Madhuchanda DeyMoneycontrol Research
NIIT Technologies started FY19 on a strong note despite seasonal and client-specific weaknesses in Q1. Outlook for the future is strong and the management doesn’t see any speed breaker in the road ahead. While the stock has substantially outperformed both the Nifty and IT Index in the recent past, the strong outlook and reasonable valuation (15.6 times FY20e earnings) beckons investor attention.
Quarterly snapshot
The company reported total revenue of Rs 824.9 crore in Q1, up 4.6 percent in reported currency and 3.3 percent in constant currency sequentially. The year-on-year revenue growth was 16.4 percent.
During the quarter under review, growth was led by banking and financial service (BFS), insurance as well as travel and transportation that together contributed 72 percent of revenue. Weakness in the other segment was driven by seasonal softness in GIS (geographical information services) and ramp down in Morris Communications (US based media group).
The management feels the worst is behind it with respect to Morris and revenue can only rise from current levels. Despite the weakness in Morris, North America showed positive growth and Europe, Middle East and Africa (EMEA) region was also supportive.
The company reported a 213 basis points quarter-on-quarter decline in operating margin to 15.8 percent owing to a drop in GIS revenue, visa costs and wage hike. Its client base is also diversifying with contribution from top five clients now at 27 percent, down from 33 percent last year.
Strong deal wins
NIIT Technologies bagged 9 deals in Q1: five from the US, three from the EMEA and one from the rest of the world. The deal flow has been on an upward trajectory. The management said winning eight new deals in Q1 is the new normal as against 4 or 5 a year back.
Source: Company
Positive outlook
The outlook for FY19 is extremely encouraging especially for key verticals like BFS (driven by capital markets) and travel and tourism. IATA (International Air Transport Association) expects 2018 to be a good year for travel and tourism with RPK (revenue passenger km) expected to rise 4.5 percent. The management guided to acceleration in momentum and sees no spread breakers ahead.
Source: Company
In view of the improved order outlook and backlog, it expects at least double-digit revenue growth in constant currency in FY19 along with an improvement in operating margin.
Why should investors still look at NIIT Technologies?
NIIT Tech’s has been reducing government business and trying to expand revenue share from its international business. Growth in international geographies is strong. Revenue contribution from Digital has been improving rapidly and stood at 27 percent of sales aided by the acquisition of Incessant Technologies and then RuleTek. Organically too, the segment has been growing well above company average each quarter (11 percent sequential and 53 percent YoY in Q1). On the back of strong order pipeline, experienced senior management team with several new hires and energised sales force, we expect the performance momentum to continue.
Even after a strong stock price performance, we would recommend accumulating NIIT Technologies.
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