NIIT Technologies: IT’s on a rebound

Healthy order wins and promising digital business should pay off

Investors looking for a long-term value bet in the technology space can consider buying the stock of NIIT Technologies. From our initial ‘buy’ recommendation in June last year, the stock has corrected 20 per cent due to drop in revenue in its travel and insurance verticals. In both cases, the issues were client-specific.

But it looks like the worst is behind NIIT Tech. The company has consistently won orders worth over $100 million in each of the last four quarters. In the December quarter, executable orders over one year stood at $311 million (up from $309 million in the last quarter). The constant currency revenue growth was 0.6 per cent sequentially.

The management has guided for a rebound in growth in the March 2017 quarter as the recently won deals are executed. At the current market price, the stock trades at an inexpensive valuation of nine times its expected earnings for 2017-18. In the last one year, it has traded in the valuation band of 10-11 times. Investors, however, should note the fact that, though a value buy at the current price, the stock is a risky investment, given the volatile market conditions of the segments and geographies the company operates in. All small and mid-cap IT players, including Persistent (valuation of 13 times on expected earnings of 2017-18) and MindTree (13.8 times), have similar risk. In NIIT Tech’s case, there is comfort on valuation. It can do well when the market revives.

Business outlook

Over the last two quarters, NIIT Tech’s business has faced several challenges. One, cut in IT spends of a large client in the travel space; two, decline in orders from the UK market, and three, adverse movements in currency. In the December quarter, the company’s revenue from its Europe and West Asia businesses grew by a strong 4 per cent in constant currency terms, but depreciation in pound as also euro pulled down growth in reported terms. The bright spot was the strong order book growth. The company won new orders worth $101 million — $38 million from the US; $51 million from Europe and West Asia and the balance from Asia.

The year 2017-18 is likely to be better. NIIT Tech’s expertise in niche technologies — IP platforms and automation — should help it get a piece of the client discretionary spends. The insurance business may face uncertain times, following Brexit. NIIT Insurance Technologies Limited (NITL) is the company’s subsidiary in the UK which operates in the insurance market in London. However, outside of the UK, the insurance business of the company is doing well. The company’s digital business, which contributed about 19 per cent to revenue in the December 2016 quarter (a revenue growth of 31 per cent over the same period last year), is promising. The company’s India business may also see some momentum in the next year. It had consciously reduced exposure to government projects in recent years due to payment-related problems. But of late, it has jumped back into the space, this time as an original equipment manufacturer (OEM) and not as a system integrator (SI). The advantage is that the payments won’t be blocked on delay in the overall project. Once the company delivers, it will receive its due from the SI.

Efficiency in operation

In the December quarter, the company’s debtor days were at 69 versus 90 in the same quarter last year on improved efficiency in collection.

Cash and cash equivalents stood at ₹568 crore, up from ₹311.8 crore last year. The management has indicated that acquisitions would be the best way to use the funds.

The company’s operating profit margin expanded marginally to 16.8 per cent in the December quarter.

This followed increased offshore revenue (40 per cent in the December quarter, up from 39 per cent in the previous quarter). In the coming quarters, use of automation in projects across verticals and higher operating leverage should buttress margins.

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