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Last Updated : Jul 24, 2019 05:13 PM IST | Source: Moneycontrol.com

NIIT Technologies – Strong quarter and good outlook, buy on decline

We advise investors to wait for any weakness to gradually get into the stock.


NIIT Technologies started 2019-20 on a strong note with encouraging revenue momentum, strong deal wins, a healthy order backlog and the management’s confident commentary on robust, predictable and profitable growth in quarters ahead.

The business outlook remains strong and the management stays committed under the new private equity promoter Baring. The open offer had limited the downside for the stock in a rather turbulent market in recent times, and the stock has been an outperformer in the market and in the sector.

Albeit the best in class in the midcap IT space, the valuation at 15x FY21e earnings leaves little room for error. Investors should look to add the stock on any decline.

Close

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Key positives

NIIT Tech delivered a satisfactory revenue performance in Q1 FY20 - revenue in Indian rupee grew 3 percent sequentially and 4 percent in constant currency. The constant currency growth factors in divestment of the India GIS business and acquisition of Whishworks IT Consulting (15 days of revenue impact of Rs 10.8 crore).

In terms of verticals, insurance, and travel and tourism showed healthy growth in April-June.

Notwithstanding the margin dip in the quarter, the company is confident of maintaining 18 percent operating margin, thanks also to the accounting change (IND AS 116). Any margin gain beyond that might be ploughed back into the business.

Order inflow momentum remains strong, with the company bagging orders worth $175 million in the quarter under review. The US contributed $100 million, EMEA (Europe, Middle East and Africa) $58 million and ROW (rest of the world) $17 million. A total of 11 new customers got added: 5 in the US, 4 in EMEA and 2 in ROW.

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Source: Company

The unexecuted order book at the end of the June quarter stood at $395 million.

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Source:Company

The share of digital revenue stood at 34 percent at the end of Q1 and showed a YoY growth of 46 percent and sequential jump of 12 percent.

The management alluded to no overt macro concern impacting business and added that in the UK market, its focus verticals – travel, and transportation and specialised insurance – have not got impacted by Brexit.

The ownership change has not impacted employee morale and the attrition rate remains range-bound at 12.9 percent.

Key negatives

There was a decline in a key BFSI client – one of the top 5 – whose IT spend has declined. This has impacted revenue across top client buckets. The management, however, clarified that it has not lost wallet share and hopes to recoup the business should the client’s business comes back.

Margin from continued operations stood at 17.1 percent. The contraction in margin was due to 240 bps of wage hike (blended wage hike of 4.9 percent) and 90 bps impact from visa cost. This was partially offset by 90 bps expansion in margin due to change in accounting. During the quarter, the company also incurred Rs 23.5 crore non-recurring expense, which consists of professional expenses related to GIS and Whishworks. There was also one-time ex-gratia payment to employees.

Outlook

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NIIT has strategic clarity in terms of its focused verticals and geography. The new promoter Barings is likely to drive growth. The management has seen no adverse reaction from clients or employees so far due to the ownership change. With the open offer price at Rs 1,394 limiting the downside, we advise investors to wait for any weakness to gradually get into the stock.

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First Published on Jul 24, 2019 01:03 pm
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