CMP: INR416 TP: INR470(+13%) Neutral Stellar cash generation

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1 17 January 2017 Results Update Sector: Technology NIIT Technologies BSE SENSEX S&P CNX 27,236 8,398 Bloomberg NITEC IN Equity Shares (m) 61 M.Cap.(INRb)/(USDb) 26.1 / Week Range (INR) 588 / 370 1, 6, 12 Rel. Per (%) -5/-9/-31 Avg Val, INRm 117 Free float (%) 69.3 Financials & Valuations (INR b) Y/E Mar E 2018E Net Sales EBITDA PAT EPS (INR) Gr. (%) BV/Sh (INR) RoE (%) RoCE (%) P/E (x) P/BV (x) Estimate change TP change Rating change CMP: INR416 TP: INR470(+13%) Neutral Stellar cash generation Offset by patchy growth trajectory Ramp-downs and seasonality: NIIT Technologies (NITEC) revenue declined 0.6% QoQ to USD103m (in line), but increased 0.6% QoQ CC. While seasonal weakness played out as usual, growth was bogged down by ramp-down in a large Travel account. Top client issues/project completions have resulted in sporadic growth over last few quarters. Increase in GIS revenue, contributing 1pp to growth, led to in-line revenue performance. Better outlook for 4Q: Revenue growth and profitability are expected to improve in 4Q, led by pick-up in new deal wins. Although deal wins have gained pace LTM (+19% YoY), the progress is not being reflected in the executable order book, which has grown merely by 3% YoY to USD311m. Following strong EBITDA margin increase of 70bp QoQ to 16.9% in, NITEC is on track to achieve its end-fy17 margin guidance of 17.5%. Improved cash generation: Cash generation has improved significantly. Net cash addition in stood at INR1b (166% of PAT). This has been largely led by improvement in DSO to 69 in (from 73 in and 90 in ), and lower organic capex requirements on the back of completion of the Greater Noida campus. Attractive valuations; momentum yet to pick up: With cash forming 22% of market cap, FCF yield of 10/11% and dividend yield of 2.7/2.9% for FY18/19E, we believe valuations provide ample support at current levels. However, with growth trends, deal wins and order book failing to improve materially versus the past, we keep our stance unchanged. Valuing the stock at 9x FY19 earnings, we maintain Neutral with a target of INR470. Ashish Chopra (Ashish.Chopra@MotilalOswal.com); Sagar Lele (Sagar.Lele@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 : Flat as expected; but saved by GIS NITEC s revenue at USD103m declined by 0.6% QoQ; and grew by 0.6% on a constant currency basis. Flattish revenue in 3Q was a function of seasonal weakness and ramp down of a large client in the Travel vertical in the US. GIS revenue however increased to INR352m in, from INR286m in the previous quarter. This contributed to 1pp to revenue growth. Exhibit 1: Seasonal weakness reduced growth in 3Q Revenue - ex-hardware (INR m) QoQ growth , ,606 5,827 5,896 5,872 6,251 6,749 6,773 6, ,913 6,922 Source: MOSL, Company Amongst verticals, only Manufacturing, Media and Others saw growth (4.8% QoQ). While BFSI was flat sequentially, Travel and Transportation revenue was down 2.8% QoQ. Digital contributed to 19% of total revenue, the proportion being unchanged compared to the previous quarter. Exhibit 2: Growth driven by Insurance and Manufacturing/Media/Others Verticals Contr to Gr Contr to 4 Qtr Rev. (%) QoQ (%) incr. rev (%) CQGR (%) BFS Insurance Transportation Mfg / Med & Others Source: MOSL, Company Exhibit 3: Growth led by SI & PI; ADM still soft Practice Contr to Rev. (%) Gr - QoQ (%) Contr to incr. rev (%) 4 Qtr CQGR (%) ADM IP Assets Managed Services SI & PI BPO January

3 Exhibit 4: Travel led weakness in the US Contr to Geographies Rev. (%) Gr - QoQ (%) Contr to incr. rev (%) 4 Qtr CQGR (%) Americas EMEA RoW Profitability: Strong margin performance EBITDA margin expanded by 70bp QoQ to 16.9%, in line with our expectation. Expansion of 90bp in gross margins was partly offset by 30bp increase in SGA expenses. NITEC is on track in achieving its end-fy17 margin outlook of 17.5%. Exhibit 5: Second quarter of strong margin performance EBITDA Margin (%) SGA (%) Source: MOSL, Company Exhibit 6: Strong deal signings, but no sustainable uptick Deals signed TCV (USDm) QFY14 Source: MOSL, Company 17 January

4 Exhibit 7: Executable order book up 3% YoY to USD311m Orders executable over the next 12 months (USD m) Next 12 months multiple- (Actual / executable orders) Source: MOSL, Company Takeaways from management comments Introduced two senior leaders: Earlier this month, NITEC introduced two senior leaders to the management team. Joel Lindsey was appointed as the global head of Digital Services, and Adrian Morgan as the head of NITL. Prior to joining NITEC, Joel was leading digital transformation globally for HPE. Adrian was previously at CSC, where was the UK Digital Transformation Practice Head and most recently held the position of UK Head of Digital for Insurance. Strong 4Q ahead: 4Q is expected to be stronger than 3Q on account of the absence of seasonal weakness, client-specific weakness being behind and a pickup in growth with commencement of work on some of the new deals won. With this, margins too are expected to expand in 4Q. Vertical outlook: The softness in Travel has bottomed out, and no more issues are expected going forward. In BFSI, NITEC has been seeing strong traction in Insurance, which has also reflected well in deal wins and executable order book. NITL, although not on a growth trajectory at the moment is stable and isn t seeing a decline. Cash utilization: Cash generation can be expected to remain strong as receivable days have improved, and the organic capital expenditure requirements are now lower. Cash can now be utilized for acquisitions that would help transform the organization. Change in estimates Although 3Q performance was in line with expectations, growth was driven primarily by GIS. Other areas remained soft during the quarter. The overall weak performance combined with a stagnant executable order book lead to little confidence of a material pick-up in revenue growth going forward. We have hence cut our revenue estimates by 1.9/1.7% for FY18/19E. With margins on-track to hitting the 17.5% exit in 4Q, we expect FY17 margins of 16.7% (-90bp YoY). With benefits of a transformed revenue mix already in the numbers, revenue growth revival will be key for margin expansion. We have hence cut our EPS estimates by 1.8/2.1% for FY18/19E. 17 January

5 Exhibit 8: Change in estimates Revised Earlier Change FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E INR/USD % 0.0% 0.0% USD Revenue - m % -1.9% -1.7% YoY (%) 0.9% 5.6% 8.0% 1.0% 7.5% 7.8% -14bp -190bp 21bp EBITDA Margin 16.7% 16.5% 16.0% 16.5% 17.0% 16.6% 24bp -42bp -66bp EPS - INR % -1.8% -2.1% Valuation and view On track in focus areas: NITEC s biggest thrust in FY16 has been on reducing the footprint in Government business and trying to expand revenue share from International business. Business from Government segment was down to an insignificant 4% FY16 (and is now at less than 1%). While organic growth in International geographies was very strong in 1HFY16, the second half saw some stagnation on account of deal closures, and delay in ramp ups. These issues have again surfaced, resulting in a soft. However, fresh order intake continues to be dominated by the US and EMEA leading to substantiation of being on track. Change in quality quotient: NITEC s EBITDA margin has expanded 308bp in FY16 to 17.6% - including a round of wage hikes. This has been a function of lower government business and driving operational efficiencies. Revenue contribution from Digital has started looking reasonable, at 19% - after the acquisition of Incessant (5% contribution to revenues). And has been growing well above company average each quarter. Introduction of Advantage Suite an year ago has helped revive growth in its Insurance subsidiary NITL, which adds revenues into its owned IP / platforms category. Reduction in Government business is not only helping improvement in margins, but also in DSOs down from 90 days in to 69 in. Revenue growth pick-up around the corner, but sustenance questionable: We see three areas that hold strong potential to drive revenue growth for NITEC: Travel segment, which will benefit from the low oil prices regime Insurance segment with the acceptance of its new products around policy admin and risk aggregation (with one credible reference in place) Digital segment with contribution from Incessant. However, on account of ramp downs in top accounts and delays in ramp up of new deals, revenue growth has been soft for three out of the last four quarters. Although momentum is expected to revive 4Q onwards, uncertainty around Brexit and its impact on NITEC s presence in the Insurance vertical in the UK bring some ambiguity around the sustenance of such momentum. 17 January

6 And there are other issues yet to be ironed out: The quarterly order intake has remained subdued and inconsistent for multiple quarters. This has partly also been responsible for the stagnant executable order book of ~USD300m, which has largely remained range-bound for eight quarters now. Without sustenance of the pick-up in order intake, growth recovery is likely to elude. We expect NITEC to grow its USD revenues at a CAGR of 3.2% and earnings at a CAGR of 3.8% over FY16-18E. NITEC currently trades at 8.4/8.0x FY18/19E. Our target price of INR470 discounts FY19 EPS by 9x; the multiple being a function of missing consistency in deal wins, on-going lumpiness in revenue growth, and consequent lower-than-industry growth rate. Key triggers Boost to travel vertical (40% of revenues) from low energy prices Improved commentary around NITL Sustained uptick in fresh order intake Key risks Continued customer-specific issues Slowdown of IMS growth amid stiff competition and pricing pressure Difficulty in maintenance of margins in the absence of revenue growth Exhibit 1: NITEC 1 year forward PE chart PE (x) Peak(x) Avg(x) Min(x) Dec-06 Mar-08 Jun-09 Sep-10 Dec-11 Mar-13 Jun-14 Sep-15 Dec-16 Exhibit 2: NITEC 1-year forward PB chart PB (x) Peak(x) Avg(x) Min(x) Dec-06 Mar-08 Jun-09 Sep-10 Dec-11 Mar-13 Jun-14 Sep-15 Dec January

7 Story in charts Exhibit 9: Focused on growing select verticals BFSI and Travel Exhibit 10: Steady decline in hardware revenues Hardware revenues (INRm) BFS Insurance Transport Manufacturing, Medical and Others Exhibit 11: Fresh order intake inconsistent Exhibit 12: Executable order book steady at around USD300m Fresh order intake (USDm) Executable order book (USDm) Exhibit 13: EBITDA margins improved significantly in FY16 Exhibit 14: Utilization has been a key lever so far EBITDA Margin (%) SGA (%) Utilization (%) QFY14 2QFY14 3QFY14 4QFY January

8 Exhibit 15: Operating metrics Operating metrics Revenue Mix Geo-wise (%) Americas EMEA RoW Revenue mix Vertical-wise (%) BFS Insurance Transportation Mfg / Med / Others Practice Split (%) Application Development & Management IP Assets Managed Services SI & PI** Business Process Outsourcing Non Linear BPO Revenue Mix (%) Offshore Onsite Effort Mix (%) Offshore Onsite Top Clients contribution (%) Top Top Fresh order Intake - USD m USA EMEA ROW Deals signed - USD m Executable Order Book (NTM) - USD m Employee Metrics Billable Personnel 7,608 7,601 7,387 7,822 8,517 8,853 8,784 8,743 8,275 8,109 8,037 Sales and Marketing Others Total 8,282 8,288 8,059 8,494 9,228 9,592 9,517 9,476 9,022 8,868 8,809 Utilization Attrition January

9 Exhibit 16: Operating metrics QoQ Growth Rates Revenue Mix Geo-wise (%) Americas EMEA RoW Revenue mix Vertical-wise (%) BFS Insurance Transportation Mfg / Med / Others Practice Split (%) Application Development & Management IP Assets Managed Services SI & PI** Business Process Outsourcing Top Clients contribution (%) Top Top Top Net Adds - Employees Onsite Offshore Total Annualized Rev / employee - USD 45,036 45,703 46,440 43,340 42,351 42,816 43,208 42,895 43,784 46,575 46,600 Change in Productivity Cash and Cash Equiv. (INR m) Hedge amount (m) USD GBP EUR Average rates USD GBP EUR January

10 Financials and Valuations Key assumption E 2018E 2019E INR/USD Rate Revenues (USD m) Offshore Revenue (%) Total Headcount 7,362 8,158 8,290 8,494 9,476 9,009 9,709 10,484 Net Addition 1, Blended Utilization (%) Income Statement (INR Million) Y/E Mar E 2018E 2019E Net Sales 15,764 20,213 23,050 23,724 26,824 27,662 30,600 32,784 Change (%) EBITDA 2,682 3,296 3,516 3,456 4,733 4,624 5,064 5,234 EBITDA Margin (%) Depreciation ,101 1,153 1,197 1,193 EBIT 2,318 2,729 2,897 2,540 3,632 3,472 3,867 4,041 Interest Other Income Extraordinary items PBT 2,600 2,936 3,185 1,759 3,802 3,336 4,262 4,472 Tax ,032 1,083 Tax Rate (%) Min. Int. & Assoc. Share Reported PAT 1,971 2,133 2,361 1,139 2,801 2,356 3,038 3,197 Adjusted PAT 1,971 2,133 2,361 1,939 2,814 2,717 3,038 3,197 Change (%) Balance Sheet (INR Million) Y/E Mar E 2018E 2019E Share Capital Reserves 8,505 10,339 12,632 12,964 15,296 16,641 18,866 21,176 Net Worth 9,101 10,941 13,239 13,574 15,908 17,255 19,480 21,790 Debt Deferred Tax Total Capital Employed 9,523 11,084 13,294 13,461 16,396 17,708 19,952 22,267 Gross Fixed Assets 8,515 9,234 10,004 11,965 15,692 16,322 17,722 19,122 Less: Acc Depreciation 4,284 4,851 5,470 6,386 7,487 8,639 9,836 11,029 Net Fixed Assets 4,231 4,383 4,534 5,579 8,205 7,682 7,885 8,092 Capital WIP ,286 1, Investments Current Assets 8,822 10,606 11,971 12,600 13,861 14,172 16,777 19,306 Inventory Debtors 3,492 4,538 5,643 6,060 5,901 5,864 6,446 6,943 Cash & Bank 2,871 3,325 2,874 3,375 4,241 4,793 6,593 8,471 Loans & Adv, Others 2,459 2,743 3,454 3,165 3,719 3,515 3,738 3,892 Curr Liabs & Provns 3,533 4,182 4,497 5,921 5,837 4,516 5,078 5,501 Curr. Liabilities 3,533 4,182 4,497 5,921 5,837 4,516 5,078 5,501 Provisions Net Current Assets 5,289 6,424 7,474 6,679 8,024 9,656 11,698 13,805 Total Assets 9,522 11,084 13,294 13,461 16,396 17,708 19,952 22, January

11 Financials and Valuations Ratios Y/E Mar E 2018E 2019E Basic (INR) EPS Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation(x) P/E Cash P/E Price / Book Value EV/Sales EV/EBITDA Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios (%) Asset Turnover (x) Debtors (No. of Days) Inventory (No. of Days) Creditors (No. of Days) Leverage Ratios (%) Net Debt/Equity (x) Cash Flow Statement (INR Million) Y/E Mar E 2018E 2019E Adjusted EBITDA 2,682 3,296 3,516 3,456 4,733 4,624 5,064 5,234 Non cash opr. exp (inc) (Inc)/Dec in Wkg. Cap ,501 1, , Tax Paid ,032-1,083 Other operating activities , CF from Op. Activity 2,091 1,897 1,090 3,169 3,367 2,085 3,597 3,731 (Inc)/Dec in FA & CWIP -1, ,779-1,878-2, ,400-1,400 Free cash flows , ,253 2,197 2,331 (Pur)/Sale of Invt Others CF from Inv. Activity -1, ,779-1,878-2, ,400-1,400 Inc/(Dec) in Net Worth Inc / (Dec) in Debt Interest Paid Divd Paid (incl Tax) & Others CF from Fin. Activity Inc/(Dec) in Cash 1, ,800 1,879 Add: Opening Balance 1,637 2,871 3,325 2,874 3,375 4,241 4,793 6,593 Closing Balance 2,871 3,324 2,874 3,375 4,241 4,793 6,593 8, January

12 Corporate profile Company description NIIT Technologies is a leading IT solutions organization with over 8,000 professionals serving customers in North America, Europe, Middle East, Asia and Australia. Company offers comprehensive end-to-end software solutions and services in Application Development and Management, Managed Services, Cloud Computing and Business Process Outsourcing to organizations in the banking & financial services, insurance, travel & transportation, manufacturing & distribution, and government sectors. Exhibit 1: Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Sep-16 Jun-16 Sep-15 Promoter DII FII Others Note: FII Includes depository receipts Source: Capitaline Exhibit 3: Top holders Holder Name % Holding HDFC TRUSTEE COMPANY LTD - A/C HDFC MID - CAPOPPORTUNITIES FUND 6.3 BRANDES INVESTMENT TRUST-BRANDES INTERNATIONAL SMALL CAP EQUITY FUND 4.0 DSP BLACKROCK MICRO CAP FUND 3.9 FIDELITY PURITAN TRUST-FIDELITY LOW- PRICED STOCK FUND 3.1 BRANDES INSTITUTIONAL EQUITY TRUST 1.8 Source: Capitaline Exhibit 4: Top management Name Rajendra S Pawar Arvind Thakur Lalit Kumar Sharma Designation Chairman & Managing Director Joint Managing Director & CEO Company Secretary Exhibit 5: Directors Name Vijay K Thadani Ashwani Puri Surendra Singh Name Amit Sharma Holly Jane Morris *Independent Source: Capitaline Exhibit 6: Auditors Name Price Waterhouse Ranjeet Pandey & Associates Type Statutory Secretarial Audit Source: Capitaline Exhibit 7: MOSL forecast v/s consensus EPS MOSL Consensus (INR) forecast forecast Variation (%) FY FY FY Source: Bloomberg 17 January

13 N O T E S 17 January

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