NIIT Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs296
Current market price: Rs204
Better times ahead
Key points
- Restructuring gains: Given the initiatives taken to restructure its business model, NIIT Technologies Ltd (NTL) has emerged as a niche mid-cap information technology (IT) service player with focus on key industry verticals. The specialisation and an enhanced range of service offerings are likely to result in a higher growth rate of 15% in its revenues over the two-year period of FY2006-08.
- Enhanced profitability: The restructuring exercise has resulted in a marked improvement in its profitability over the last two years. Going forward, the margins are estimated to improve further on the back of the expected turn-around in its business process outsourcing (BPO) business and the improvement in the operational metrics like the offshore-onsite mix and higher sales efficiency. Consequently, its earnings are estimated to grow at a CAGR of 24% during F2006-08.
- Decent dividend yield: In spite of the capital expenditure to build the new development facilities, the company has a comfortable cash position. This is likely to prompt the management to announce another year of liberal dividend pay-out. It had given a dividend of 55% (or Rs5.5 per share) during the last fiscal which amounts to a decent dividend yield of 2.7%.
- Attractive valuations: At the current valuations of 7.6x its FY2008 estimated earnings and 3x FY2008 enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA), NTL is one of the cheapest stocks in the mid-cap IT space. It is likely to get re-rated on the back of the estimated improvement in its earnings growth rate and the possible sale of a 25% stake held in it by NIIT Ltd (NIIT) to a strategic investor. We recommend a Buy on NTL with a price target of Rs296.
SECTOR UPDATE
Cement
Rising on the earnings expressway
The cement demand in India has witnessed a strong growth in FY2006, with a YTD growth at 10.6% year on year (yoy), much higher than our expectation of an 8% growth, driven by the buoyant demand from the housing sector and the government's increasing focus on infrastructure projects. Going forward, we expect the cement demand to continue growing at 8% yoy in FY2007 and FY2008 driven by the continued focus on housing and infrastucture. We believe the capacity additions announced so far are not enough to meet the estimated incremental demand of approximately 22 million tonne. This in turn will result in a further reduction in the supply overhang and possibly a deficit situation by the end of FY2007. Hence we expect that cement prices will continue to march upwards in the absence of capacity addition and higher capacity utilisation. Hence the outlook for FY2007-2008 remains positive for the sector.
VIEWPOINT
Essel Propack
Entering new territory
Essel Propack is acquiring an 85% stake each in Tacpro Inc, USA and Avalon Medical Services Pte Ltd, Singapore. Both the companies are promoted by an Indian American, Nitin Matani, and his associates. These companies manufacture medical devices and their key products include cardiovascular catheters and balloon catheters. Catheters are basically tubes made of high quality polymers, which are inserted in the human body at the time of the surgery. Both the companies are original equipment manufacturers (OEMs) and sell their products to companies like Abbot, Bard, Med Source and Boston Sys which own the intellectual property rights (IPR). The average realisations for these products range between $75 and $100 per unit for Tacpro. The customers who own the IPR in turn sell the same for an amount ranging between $400 and $3,500 per unit.