Published on 16/08/2019 9:04:50 AM | Source: Equirus Securities Ltd

Update On NIIT Technologies Ltd by Equirus Securities

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Decent quarter despite challenges in BFS; retain ADD

NIIT Technologies’ (NITEC) 1QFY20 earnings were decent as adjusted constant currency revenue growth (4% qoq) was better than expected but Ebitm were lower than EE (12.9% vs. 13.3%) led by non-recurring costs related to ex-gratia and M&A. Commentary across verticals was encouraging (except for one large BFS customer which saw budget cuts) while margins profile is sustainable. We adjust estimates to account for decent 1Q performance, guidance and maintain ADD on the stock with a Sep ’20 TP of Rs 1,406 (Rs 1,344 earlier) set at an 17x Sep’20 (18x) Sep’20 TTM EPS of Rs 81.8. Though open offer would anchor shares in the medium term, continued weakness in Bfs customer spends remains a key risk to estimates. Uncertain macro leads to cut in target PER by 1 turn.


Decent quarter: Reported US$ revenues grew 0.4% qoq/11.4% yoy led by growth in Insurance and T&T while CC revenues excluding GIS business were up 4.0% qoq. Fresh order intake increased 3% qoq and 16% yoy to US$ 175mn, taking the executable order book over the next 12 months to US$ 395mn. US/EMEA/RoW saw bookings of US$ 100mn/ US$ 58mn/US$ 17mn. The company added 11 new customers in 1Q (five in US, three each in EMEA and APAC). A 1% change in our FY20E US$ revenue estimates is to account for the slower-than-anticipated start to 1Q and challenges in BFS.


Insurance/EMEA-led quarterly growth: Insurance (29.1% of revenues) grew 4.3% qoq with higher revenues in NITL and 2 logo wins; T&T (28.3% of revenues) grew 3.3% driven by growth in key accounts in the US and 2 logo wins, while BFS (16.4%, +0.8%) growth was driven by EMEA and APAC with 2 logo wins. Others (26.6%) declined 11.0% qoq while 5 new accounts were added. Growth across geo’s was led by EMEA (6.5% qoq); Americas was soft (0.4%) while RoW was weak (10.7%) led by divestiture of GIS business.


18% EBITDAM commentary encouraging: Reported EBITDAM declined 313bps qoq/142bps yoy to 14.4% led by headwinds from non-recurring costs (-240bps), annual wage hike (-240bps) and visa costs (-90bps), partly offset by the Ind AS 116 impact (+90bps) and operational efficiency (+160bps; driven by mix change). Commentary suggests 18% EBITDAM are sustainable and excess margins could be reinvested in the business.


Growth across top customers weighed by client-specific issues: Top-5 customer revenues declined 6.5% qoq led by client-specific issues while top 6-10 saw material deceleration (+0.4% qoq vs. 2.3% in 4q). Non top-10 growth was better qoq (3.8%) but is moderating yoy (6.2% vs. 11%/19.6%/20.1%/31.6% in 4Q/3Q/2Q/1Q19).


Retain ADD: Deal activity continues to be encouraging, portfolio challenges are abating, while management focus seems to be on profitable execution. That said, valuations are pricing in most of these positives and we would prefer selloffs to accumulate shares.


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