MOSL: NIIT TECHNOLOGIES (Neutral)-Revenue and deals momentum intact
NIIT TECHNOLOGIES: Revenue and deals momentum intact
(NITEC IN, Mkt Cap USD1.2b, CMP INR1354, TP INR1420, 5% Upside, Neutral)
- Marginally better organic revenue growth: 1QFY20 organic revenue growth from continuing operations (excluding GIS) stood at 4% QoQ CC (our estimate: +3%). This was the 10th consecutive quarter of an uptick in deals TCV - at USD175m (v/s USD170m in 4QFY19 and USD151m in 1QFY19). EBIT margin shrank 150bp QoQ (+70bp YoY) to 12.8% (100bp miss), largely as wage hikes become fully effective for NITEC in the first quarter. Adj. PAT grew 22% YoY (-8% QoQ) to INR1.0b (in-line).
- Broad-based growth; BFS relatively soft on spending cut by one top-5 client: Digital revenue grew 12% QoQ (+46% YoY), accounting for 34% of revenue. In terms of verticals, growth (QoQ CC) was broad-based, with Transportation up 5.9%, Insurance up 6.6%, BFS up 2.8%, and others up 1.5%. BFS was relatively soft due to spending cuts in one of the top-5 clients in the Capital Markets segment. NITEC has not lost any wallet share within the client. There are no other client-specific issues within the top-20 customers as of now.
- Profitability comment drives our cautious estimate: NITEC retained its outlook for an 18% EBITDA margin, despite ~90bp positive impact from Ind-AS 116 accounting changes. The company will take a call with respect to reinvestment of the benefits, in which case the EBIT margin will be lower. This drives ~40/25bp cut in our EBIT margin estimate for FY20/21, which now stands at 14%/14.2%.
- Valuation view: We expect revenue/EPS CAGR of 14%/16% over FY19-21. NITEC trades at 17.7/15.3x FY20E/21E earnings. Our TP of INR1,420 discounts forward earnings by 16x and implies a 5% upside. While we remain Neutral, we would treat any correction as an entry opportunity.
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.
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