Buy NIIT Technologies; target of Rs 600: Religare

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Religare's research report on NIIT Technologies;

NIIT Technologies posted below-expected Q3 revenues of Rs 6.8bn (flat QoQ; RCMLe +6.9%). Operating margins however improved 50bps QoQ on lower S&GA costs, with management guiding to further expansion in Q4. While Q4 revenue commentary is weak, new deal wins (incl. Ofcom) should help drive growth from Q1FY17. Post the recent 15% correction, stock valuations are inexpensive at 9.8x FY17, leading us to upgrade NITEC to BUY (from HOLD). Our Mar’17 TP of Rs 600 remains unchanged upon rollover from Sep’16.

Revenue miss a disappointment: NITEC’s Q3FY16 revenues came in at Rs 6.8bn (vs. Rs 6.9bn) with only 0.1% CC QoQ growth, which management attributed to lower deliverable days and completion of projects during the quarter. In terms of geographies, the US was flat at 0.1%, Europe declined 2.7%, while India grew 11% QoQ. Vertical-wise, BFSI grew 2.8% QoQ while transportation declined 2.6%. Revenue from ADM was flat during the quarter and managed services slid 1.3% QoQ. PAT grew 8.6% QoQ on account of higher other income.

Margin recovery on track: EBIT margins expanded 50bps QoQ to 14.2% due to lower SG&A costs. While revenue outlook for Q4 remains weak, management guided for further margin expansion and weakening INR remains a tailwind. NITEC’s order book stood at US$ 301mn with fresh order intake of US$ 123mn this quarter. Headcount stood at 9,517 (vs. 9592 in Q2).

Valuations cheap; upgrade to BUY: Overall, while Q3FY16 was a soft quarter for NITEC due to unfavourable seasonality, we expect a recovery from Q1 onwards. We pare our FY17/FY18 EPS estimates by 2.4%/4.3% to factor in the revenue miss. However, we think valuations are cheap at 9.8x FY17E, and a FCF yield of 12% (FY17) is beginning to look attractive. While near-term catalysts are missing, the recent correction in the stock and cheap valuations lead us to upgrade NITEC to a BUY. We maintain our Mar’17 TP of Rs 600 set at 10x one-year forward earnings.For all recommendations, click here 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.

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