CMP: INR470 TP: INR530(+13%) Neutral

Transcription

1 16 July 2016 Q1FY17 Results Update Sector: Technology BSE SENSEX S&P CNX 27,837 8,541 Bloomberg NITEC IN Equity Shares (m) 61.2 M.Cap.(INRb)/(USDb) 28.8 / Week Range (INR) 632 / 407 1, 6, 12 Rel. Per (%) -22/-23/4 12M Avg Val (INR M) 146 Free float (%) 69.2 Financials & Valuation (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: INR470 TP: INR530(+13%) Neutral Brexit and deal wins dampen recovery process Revenue disappointment continues: NITEC s revenue declined by 2.8% QoQ to USD99m v/s expectation of 1.1% growth. This was led by seasonality in GIS, declining revenue in the Travel vertical and contraction in NITL, which it attributed to decision making delays caused by uncertainties surrounding the Brexit referendum. Turnaround expected in 2Q, but : It expects a turnaround in 2QFY17 given the revival in the Travel vertical. While the decline seen in a major customer is now behind, an additional trigger would emerge from the ramping up of a large deal won in the current quarter with a Tier-I US airline. This is likely to be coupled by strength in BFSI in the US and in Asia. However, NITEC is the first so far to have borne the brunt of Brexit (although not in services), and has cited the weakness in NITL to be expected through the course of the year. Margin pressure coupled with subpar revenue growth: 1Q margins declined by 310bp QoQ on account of wage hike (-220bp) and decline in the higher margin businesses of GIS and NITL (-80bp). With NITEC starting the year at 15.3% EBITDA margin, an expansion through the year (and exit rate of 17.5%) would yet lead to a 100bp decline in margins in FY17 over the previous year. No material pick-up in deal wins/order book: NITEC won deals with a TCV of USD101m in 1QFY17, which fails to enthuse because of no material pick-up in the last three years. This has led to an executable order book that has remained in the USD m range for the last 8 quarters, resulting in yet another year of sub-par organic growth rate. Adjusting for the 1Q disappointment and the fact that sustenance/expansion of margins should be a function of revival of revenue growth, we cut our earnings by 8.8/5.4% for FY17/18E; thus lowering the target price to INR530. Neutral. Ashish Chopra (Ashish.Chopra@MotilalOswal.com); Sagar Lele (Sagar.Lele@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 1QFY17: Softer than expected NITEC s 1QFY17 revenue was INR6,692m, down 2.3% QoQ, below our estimate of INR6,932m (growth of 1.2% QoQ). Revenue growth was lower because of ramp down in top accounts, delayed ramp ups, seasonality in GIS and a decline in NITL that was led by decision making delays by customers due to uncertainties around the Brexit referendum. Digital revenue grew by 10% QoQ and now constitutes to 18% of total revenue. Exhibit 1: Revenue weakness aggravates Revenue - ex-hardware (INR m) QoQ growth ,606 5,827 5,896 5,872 6,251 6,749 6,773 6,847 6,692 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Source: MOSL, Company During the quarter, revenue growth was strong in BFS (2.9% QoQ) and in Insurance (2.4% QoQ). This was largely led by growth in top accounts and expansion in new logos in the geographies of the US and Asia. Revenue growth was drawn down by weakness in Transport (-2.3% QoQ) and Manufacturing/Medical/Others (-9.2% QoQ). Exhibit 2: Continued weakness in Transport and Manufacturing/Distribution Verticals Contr to Gr Contr to 4 Qtr Rev. (%) QoQ (%) incr. rev (%) CQGR (%) BFS Insurance Transportation Mfg / Med & Others Source: MOSL, Company Exhibit 3: IP affected by NITL; SI & PI by GIS and Government Practice Contr to Rev. (%) Gr - QoQ (%) Contr to incr. rev (%) 4 Qtr CQGR (%) ADM IP Assets Managed Services SI & PI BPO July

3 Exhibit 4: Growth led by Americas, due to BFSI Geographies Contr to Rev. (%) Gr - QoQ (%) Contr to incr. rev (%) 4 Qtr CQGR (%) Americas EMEA RoW Profitability: Margins bogged down by multiple factors EBITDA margin declined by 310bp QoQ to 15.3%, against our expectation of 200bp decline to 16.4%. Margins were lower because of revenue decline, wage hike and decline in the higher margin businesses of GIS and NITL. Exhibit 5: Wage hike, seasonality and revenue decline impact margins EBITDA Margin (%) SGA (%) QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Source: MOSL, Company During the quarter NITEC reported an exceptional item to the tune of INR361m in relation to amounts outstanding with respect to a government contract that has been put on hold for resolution of issues. Consequently, reported PAT in 1Q was INR313m. 16 July

4 Exhibit 6: Deal signings lack consistent uptick Deals signed TCV (USDm) QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Source: MOSL, Company Exhibit 7: Executable order book steady at ~USD300m Orders executable over the next 12 months (USD m) Next 12 months multiple- (Actual / executable orders) QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Source: MOSL, Company Takeaways from management comments Digital Push: Digital currently contributes 18% of NITEC revenues; and has increased steadily over the last few quarters. The company saw 10% QoQ growth in Digital led by the acquisition of Incessant, its expansion in geographies apart from APAC and NITEC s positioning in Digital-Legacy integration. Expect rebound in 2Q: Revenue growth in 1Q was led down by seasonality in GIS, decline in revenue in the Travel & Transport vertical and contraction in NITL. However, with strong momentum in BFSI in the US and Asia, stoppage of decline in Travel, large new deal wins in Travel and continued traction in Digital, NITEC expects a revival of revenue growth in 2Q. However, given the weak entry into FY17, double digit revenue growth won t be possible for this year. Cautious on Brexit: The management cited some caution on the implications of Brexit. It saw the impact of macroeconomic uncertainties in customer spend on platforms in 1Q. It expects this to continue through the year, impacting NITL. Although it has seen repercussions on the performance of NITL, it hasn t seen anything so far in the Services business. Margin improvement expected through better revenue mix: Despite the weak margin in 1Q, NITEC expects recovery through the course of FY17. This is largely going to be a function of an improved portfolio and bettering revenue mix. The impact of wage hike, visa expenses and seasonal weakness is expected to be offset by further improvement in utilization, driving productivity through automation and higher revenue from Digital. 16 July

5 Change in estimates 1Q saw a disappointment to the tune of 3.8% in terms of USD revenue. Given the weak start, mid-single digit revenue growth would be difficult for NITEC to achieve despite revenue growth momentum pick-up 2Q onwards. Considering this, we have cut out revenue growth estimates for FY17/18E by 4.6/4.2%. We now forecast revenue growth of 2.3/10.3% for FY17/18E. The company is starting the year at an EBITDA margin of 15.3%. Margin expansion through the course of the year, and an exit rate of 17.5% would still lead to FY17 margins of 16.6% (-100bp YoY). The margin disappointment and its dependency on revenue growth for expansion lead to a further cut in our forecasts. Consequently there has been a cut to our earnings estimate for FY17/18E of 8.8/5.4% Exhibit 8: Change in estimates Revised Earlier Change FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E INR/USD % -0.2% 0.0% USD Revenue - m % -4.6% -4.2% YoY (%) 8.6% 2.3% 10.3% 8.6% 7.2% 9.9% 0bp -488bp 43bp EBITDA Margin 17.6% 16.6% 16.7% 17.6% 17.7% 16.8% 0bp -105bp -11bp EPS - INR % -8.8% -5.4% 16 July

6 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. 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. 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 16% - after the acquisition of Incessant (5% contribution to revenues). 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 93 days in 4QFY15 to 80 in 4QFY16. 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 the last three quarters. Although momentum is expected to revive next quarter 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. And there are other issues yet to be ironed out: The quarterly order intake has remained subdued and inconsistent for multiple quarters. In 1QFY17, it managed to inch just a shade higher than the targeted rate of USD100m+ a quarter. 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 6.2% and earnings at a CAGR of 8.0% over FY NITEC currently trades at 11.4/8.8x FY17/18E. Our target price of INR530 discounts FY18 EPS by 10x, factoring the missing consistency in deal wins, on-going softness in revenue growth, stagnation of deal wins, and consequent lower-than-industry growth rate. Moreover, with most margin levers utilized, we believe revenue growth revival will be key to sustenance of improved margins. 16 July

7 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 9: NITEC 1 year forward PE chart PE (x) Peak(x) Avg(x) Min(x) Jun-06 Sep-07 Dec-08 Mar-10 Jun-11 Sep-12 Dec-13 Mar-15 Jun-16 Exhibit 10: NITEC 1-year forward PB chart PB (x) Peak(x) Avg(x) Min(x) Jun-06 Sep-07 Dec-08 Mar-10 Jun-11 Sep-12 Dec-13 Mar-15 Jun July

8 Story in charts Exhibit 11: Focused on growing select verticals BFSI and Travel Revenue by vertical (%) Exhibit 12: Steady decline in hardware revenues Hardware revenues (INRm) BFS, Mfg / Med / Others, Travel, 32 Insurance, 22 1QFY QFY15 3QFY15 4QFY15 1QFY QFY QFY16 4QFY16 1QFY17 Exhibit 13: Fresh order intake inconsistent Exhibit 14: Executable order book steady at USD300m Fresh order intake (USDm) Executable order book (USDm) QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Exhibit 15: EBITDA margins improved significantly in FY16 Exhibit 16: Utilization has been a key lever so far EBITDA Margin (%) SGA (%) Utilization (%) QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 16 July

9 Exhibit 17: Operating metrics Operating metrics 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Revenue Mix Geo-wise (%) Americas EMEA RoW Revenue mix Vertical-wise (%) BFS Insurance Transportation Mfg / Med / Others Practice Split (%) Application Development & Magmt 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 7,498 7,631 7,608 7,601 7,387 7,822 8,517 8,853 8,784 8,743 8,275 Sales and Marketing Others Total 8,160 8,290 8,282 8,288 8,059 8,494 9,228 9,592 9,517 9,476 9,022 Utilization Attrition July

10 Exhibit 18: Operating metrics QoQ Growth Rates 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 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 45,320 44,692 45,036 45,703 46,440 43,340 42,351 42,816 43,208 42,895 43,784 Change in Productivity Cash and Cash Equiv. (INR m) Hedge amount (m) USD GBP EUR Average rates USD GBP EUR July

11 Financials and Valuation Key assumption Y/E March E 2018E INR/USD Rate Revenues (USD m) Offshore Revenue (%) Total Headcount 5,806 7,362 8,158 8,290 8,494 9,476 9,972 10,547 Net Addition 1,330 1, Blended Utilization (%) Income Statement (INR Million) Y/E Mar E 2018E Net Sales 12,323 15,764 20,213 23,050 23,724 26,824 28,576 31,664 Change (%) EBITDA 2,404 2,682 3,296 3,516 3,456 4,733 4,745 5,279 EBITDA Margin (%) Depreciation ,101 1,159 1,186 EBIT 2,089 2,318 2,729 2,897 2,540 3,632 3,586 4,093 Interest Other Income Extraordinary items PBT 2,178 2,600 2,936 3,185 1,759 3,802 3,468 4,436 Tax Tax Rate (%) Min. Int. & Assoc. Share Reported PAT 1,822 1,971 2,133 2,361 1,139 2,801 2,535 3,276 Adjusted PAT 1,822 1,971 2,133 2,361 1,939 2,814 2,896 3,276 Change (%) Balance Sheet (INR Million) Y/E Mar E 2018E Share Capital Reserves 6,885 8,505 10,339 12,632 12,964 15,296 16,945 19,411 Net Worth 7,478 9,101 10,941 13,239 13,574 15,908 17,557 20,023 Debt Deferred Tax Total Capital Employed 7,488 9,523 11,084 13,294 13,461 16,396 17,937 20,398 Gross Fixed Assets 5,814 8,515 9,234 10,004 11,965 15,692 16,923 18,323 Less: Acc Depreciation 3,920 4,284 4,851 5,470 6,386 7,487 8,646 9,831 Net Fixed Assets 1,894 4,231 4,383 4,534 5,579 8,205 8,277 8,491 Capital WIP 1, ,286 1, Investments Current Assets 6,665 8,822 10,606 11,971 12,600 13,861 15,318 18,126 Inventory Debtors 2,871 3,492 4,538 5,643 6,060 5,901 7,407 8,095 Cash & Bank 1,637 2,871 3,325 2,874 3,375 4,241 4,121 6,021 Loans & Adv, Others 2,157 2,459 2,743 3,454 3,165 3,719 3,790 4,010 Curr Liabs & Provns 2,508 3,533 4,182 4,497 5,921 5,837 5,880 6,441 Curr. Liabilities 2,508 3,533 4,182 4,497 5,921 5,837 5,880 6,441 Provisions Net Current Assets 4,157 5,289 6,424 7,474 6,679 8,024 9,438 11,685 Total Assets 7,488 9,522 11,084 13,294 13,461 16,396 17,937 20, July

12 Financials and valuation Ratios Y/E Mar E 2018E 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) Net Debt/Equity (x) Cash Flow Statement (INR Million) Y/E Mar E 2018E Adjusted EBITDA 2,404 2,682 3,296 3,516 3,456 4,733 4,745 5,279 Non cash opr. exp (inc) (Inc)/Dec in Wkg. Cap. -1, ,501 1, , Tax Paid Other operating activities , CF from Op. Activity 393 2,091 1,897 1,090 3,169 3,367 1,803 3,771 (Inc)/Dec in FA & CWIP , ,779-1,878-2,691-1,286-1,400 Free cash flows , ,371 (Pur)/Sale of Invt Others CF from Inv. Activity , ,779-1,878-2,691-1,286-1,400 Inc/(Dec) in Net Worth Inc / (Dec) in Debt Interest Paid Divd Paid (incl Tax) & Others CF from Fin. Activity Inc/(Dec) in Cash , ,900 Add: Opening Balance 1,895 1,637 2,871 3,325 2,874 3,375 4,241 4,121 Closing Balance 1,638 2,871 3,324 2,874 3,375 4,241 4,121 6, July

13 Corporate profile Company description 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 (%) Mar-16 Dec-15 Mar-15 Promoter DII FII Others Note: FII Includes depository receipts 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 3: Top holders Holder Name % Holding HDFC Trustee Company Ltd A/c HDFC Mid Cap Opportunities Fund 6.3 Fidelity Management And Research Co. A/c Fidelity Advisor Series I Fidelity Advisor Small Cap Fund 6.2 Edgbaston Asian Equity Trust 3.9 Fidelity Puritan Trust Fidelity Low Priced Stock Fund 3.3 Brandes Investment Trust Brandes International Small Cap Equity Fund 3.2 Source: Capitaline Exhibit 5: Directors Name Name Amit Sharma Ashwani Puri Surendra Singh Vijay K Thadani Holly Jane Morris Exhibit 6: Auditors Name Nessr & Associates Price Waterhouse Source: Capitaline Type Secretarial Audit Statutory *Independent Exhibit 7: MOSL forecast v/s consensus EPS MOSL Consensus (INR) forecast forecast Variation (%) FY FY Source: Bloomberg Source: Capitaline 16 July

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