Buy NIIT Technologies; target of Rs 875: Prabhudas Lilladher

Prabhudas Lilladher's research report on NIIT Technologies

NIIT Tech’s Q3FY18 results beat our estimates on Revenues, EBIDTA margin and PAT. Revenues at USD115.2mn were up 2% QoQ above our estimates (USD113.2mn). EBIDTA margin at 17.1% was up 90bps QoQ was above our estimate (PLe: 16.6%). Adjusted EBIDTA Margin (excluding Forex hedge gains) stood at 16.1% for 3QFY18 up 140bps QoQ. NIIT Tech has elevated Mr Sudhir Singh as the CEO of the company with immediate effect. Mr Arvind Thakur has been elevated to the role of Vice Chairman and MD. NIIT Tech has delivered the third consecutive quarter of revenue beat which is positive. Management cited winning three large deals during the quarter competing against Tier I IT peers. NIIT tech cited that it remains positive on winning another two large deals in 4QFY18.  Management guided for strong revenue growth in 4QFY18 as well as margin expansion. Aided by strong deal momentum, NIIT Tech anticipates scope for double digit revenue growth for FY19E (Despite headwinds from ramp down in Morris). NIIT tech also cited that there have been several new additions to front end sales team and Digital practice.   NIIT Tech’s organic USD revenue growth was tepid for the past four consecutive years (FY13-FY17). However, steady execution over past three consecutive quarters raises optimism. Post 3Q revenue beat, we upgrade NIIT Tech USD revenues to grow by 10.4/11.5% for FY18/FY19E (vs 9/8.5% modelled earlier). Organic USD revenue growth for FY18 would be at 9% and rest owing to RuleTek acquisition. Hence, FY18 marks a strong turnaround in revenue growth. Management remained confident on revenue growth momentum for FY19E as well led by new deal wins. We are optimistic on the expansion in order book executable over next twelve months which stood at USD329mn up 5.8% YoY.  Led by 3Q margin beat, we build EBIDTA margins at 16.8/16.3% for FY18/FY19E (vs 16.5/16% modelled earlier). We upgrade FY18/FY19/FY20E EPS by 5/5/7% for FY18/FY19E/FY20E. Our EPS estimates are at Rs45/52.5/62/sh for FY18/FY19E/FY20E. NIIT Tech trades at 11.8x FY20E EPS which is cheaper than midcap peers (Mindtree/Hexaware trading at 16/17x FY20E EPS respectively). Strong revenue momentum and steady margin execution coupled with reasonable valuations leads us to remain positive.

Outlook Revise TP upwards by 30% to Rs875/sh (14x FY20E EPS vs 12.5x Sep19E EPS earlier). Upgrade to BUY (vs Accumulate earlier). Our P/E upgrade is driven steady revenue beats, margin execution and strong deal signing.

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