NIIT Technologies - Money Control

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Oct 15, 2013 ... c-1. 2. Fe b. -1. 3. Ap r-1. 3. Jun-1. 3. Au g-1. 3. Oct-1. 3. (Rs). NIIT ... 42% QoQ to US$84m due to volatile India order book (Q1FY14 had US$65 ...
NIIT Technologies  NIIT Technologies (NIIT Tech) reported revenues/margin below PLe/Consensus expectation due to weakness in Europe. Order intake was softer due to weakness/volatility in India order book. We retain our ‘BUY’ rating with a target price of Rs380.

October 15, 2013 Shashi Bhusan [email protected] +91-22-66322300

Rating Price Target Price Implied Upside Sensex Nifty

BUY Rs288 Rs380 31.9% 20,548 6,089

(Prices as on October 15, 2013)  Trading data  Market Cap. (Rs bn) Shares o/s (m) 3M Avg. Daily value (Rs m) Major shareholders  Promoters Foreign Domestic Inst. Public & Other Stock Performance   (%)  1M  6M  Absolute 2.8 2.8 Relative (1.3) (9.1) How we differ from Consensus  EPS (Rs)  PL  Cons.  2014 43.5 42.4 2015 48.1 46.2

17.3 60.2 23.4 31.19% 29.21% 19.94% 19.66% 12M  1.9 (7.9) % Diff.  2.7 4.0

Price Performance (RIC: NITT.BO, BB: NITEC IN) 

Source: Bloomberg

Oct-13

Aug-13

Jun-13

Apr-13

Feb-13

Dec-12

Oct-12

(Rs) 350 300 250 200 150 100 50 0



Revenue  growth  muted,  margins  disappoint: NIIT Tech reported a revenue growth of 8.4% (0.3% @cc) QoQ to Rs5,873m (PLe: Rs5,907m, Cons: Rs5,904m). EBITDA margins expanded by 66bps to 15.1% (PLe: 16%), primarily due to a forex loss accounted. However, PAT grew by 17.3% QoQ to Rs624m (PLe: Rs657m, Cons.: Rs541m).



Order book soft due to weakness in India business: Order book has declined by 42% QoQ to US$84m due to volatile India order book (Q1FY14 had US$65m order from Airport Authority of India). Order book in EMEA grew by 96.2% QoQ to US$51m, whereas America and RoW declined by 64% and 77% QoQ to US$16m and US$17m, respectively. The company bagged 3 clients in Europe, all in Travel and Transportation vertical.



Margins  bottomed  out,  improvement  ahead: The current quarter margin got impacted due to cross-currency movement and hedging losses. However, we expect margin of the company to delivery steady improvement in H2FY14. The contracts renewed are either at same realization or up by 4-8%. Also, Morris contract is transformed to outcome-based model.



Why  still  a  BUY? Revenue performance of the company has bottomed out, so has margins. We believe that revenue momentum will pick-up from CY14. Moreover, we expect lower contribution from hardware revenue; outcomebased pricing to push the margin higher.



Valuation  &  Recommendation  –  Reiterate  “BUY”  with  target  price  of  Rs380: Positive IATA commentary, ramp-up in government projects and stability in GIS would give steady revenue growth with stable margin. It is currently trading at 6.6x FY14E earnings estimates with an EPS CAGR of 16% (FY13-15E).

Key financials (Y/e March)    Revenues (Rs m)      Growth (%)  EBITDA (Rs m) PAT (Rs m) EPS (Rs)      Growth (%)  Net DPS (Rs) Profitability & Valuation    EBITDA margin (%)  RoE (%)  RoCE (%)  EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) 

2012 15,764 27.9 2,683 1,972 33.1 7.7 8.6

2013  20,213 28.2  3,296 2,133 35.4 7.1  9.4

2014E 25,128 24.3 4,045 2,621 43.5 22.9 12.0

2015E 28,284 12.6 4,293 2,896 48.1 10.5 13.0

2012 17.0 23.6 23.1 1.0 5.6 8.7 1.9 3.0

2013  16.3  21.2  21.0  0.8 4.7 8.1 1.6 3.3 

2014E 16.1 22.1 20.8 0.6 3.8 6.6 1.4 4.2

2015E 15.2 20.9 20.1 0.5 3.4 6.0 1.2 4.5

Source: Company Data; PL Research 

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

Q2FY14 Result Update 

Growth expectation pushed to CY14 

NIIT Technologies

Exhibit 1:

Revenue and margin touch softer than PLe/Consensus expectation (Rs m)  QoQ

Q2FY13

YoY 

5,419

8.4%

5,001

17.4%

5,906.7

Variance(PL  VS ACTUAL) ‐0.6%

782

13.3%

848

4.5%

945.1

‐6.3%

15.1%

14.4%

66 bps

17.0%

‐187 bps

16.0%

‐91 bps

Pre Tax Income

913

840

8.7%

595

53.4%

918.5

‐0.6%

Tax

269

296

‐9.1%

146

84.2%

262

2.8%

29%

35%

‐577 bps

25%

493 bps

29%

96 bps

624

532

17.3%

431

44.8%

541

639

‐2.3%

10.27

8.8

17.3%

7.2

43.0%

8.9

10.5

‐2.3%

Y/e March  Revenue EBITDA EBITDA Margin 

Tax Rate  PAT EPS (Rs)

Q2FY14 

Q1FY14 

5,873 886

Consensus  Q2FY14(PLe) 5,904

Source: Company Data, PL Research 



Conference  call  highlights:  1) Q2FY14 Revenue – Insurance: Rs405m (Op. Margin: 17%), Media: Rs357m (14%), Projecta: Rs180m (5%), GIS: Rs225m (15%), CCTNS: Rs470m 2) Non-Linear revenue: 24% 3)  ETR for FY14 ~27-28% (Q2FY14: 29.5) 4)  3 new customers in Travel & Transport  6)  DSO: 100 days (should come down to ~85-100 days) 7)  Capex for Q2FY14: Rs196m, H2FY13: Rs660m in each quarter, FY14: ~Rs2,000m. 8) Net addition -190 employees due to project closure in India 9)  Hedge: US$42.5m (Rs59.67m/$) 10) Constant currency order executable: US$253m. 

Exhibit 2: Order Intake softer in the US & RoW  Fresh Order Analysis ($ m) 

Q2FY14

Q1FY14 

QoQ gr.

Q2FY13

YoY gr.

USA

16

44

‐63.6%

43

‐62.8%

EMEA

51

26

96.2%

33

54.5%

ROW

17

75

‐77.3%

17

0.0%

Total 

84

145

‐42.1%

93

‐9.7%

248

263 

‐5.7%

253

‐2.0%

USA

0

1

NA

1

NA

EMEA

3

1

200.0%

2

50.0%

ROW

0

3

NA

0

NA

Total 

3

5

‐40.0%

3

0.0%

Q2FY14

Q1FY14 

QoQ gr.

Q2FY13

YoY gr.

USA

2,408

2,113

13.9%

1,900

26.7%

Europe

2,114

1,897

11.5%

1,950

8.4%

RoW

1,351

1,409

‐4.1%

650

107.8%

Total 

5,873

5,419

8.4%

5,001

17.4%

USA

41.0%

39.0%

200 bps

38.0%

300 bps

Europe

36.0%

35.0%

100 bps

39.0%

‐300 bps

RoW

23.0%

26.0%

‐300 bps

Executable over next 12 months  New Customer Addition 

Source: Company Data, PL Research  Exhibit 3: The US witnesses steady growth  By Geography 

13.0% 1000 bps

Source: Company Data, PL Research 

October 15, 2013

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NIIT Technologies

Exhibit 4: Growth led by Manufacturing & ramp up in Govt deals  By Verticals 

Q2FY14

Q1FY14 

QoQ

Q2FY13

YoY

Finance Insurance & Banking

1,938

1,626

19.2%

1,650

17.4%

Transportation

2,173

1,951

11.4%

2,100

3.5%

Manufacturing & Retail

352

379

‐7.1%

300

17.4%

Government

587

704

‐16.6%

250

134.9%

Others

822

759

8.4%

700

17.4%

5,873

5,419 

8.4%

5,001

17.4%

Finance Insurance & Banking

33.0%

30.0%

300 bps

33.0%

0 bps

Transportation

37.0%

36.0%

100 bps

42.0% ‐500 bps

6.0%

7.0%

‐100 bps

Government

10.0%

13.0%

Others

14.0%

14.0%

Total  as % of Total 

Manufacturing & Retail

6.0%

0 bps

‐300 bps

5.0%

500 bps

0 bps

14.0%

0 bps

Source: Company Data, PL Research  Exhibit 5: Good growth top 5 clients  Client metrics  Top 5 Clients

Q2FY14

Q1FY14

2,114 705 2,819

Top 6-10 Clients Top 10 Clients

QoQ gr. 

Q2FY13

YoY gr.

1,680

25.9% 

1,600

32.1%

813

‐13.3% 

750

‐6.1%

2,493

13.1% 

2,350

19.9%

Non Top 10 Clients

3,054

2,926

4.4% 

2,651

15.2%

Total 

 5,873 

 5,419 

8.4% 

5,001

17.4%

Top 5 Clients

36.0%

31.0%

500 bps 

32.0%

400 bps

Top 10 Clients

48.0%

46.0%

200 bps 

47.0%

100 bps

Non Top 10 Clients

52.0%

54.0%

‐200 bps 

53.0%

‐100 bps

Source: Company Data, PL Research  Exhibit 6: Onsite growth strong for the quarter  Revenue by Delivery Type 

Q2FY14

Q1FY14 

QoQ gr. 

Q2FY13

YoY gr.

Onsite

3,817

3,414

11.8% 

3,151

21.2%

Offshore

2,056

2,005

2.5% 

1,850

11.1%

 5,873 

 5,419 

8.4% 

 5,001 

17.4%

Onsite

65.0%

63.0%

200 bps 

63.0%

200 bps

Offshore

35.0%

37.0%

‐200 bps 

37.0%

‐200 bps

Total  % of Total Revenue 

Source: Company Data, PL Research     

October 15, 2013

3

NIIT Technologies

Exhibit 7: Expected to hire more freshers in FY14  Employee metrics 

Q2FY14

Q1FY14 

QoQ gr. 

Q2FY13

YoY gr.

Total employees

8,017

8,207

‐2.3% 

7,617

5.3%

Net addition

(190)

49

‐487.8% 

173

‐209.8%

Utilisation

77.3%

77.3%

0 bps 

79.8%

‐250 bps

Attrition

12.4%

12.4%

0 bps 

12.7%

‐27 bps

Source: Company Data, PL Research 

October 15, 2013

4

NIIT Technologies Income Statement (Rs m)            Y/e March   2012  Net Revenue  Raw Material Expenses Gross Profit Employee Cost Other Expenses EBITDA  Depr. & Amortization Net Interest Other Income Profit before Tax  Total Tax Profit after Tax  Ex-Od items / Min. Int. Adj. PAT  Avg. Shares O/S (m)  EPS (Rs.) 

15,764  9,876 5,888 — 3,205 2,683  364 — 282 2,601  637 1,964  (8) 1,972  59.6  33.1 

2013 

2014E

2015E

20,213  13,159 7,054 — 3,758 3,296  567 — 207 2,936  751 2,185  52 2,133  60.2  35.4 

25,128 16,233 8,895 — 4,850 4,045 650 — 275 3,670 1,101 2,569 (52) 2,621 60.2 43.5

28,284 18,548 9,736 — 5,443 4,293 717 — 270 3,846 961 2,884 (12) 2,896 60.2 48.1

Cash Flow Abstract (Rs m)     Y/e March    

2012 

2013 

2014E

2015E

C/F from Operations C/F from Investing C/F from Financing Inc. / Dec. in Cash Opening Cash Closing Cash FCFF FCFE

1,643 (985) 371 1,029 1,194 2,223 1,063 1,079

2,351 (1,133) (543) 675 1,654 2,329 955 1,169

2,901 (2,262) (723) (83) 2,329 2,246 692 692

2,960 (1,414) (783) 763 2,246 3,009 1,558 1,558

Key Financial Metrics  Y/e March             Growth 

2012   

2013   

2014E

2015E

27.9 11.6 8.3 7.7

28.2 22.8 8.2 7.1

24.3 22.7 22.9 22.9

12.6 6.1 10.5 10.5

16.1 10.4 20.8 22.1

15.2 10.2 20.1 20.9

(0.1) 23

(0.2) 22

6.6 1.4 3.8 0.6

6.0 1.2 3.4 0.5

30.0 7.5 7.0 26.4

25.0 7.0 6.7 53.8

Revenue (%) EBITDA (%) PAT (%) EPS (%)

Profitability  EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%)

  17.0 12.5 23.1 23.6

Balance Sheet  Net Debt : Equity Net Wrkng Cap. (days)

 

Valuation  PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x)

 

Earnings Quality  Eff. Tax Rate 24.5 Other Inc / PBT 10.8 Eff. Depr. Rate (%) 5.4 FCFE / PAT 54.7 Source: Company Data, PL Research. 

October 15, 2013

2014E

2015E

10,941 339 173 11,453  4,661 — 820 5,481 2,329  7,087  3,935  491 11,453 

12,787 339 173 13,299 5,998 — 1,094 5,715 2,246 9,455 5,986 491 13,299

14,888 339 173 15,400 6,696 — 1,094 7,119 3,009 11,003 6,893 491 15,401

Quarterly Financials (Rs m)      Y/e March      Q3FY13 

Q4FY13 

Q1FY14

Q2FY14

5,372  884  16.5  161 — (14) 709  129 565  565 

5,419 782 14.4 148 — 206 840 296 532 532

5,873 886 15.1 155 — 182 913 269 624 624

Net Revenue  EBITDA  % of revenue  Depr. & Amortization Net Interest Other Income Profit before Tax  Total Tax Profit after Tax  Adj. PAT 

Key Operating Metrics  Y/e March      

5,144  813  15.8  142 — 126 797  230 561  561 

2012 

2013

2014E

2015E

Total Technical Billed (Headcount) 10,813 Utilization 79.0 Software Dev. Exp. (% of Sales) 62.6 Sales & Mktg. (% of Sales) 20.3 Source: Company Data, PL Research. 

13,375 78.2 65.1 18.6

15,114 — 64.6 19.3

16,928 79.0 65.6 19.2

  (0.2) 32

8.7 1.9 5.6 1.0

2013 

9,222 126 — 9,348  4,234 — 549 3,963 2,223  5,654  3,914  602 9,348 

Shareholder's Funds Total Debt Other Liabilities Total Liabilities  Net Fixed Assets Goodwill Investments Net Current Assets      Cash & Equivalents       Other Current Assets       Current Liabilities  Other Assets Total Assets 

  16.3 10.6 21.0 21.2

(0.2) 14

Balance Sheet Abstract (Rs m)    Y/e March      2012 

  8.1 1.6 4.7 0.8

 

  25.6 7.1 8.1 54.8

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NIIT Technologies

Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage 

% of Total Coverage

60%

 

54.4%

50% 40% 30%

27.2% 16.8%

20% 10%

1.6%

0% BUY

Accumulate

Reduce

PL’s Recommendation Nomenclature 

Sell  

 

BUY  



Over 15% Outperformance to Sensex over 12-months

Accumulate 

:

Outperformance to Sensex over 12-months

Reduce 

:

Underperformance to Sensex over 12-months

Sell 

:

Over 15% underperformance to Sensex over 12-months

Trading Buy 

:

Over 10% absolute upside in 1-month

Trading Sell 

:

Over 10% absolute decline in 1-month

Not Rated (NR) 

:

No specific call on the stock

Under Review (UR) 

:

Rating likely to change shortly 

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

October 15, 2013

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