Hold NIIT Tech; target of Rs 350: ICICIdirect

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ICICIdirect.com`s research report on NIIT Technologies“NIIT Technologies reported Q2FY15 earnings, which were marginally above our estimates primarily led by growth in the travel vertical. Rupee revenues grew 1.9% QoQ (Rs 588.3 crore) and were in line with our estimate of 1.9% QoQ growth (Rs 588.3 crore). EBITDA margins came in at 14% (60 bps QoQ improvement), above our 13.8% estimate led by better operating metrics (offshoring, utilisation) and hedge gains. Reported PAT of Rs 40 crore came in below our Rs 45.2 crore estimate led by higher depreciation and lower other income.” “We expect NTL to deliver FY14-16E dollar revenue CAGR of 7.5%, below its FY09-14 average of 12.3%. We are revising our FY15 estimates lower and now expect dollar revenues to grow 5% vs. 6% earlier led by tepid execution, client ramp-down impact and despite 20% YoY growth in the next 12 month executable order book to $298 million ($248 million as of Q2FY14), rising contribution from AAI contract and acceleration in the IMS business. The management alluded at softness in H2 to slower recovery in insurance and the US. Recall, Q1 saw ramp-downs in two BFSI clients (one top 5 likely) in the US. NTL now expects insurance recovery to shift to FY16E while steps to address US weakness may yield results after two quarters. Notably, FY15E may now be a washout year vs. growth expected earlier as client ramp-downs in Q1, declining purchasefor- resale (hardware) revenues continue to weigh and may offset the rise in services business while growth could only return in FY16E.” “EBITDA margins increased 55 bps QoQ to 14% marginally above our 40 bps and 13.8% estimate led by better operating metrics (offshoring, utilisation), currency tailwinds and hedge gains. Recall, FY14 margins declined 41 bps YoY primarily led by 1) higher contribution from lower margin purchase-for-resale (PFR) hardware business, 2) weakness in the insurance business and 3) moderating revenue growth. Note, the management continues to guide an FY15E exit rate of 16%. We expect FY15 margins to decline 35 bps to 14.9%, led by the impact of client ramp-downs, large deal transition cost partially offset by lower hardware revenue contribution, offshoring and pyramid correction. We estimate NTL to report revenue, earnings CAGR of 7%, 6% over FY14-16E (average 15.5% EBITDA margins in FY15-16E), vs. 19%, 15% reported in FY09-14 (average 17.8%), respectively, led by weak execution. Though NTL is reprioritising its sales, execution efforts under the COO, perceptible outcome is a couple of quarters away and dictates our HOLD recommendation. We continue to value NTL at 8x its FY16E EPS of Rs 42.5 to arrive at a target price of Rs 350,” says ICICIdirect.com research report.

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