NIIT Technologies

Investors with a two-year horizon can buy the shares of NIIT Technologies (NIIT Tech), a mid-cap IT services company, given the broad-based revival in its key segments of operations such as BFSI and the US geography as well as a robust domestic deal pipeline.




At Rs 180, the stock trades at eight times its likely FY11 per share earnings. This is at a discount to mid-tier IT companies such as Hexaware Technologies and Zylog Systems. The added sweetener for investors is that NIIT Tech stock provides a dividend yield of nearly 4 per cent.

NIIT Tech has managed a difficult 2008-10 fairly well. In FY10, the company saw its revenues decline by 6.8 per cent over FY09 to Rs 913.7 crore, while net profits expanded by 10 per cent to Rs 126.4 crore.

In the recent June quarter, NIIT Tech has seen a revenue growth of 33.6 per cent over the same period last year to Rs 291.4 crore, while net profits more than doubled to Rs 40.8 crore.

A well-diversified geographic-mix, revival in volumes (increase in person-months billed), and large (Rs 100 crore-plus) deals from domestic governmental agencies augur well for expansion in revenues for the company. The proportion of non-linear, IP-led revenues too is increasing significantly, thus aiding margins.

Business positives

NIIT Tech has managed to significantly improve its domestic footprint with a Rs 228-crore deal-win from the border security force (BSF) in India. NIIT Tech would set up the complete infrastructure, network and applications for BSF's various operations. Although there is a significant hardware component in the deal, which could mean lower margins, the segment itself is strategic and could turn in more deals for the company as the government spends more on homeland security. This apart, the company has won deals from several governmental agencies, the key among them being the support services that NIIT Tech delivers to APDRP (Accelerated Power Development and Reforms Programme). The government segment contributes 9 per cent of revenues for the company.

The company also has a well-diversified geographic-mix across the US (36 per cent of revenues), Europe and West Asian area (35 per cent), Asia-Pacific (13 per cent) and India (16 per cent). NIIT Tech has witnessed client-additions and also expansion in volumes even in Europe, though the depreciating Euro caused a significant dent in realisations. But key geographies such as the US and key segment - BFSI (43 per cent of revenues) have seen growth. The company also operates in the travel and transport segment which contributes over 30 per cent of the revenues. With the worst expected to be behind for the airline industry, the company may be well-positioned to capture a revival in spends there, what with software deployments already in over 30 airlines.

The company is also signalling a climb up the value chain over the past few years with non-linear initiatives (offerings not linked to headcount additions). It now derives 26-27 per cent of its revenues from IP/platform-based services and managed services in the remote infrastructure management segment. These initiatives would significantly augment margins for NIIT Tech over the long run.

The company has also seen a stable-to-increasing top 10 client base, which suggests effective client-mining. With a favourable 76:24 offshore-onsite workforce-mix, costs are significantly optimised.

With an annualised attrition of 18 per cent (24 percent in the June quarter), NIIT Tech faces a key execution risk on this front.

via BL