MOSL: NIIT TECHNOLOGIES (Neutral)-In-line performance-strong commentary on deals
​NIIT Technologies: In-line performance; strong commentary on deals
(NITEC IN, Mkt Cap USD0.5b, CMP INR614, TP INR600, 2% Downside, Neutral)
- Marginal revenue beat amid healthy Digital growth: NITEC’s 2QFY18 CC revenue grew ~4.0% QoQ, and adjusted for forex gains on the top line, grew 3.6% QoQ, marginally ahead of our estimate of 3.6%. The integration of RuleTek was one of the contributing factors to overall and North America growth (~1pp contribution). This also fed into 14% QoQ growth in Digital segment, which now contributes 23% of overall business.
- No surprise on profitability barring lower tax: GPM of 35% (-40bp QoQ), SGA of 18.9%. (-90bp) and consequently EBITDA of 16.1% (+50bp) were all in line – driving SGA-led margin uptick in 2QFY18. PAT increased 31% QoQ to INR671m (est. of INR643m), led by a 21.8% tax rate in 2Q v/s 34.7% in 1Q.
- Strong commentary on deals, but soft on couple of segments: NITEC expects to close at least two large deals in 3Q, defined as TCV of USD20m+. However, softness in Government business in GIS and also in Morris JV due to its publishing business sale to Gatehouse implies marginal growth in 3Q despite deals. As the drag from transportation client nears bottom, the new headwinds may drag growth recovery in the foreseeable future.
- Valuation and view: Our revenue and earnings estimates for FY18-20 are revised upward by 2-3% on the back of a couple of quarters of sanguine revenue performance and positive commentary on deal wins. However, with fresh headwinds to address in the near future, we continue to await evident signs of revival in growth to high-single-digits. NITEC trades at 14x/12x FY18E/19E earnings. Our price target of INR600 discounts forward earnings by 12x (from 11x earlier on stabilizing revenue trajectory). Maintain Neutral.
NIIT Technologies Ltd is an India-based Information technology (IT) solutions company. The Company is engaged in application development and maintenance, managed services, cloud computing and business process outsourcing to organizations in several sectors such as banking and financial services, insurance, travel and transportation and logistics, manufacturing and distribution and government. The Company is combined with capabilities in data and analytics, automation, cloud and digital, is enabling to drive business transformation. The Company offers Tron intelligent automation, digital process transformation, application services, business process services, cyber security, among others. It serves industries such as travel and transportation, insurance, banking and financial services and enterprise services.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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