Buy NIIT Technologies; target Rs 329: SPA Research

SPA Research is bullish on NIIT Technologies (NTL) and has recommended buy rating on the stock with a target price of Rs 329 in its October 17, 2012 research report.

"NIIT Technologies (NTL) reported a strong Q2FY13 revenue growth at 6.5% (INR 5bn) on the back of 3% increase in volume. Operating margins also improved by 97bps to 17%. The company added 3 new clients and had an order intake of $93mn taking the 12-month executable order book to record levels of $253mn. The management remains hopeful to exceed Nassscom’s revenue growth guidance for FY13. Based on its Q2 performance and strong order pipeline we continue to recommend BUY with an 18-month target price of INR 329.

Revenue Growth – Volume Driven
NTL’s Q2FY13 revenues at INR 5bn (SPAe: INR 4.9bn) grew 6.5% sequentially (34.8% YoY). This growth was driven by 3% volume growth (6% US and 3.5% Europe) and 3.5% currency (INR) depreciation. The company added 3 new clients (1 each in BFSI, Travel and Others). The order intake of $93mn was highest in the last four quarters and took the 12-month executable order book to record levels of $253mn.

Margin – Improvement
The operating margins improved by 97bps to 17% on the back of INR depreciation by 3.8% partially offset by decrease in contribution from non-linear businesses. GIS (INR 229mn) degrew 4% due to seasonality and its margins fell from 15% to 1% in Q2FY13 as was the case with ROOM solutions.

Deal Details
The company extended its relationship with Sabre by acquiring its Manila based development center to support various platforms of the company and other NTL clients from this low costs BPO destination. Off the $93mn, $20mn came as additional work from Morris JV to build digital platform on existing business terms.

Growth Avenues
In Q2 70% of delta revenue growth came from US (12.4% QoQ) and 75% from Travel (11.8% QoQ). ADM recorded 11.7% QoQ growth while India (-11.3%), IP (-11.3%), Manufacturing (-8.7%) and Govt. (-33.4%) dragged the overall performance.

Guidance
Management is hopeful of beating the NASSCOM revenue growth guidance of 11%-14% for FY13. To achieve the same the company has to grow at 1.5%-5% CQGR in H2FY13. With Q3 being a seasonally slow quarter, we expect the company to be at the lower end of the FY13 growth guidance.

Outlook and Recommendation
With strong deal pipeline from Travel vertical but headwinds from BFSI and Manufacturing vertical we expect a revenue CAGR of 10.3% over FY12-14E. We expect operating margins of 16%/18.4% in FY13E/14E due to greater traction from platform and non-linear business, though currency could be a concern. Factoring in all this we estimate an 18.9% EPS CAGR over FY12-14E thus recommending BUY on the stock with an 18-month TP of INR 329 at 7x FY14E earnings," says SPA Research report.

Non-Institutions holding more than 90% in Indian cos

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