INSTITUTIONAL EQUITY RESEARCH
NIIT Technologies (NITEC IN)
Tepid growth, strong operating performance
INDIA | IT SERVICES | Quarterly Update
18 January 2016Page | 4 | PHILLIPCAPITAL INDIA RESEARCH
INSTITUTIONAL EQUITY RESEARCH
Top takeaways from Q3FY16
û Revenue declined 1.3% qoq – below our estimates of 0.3% qoq growth.
ü EBITDA margins at 18.2% were higher than our estimates of 16.4%. Margin expansion of 60bp was due to reduced SG&A (-50bps).
ü BFSI up 1.4% qoq (led by insurance growth of 4.1%); manufacturing grew 11.1% qoq.
û Travel and transport ( 36% of revenue) declined by 3.9% during the quarter due to some large projects getting completed, and delay in accruals of new ordersIndia and APAC grew 9.7% and 3.9% qoq. India’s growth was due to milestone achieved in Q3.
û US and Europe declined 1.3% and 4.1% qoq.
ü PAT at Rs 742mn was higher than our and street estimates because of better operating margins.
û Executable order book at US$ 301mn was flat qoq despite new order intake of US$ 123mn (lower than expected).
Management comments/con-call takeaways
û Flat order book: Management alluded to higher digital revenues and unsigned contracts not reflecting in the order book.
ü Order book quality has improved with greater contribution (~85%) from US and Europe.
û Travel and transport is likely to remain soft in 4Q and will result in soft 4Q and H2FY16.
û Digital contribution at 15% was flat qoq.
Outlook and valuation
NITEC’s strategy for FY16 (to increase its digital presence with clients and up its BFSI presence in the US) is playing out along expected lines. However, soft H2FY16 adds to the concern of lower fresh order booking impacting revenue growth. We believe that lower order booking should be seen in the light of change in business mix and increased contribution from shorter-duration digital projects. Margin expansion is aiding earnings growth and improving order book mix should aid margins. We do not expect it to be a major concern in the turnaround story and believe soft 2HFY16 is just a blip.
Despite the significant revenue miss in Q3, we have only made minor revisions to our FY16/17 estimates (-0.6%/-0.3%). Miss on the revenue front was negated by better-than-expected operational performance. The sharp correction post the disappointing results offers an attractive opportunity to buy the stock at attractive valuations of 10x FY17. We rate NITEC as our top pick in the IT midcap space, with inexpensive valuations and strong growth profile. We maintain our target multiple of 12x average FY17/18 P/E and revise our price target to Rs 640 (from Rs 650), which represents a 30% upside from current levels. We maintain BUY.
BUY (Maintain)
CMP RS 592
TARGET RS 640 (+28%)
COMPANY DATA
O/S SHARES (MN) : / 61MARKET CAP (RSBN) : / 35
MARKET CAP (USDBN) : / 0.5
52 - WK HI/LO (RS) : / 631 / 326
LIQUIDITY 3M (USDMN) : / 6
PAR VALUE (RS) : / 10
SHARE HOLDING PATTERN, %
Sep 15 / Jun 15 / Mar 15PROMOTERS : / 30.8 / 30.9 / 30.9
FII / NRI : / 33.1 / 34.9 / 34.2
FI / MF : / 21.2 / 18.4 / 18.4
NON PRO : / 4.7 / 5.6 / 5.7
PUBLIC & OTHERS : / 11.3 / 11.4 / 12.0
Key Financials
Rs mn / FY16E / FY17E / FY18ENet Sales / 26,810 / 29,197 / 32,552
EBIDTA / 4,749 / 5,010 / 5,648
Net Profit / 2,788 / 3,010 / 3,483
EPS, Rs / 46.0 / 49.7 / 57.5
PER, x / 10.7 / 9.9 / 8.6
EV/EBIDTA, x / 6.0 / 5.2 / 4.1
P/BV, x / 1.1 / 0.9 / 0.7
ROE, % / 17.7 / 16.7 / 16.9
CHANGE IN ESTIMATES
Revised Est. / % RevisionRs mn / FY16E / FY17E / FY16E / FY17E
Revenue($ mn) / 414 / 449 / -3.9% / -4.5%
EBITDA / 4,749 / 5,010 / -0.4% / -1.1%
Core PAT / 2,788 / 3,010 / -0.3% / -1.1%
EPS (Rs) / 46.0 / 49.7 / -0.3% / -1.1%
Vibhor Singhal (+ 9122 6667 9949)
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INSTITUTIONAL EQUITY RESEARCH
Rs mn / Q3FY16 / Q3FY15 / yoygrowth % / Q2FY16 / qoq growth % / vs. expectations
% / Comments
US$ revenues / 103 / 96 / 7.6 / 105 / -1.3 / (1.7) / Miss due to lower transport/travel revenue
Net sales / 6,787 / 5,953 / 14.0 / 6,779 / 0.1 / 0.4 / Higher than estimates due to currency fluctuations
EBITDA / 1,296 / 1,166 / 11.1 / 1,329 / -2.5 / 11.1 / Margins better than expected due to lower SG&A spends
Margins (%) / 19.1% / 19.6% / -49bps / 19.6% / -51bps
Profit after tax / 742 / 482 / 54.0 / 683 / 8.7 / 12.6 / Strong operating performance
EPS / 12.2 / 8.0 / 54.0 / 11.3 / 8.7 / 12.6
Fresh Order book / 301 / 296 / 1.7 / 300 / 0.3 / Flat since four quarter due to change in nature of order book
Executable Order book / 123 / 109 / 12.8 / 80 / 53.8
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Quarterly performance
Rs mn / 3QFY15 / 4QFY15 / 1QFY16 / 2QFY16 / 3QFY16US$ revenues / 96 / 98 / 101 / 105 / 103
QoQ growth % / -1.2% / 2.1% / 2.8% / 4.3% / -1.3%
Net sales / 5,953 / 6,112 / 6,411 / 6,779 / 6,787
QoQ growth % / 1.2% / 2.7% / 4.9% / 5.7% / 0.1%
YoY growth % / 1% / 4% / 11% / 15% / 14%
Cost of revenues / 3,925 / 3,933 / 4,080 / 4,256 / 4,256
SGA & other exp / 1,166 / 1,182 / 1,288 / 1,329 / 1,296
EBITDA / 862 / 997 / 1,043 / 1,194 / 1,235
QoQ growth % / 4.9% / 15.7% / 4.6% / 14.5% / 3.4%
YoY growth % / -10% / 12% / 35% / 45% / 43%
Margins (%) / 14.5% / 16.3% / 16.3% / 17.6% / 18.2%
Depreciation / 231 / 242 / 276 / 265 / 273
EBIT / 631 / 755 / 767 / 929 / 962
Margins (%) / 10.6% / 12.4% / 12.0% / 13.7% / 14.2%
Other income / 53 / -866 / 79 / 13 / 39
Pre-tax profit / 684 / -111 / 846 / 942 / 1,001
Tax provided / 178 / 47 / 219 / 216 / 212
Profit after tax / 506 / -158 / 627 / 726 / 789
QoQ growth % / 23.4% / -131.2% / -496.8% / 15.8% / 8.7%
YoY growth % / -7% / -124% / 36% / 77% / 56%
Margins (%) / 8.5% / -2.6% / 9.8% / 10.7% / 11.6%
Minority interest / 24 / 18 / 40 / 43 / 47
PAT incl MI / 482 / -176 / 587 / 683 / 742
EPS, Rs / 8.0 / -2.9 / 9.7 / 11.3 / 12.2
Source: Company, PhillipCapital India Research
Segmental performance
QoQ growth rate % / 3QFY15 / 4QFY15 / 1QFY16 / 2QFY16 / 3QFY16Service Lines
ADM / -5.9% / 0.4% / 9.7% / 8.8% / 0.2%
Managed Services / -1.2% / 2.1% / -8.7% / 3.9% / -1.3%
IP based revenues / -1.2% / 2.1% / -8.7% / 16.9% / -12.2%
SI & PI / 73.0% / 31.3% / -8.7% / -48.1% / -1.3%
BPO / -1.2% / -14.9% / 2.8% / 3.9% / -1.3%
Verticals
BFSI / -1.2% / 2.1% / 12.1% / 6.8% / 1.4%
BFS / -1.2% / -4.3% / 9.6% / 3.9% / 4.9%
Insurance / -1.2% / 8.1% / 14.2% / 9.1% / -1.3%
Transport, Travel & Logistics / -5.9% / -3.0% / 0.1% / 3.9% / -3.9%
Manufacturing and Retail / -1.2% / 16.7% / -22.9% / 38.5% / 11.1%
Others / -17.6% / 2.1% / 9.6% / -0.8% / 0.0%
Government / 64.7% / 22.5% / -14.4% / -37.7% / -1.3%
Geography
Americas / -1.2% / 2.1% / 5.1% / 6.2% / -1.3%
Europe (EMEA) / -9.0% / 2.1% / 2.8% / 3.9% / -4.1%
RoW / 15.3% / 2.1% / -2.1% / -1.3% / 3.9%
Contract Type
Top 5 / -1.2% / 2.1% / 5.8% / -5.0% / 1.8%
Top 10 / -1.2% / -0.1% / 2.8% / -2.9% / 3.3%
Non Top 10 / -1.2% / 4.0% / 2.8% / 9.7% / -4.7%
Source: Company, PhillipCapital India Research
US$ revenue vs. qoq growth INR revenue vs. qoq growth
Top-5 client revenue EBITDA margin vs. SG&A as a % of sales
Employee addition Utilisation and attrition
Source: Company, PhillipCapital India Research
Financials
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Income Statement
Y/E Mar, Rs mn / FY15 / FY16E / FY17E / FY18ENet sales / 23,724 / 26,810 / 29,197 / 32,552
Growth, % / 2.9 / 13.0 / 8.9 / 11.5
Employee expenses / 0 / 0 / 0 / 0
Other Operating expenses / -20,268 / -22,062 / -24,187 / -26,904
EBITDA (Core) / 3,456 / 4,749 / 5,010 / 5,648
Growth, % / -1.7 / 37.4 / 5.5 / 12.7
Margin, % / 14.6 / 17.7 / 17.2 / 17.4
Depreciation / -916 / -1,102 / -1,078 / -1,122
EBIT / 2,540 / 3,647 / 3,931 / 4,526
Growth, % / (12.3) / 43.6 / 7.8 / 15.1
Margin, % / 10.7 / 13.6 / 13.5 / 13.9
Interest paid / 0 / 0 / 0 / 0
Other Non-Operating Income / -781 / 241 / 319 / 393
Pre-tax profit / 1,759 / 3,888 / 4,250 / 4,919
Tax provided / -541 / -922 / -1,148 / -1,328
Profit after tax / 1,218 / 2,966 / 3,103 / 3,591
Others (Minorities, Associates) / -79 / -179 / -93 / -108
Net Profit / 1,139 / 2,788 / 3,010 / 3,483
Growth, % / (50.6) / 144.8 / 8.0 / 15.7
Net Profit (adjusted) / 1,139 / 2,788 / 3,010 / 3,483
Wtd avg shares (m) / 61 / 61 / 61 / 61
FY15 / FY16E / FY17E / FY18E
US$ Revenue ($ mn) / 387.9 / 414.1 / 449.2 / 500.8
Growth, % / 1.1 / 6.7 / 8.5 / 11.5
Re / US$ (rate) / 61.2 / 64.8 / 65.0 / 65.0
Balance Sheet
Y/E Mar, Rs mn / FY15 / FY16E / FY17E / FY18ECash & bank / 3,185 / 1,170 / 3,792 / 6,970
Marketable securities at cost / 0 / 0 / 0 / 0
Debtors / 6,060 / 6,684 / 7,199 / 8,027
Inventory / 52 / 52 / 52 / 52
Other current assets / 1,717 / 1,960 / 2,052 / 2,234
Total current assets / 12,410 / 11,527 / 14,990 / 19,456
Investments / 551 / 2,301 / 1,551 / 801
Net fixed assets / 6,421 / 7,475 / 7,596 / 7,274
Non-current assets / 0 / 0 / 0 / 0
Total assets / 19,768 / 21,671 / 24,505 / 27,898
Total current liabilities / 5,921 / 5,198 / 5,699 / 6,339
Non-current liabilities / 84 / 79 / 90 / 103
Total liabilities / 6,005 / 5,277 / 5,789 / 6,442
Paid-up capital / 610 / 611 / 611 / 611
Reserves & surplus / 12,964 / 15,163 / 17,393 / 20,025
Minorities / 189 / 620 / 713 / 820
Shareholders’ equity / 13,763 / 16,394 / 18,716 / 21,456
Total equity & liabilities / 19,768 / 21,671 / 24,505 / 27,898
Source: Company, PhillipCapital India Research Estimates
Cash Flow
Pre-tax profit / 1,759 / 3,888 / 4,250 / 4,919
Depreciation / 916 / 1,102 / 1,078 / 1,122
Chg in working capital / 1,407 / -1,855 / -341 / -647
Total tax paid / -704 / -904 / -1,148 / -1,328
Other operating activities / 0 / 0 / 0 / 0
Cash flow from operating activities / 3,378 / 2,232 / 3,840 / 4,066
Capital expenditure / -1,517 / -2,156 / -1,200 / -800
Chg in investments / 0 / -1,750 / 750 / 750
Chg in marketable securities / 0 / 0 / 0 / 0
Other investing activities / 0 / 0 / 0 / 0
Cash flow from investing activities / -1,517 / -3,906 / -450 / -50
Free cash flow / 1,861 / -1,674 / 3,390 / 4,016
Equity raised/(repaid) / 3 / 1 / 0 / 0
Debt raised/(repaid) / -5 / -5 / 11 / 13
Dividend (incl. tax) / -674 / -745 / -780 / -780
Other financing activities / -133 / 156 / 0 / -71
Cash flow from financing activities / -888 / -341 / -769 / -838
Net chg in cash / 973 / -2,015 / 2,621 / 3,178
Valuation Ratios
FY15 / FY16E / FY17E / FY18EPer Share data
EPS (INR) / 18.8 / 46.0 / 49.7 / 57.5
Growth, % / (50.8) / 144.6 / 8.0 / 15.7
Book NAV/share (INR) / 224.0 / 260.2 / 297.1 / 340.5
CFPS (INR) / 68.6 / 32.8 / 58.1 / 60.6
DPS (INR) / 9.5 / 10.5 / 11.0 / 11.0
Return ratios
Return on assets (%) / 6.4 / 14.3 / 13.4 / 13.7
Return on equity (%) / 8.4 / 17.7 / 16.7 / 16.9
Return on capital employed (%) / 8.1 / 17.9 / 16.3 / 16.6
Turnover ratios
Asset turnover (x) / 2.1 / 2.1 / 2.1 / 2.2
Sales/Total assets (x) / 1.3 / 1.3 / 1.3 / 1.2
Sales/Net FA (x) / 3.9 / 3.9 / 3.9 / 4.4
Working capital/Sales (x) / 0.2 / 0.2 / 0.2 / 0.2
Receivable days / 93.2 / 91.0 / 90.0 / 90.0
Liquidity ratios
Current ratio (x) / 2.8 / 3.0 / 3.5 / 4.1
Quick ratio (x) / 2.8 / 2.9 / 3.5 / 4.1
Dividend cover (x) / 2.0 / 4.4 / 4.5 / 5.2
Total debt/Equity (%) / 0.6 / 0.5 / 0.5 / 0.5
Net debt/Equity (%) / (22.8) / (6.9) / (20.6) / (33.3)
Valuation
PER (x) / 26.2 / 10.7 / 9.9 / 8.6
PEG (x) - y-o-y growth / (0.5) / 0.1 / 1.2 / 0.5
Price/Book (x) / 2.2 / 1.9 / 1.7 / 1.4
Yield (%) / 1.9 / 2.1 / 2.2 / 2.2
EV/Net sales (x) / 1.1 / 1.1 / 0.9 / 0.7
EV/EBITDA (x) / 7.7 / 6.0 / 5.2 / 4.1
EV/EBIT (x) / 10.5 / 7.9 / 6.6 / 5.1
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