MOSL: NIIT TECHNOLOGIES (Neutral)-Strong performance despite seasonal weakness and client issues

NIIT Technologies: Strong performance despite seasonal weakness and client issues

(NITEC IN, Mkt Cap USD1.0b, CMP INR1121, TP INR1100, 2% Downside, Neutral)

• Strong growth despite issues: NITEC’s revenue grew 3.3% QoQ CC in 1QFY19, exceeding our estimate of 1.1% growth, as GIS seasonality and ramp-down in Morris were more than offset by strength in other verticals. EBITDA margin shrank 220bp QoQ to 15.8% (in-line) due to wage hikes, visa expenses and a decline in GIS. PAT fell 0.3% QoQ – a 10% beat led by better-than-expected revenue growth and higher other income.
• Broad-based traction encouraging: Decline in GIS and Morris was reflected in de-growth of 5% in ‘Others’. However, growth in the other three verticals was sanguine: 8.8% QoQ in BFS, 10% QoQ in Insurance and 7.7% QoQ in Travel. Similarly, while growth in top accounts was bogged down by Morris, growth and outlook remained robust for the rest of the clients.
• Expect improvement going forward: NITEC expects both growth and profitability to improve – this confidence stems out of: (i) broad-based traction, (ii) sustained deal flow (won USD151m TCV in 1QFY19 v/s USD110m a year ago), (iii) strengthening of leadership across verticals from Tier-I peers, (iv) traction in newer capabilities like cloud and data automation, (v) higher growth in Digital (53% YoY growth; now 27% of total revenue) and (vi) the worst in Morris now behind.