Buy NIIT Technologies; target Rs 329: SPA Research

SPA Research is bullish on NIIT Technologies and has recommended buy rating on the stock with a target price of Rs 329 in its January 16, 2013 research report.

"NIIT Tech reported a slightly higher than expected revenue at INR 5.14bn (SPAe: 5.09bn) on the back of higher govt. based business contribution. However its margins declined by 116bps to 15.8% due to cost overruns in GIS business and Morris transformation deal. PAT reported an increase by 30% QoQ on the back of higher other income on account of revaluation gains. We consider the lower volume growth as 1-2 quarter phenomenon due to natural catastrophes taking a toll on the NITL business and thus expect a rebound by H1FY14. Hence, we continue to recommend BUY with a 15-month Target Price of INR 329 based on 7.3x FY14E earnings. NIIT Tech reported 2.9% sequential revenue growth to INR 5.14bn. The constant currency growth was 4.4% partially offset by currency movement. Government's CCTNS and commodity board projects in India laid the groundwork for the growth through System Implementation and Package Implementation services. Europe (largest revenue contributor) also performed well with 5.7% volume growth with US flat at 1%. Operating margins at 15.8% are the lowest ever for the company barring Q2FY12 which was affected by Morris transformational costs. The margins declined by 116bps QoQ because of (i) Negative margins of -7% in GIS due to cost overruns in APDRP (ii) NITL's slower growth led by natural calamity (hurricane Sandy) and (iii) Morris transformation cost for new project. We expect margins to improve slightly in Q4, it being a traditionally strong quarter for GIS and also wearing off the effect of Sandy though partially offset by higher hardware spend for the new govt. project. The company added 4 new clients two in APAC and 1 each in India and Europe. It saw deal intake worth $83mn taking the 12-month executable order book to $242mn ($252mn in constant currency). Q3FY13 delta growth was fueled mainly by India (up 23.4% QoQ) driven business through govt. (64.6%) projects of CCTNS (revenue contribution of INR 266mn) and Commodity (tobacco) board for providing managed services (12.2%) and SI & PI (14.3%). IP business declined by -7.4% due to softness in NITL affecting BFS vertical. Insurance business was also affected as one of NIIT's largest customers is undergoing massive restructuring in US. Outlook and Recommendation: NIIT's high margin non-linear business continues to contribute 21% to the topline though at lower margins. We expect a sharp recovery in this business in H1FY14 on the back of (i) Morris transformation completion, thus moving the business to transaction pricing (ii) Commodity board transaction pricing business coming onboard (iii) Wearing off Sandy effect improving NITL's growth and margins which have been traditionally at 25%+ (iv) Cost over-runs in APDRP done; along with Q4 being a seasonally strong quarter for GIS and (v) Strong deal pipeline with 3-4 large deals on the table. Factoring this we not only expect revenue CAGR of 19% over FY12-14E but also expect the company to revisit its 18% operating margin levels by H1FY14 resulting in an EPS CAGR of 16% over FY12-14E. Thus, we continue to recommend BUY with a 15-month TP of INR 329 at 7.3x FY14E earnings," says SPA Research report. Bodies Corporate holding more than 50% in Indian cos Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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