDA margins in FY14-15E), vs. 16.5%, 9.5% reported during FY08-13 (average 18.4% margins). The commentary suggests EBITDA margins could revert to their mean (staggered ~100 bps improvement every year starting FY15E) led by improving revenue mix. Government business defocus, likely improving margin profile & execution and ability to win large deals lead to a modest target multiple raise to 8.7x (7x earlier) and target price revision to Rs. 415.

Source : Equity Bulls

Keywords