RESULTS REVIEW 2QFY15 16 OCT 2014 NIIT Technologies NEUTRAL INDUSTRY IT SERVICES Higher capex weighing on FCF CMP (as on 14 Oct 2014) Rs 394 Target Price Rs 406 Nifty 7,864 Sensex 26,349 KEY STOCK DATA Bloomberg/Reuters NITEC IN/NITT.BO No. of Shares (mn) 61 MCap (Rs bn) / ($ mn) 24 / 390 6m avg traded value (Rs mn) 72 STOCK PERFORMANCE (%) 52 Week high / low Rs 487 / 273 3M 6M 12M Absolute (%) (14.9) (0.9) 32.7 Relative (%) (20.3) (17.4) 4.9 SHAREHOLDING PATTERN (%) Promoters 30.99 FIs & Local MFs 14.98 FIIs 35.88 Public & Others 18.15 Source : BSE Madhu Babu madhu.babu@hdfcsec.com +91-22-6171-7316 NIIT Tech s 2QFY15 results were a mixed bag. USD revenues and EBIDTA margin were in-line with our expectations. However, PAT was 9% below our estimates owing to weaker other income and higher depreciation. NIIT Tech s business mix is under transition, with the company gradually reducing its exposure to Government contracts and increasing focus on developed markets. However, client specific weakness in core verticals has marred a smooth transition. Hence, revenue growth has been anemic for the sixth quarter in a row. Higher capex owing to investments in the AAI deal and weak margin performance are weighing on free cash flow generation. Cumulative capex over the past four quarters stood at Rs 2.13bn. Trailing twelve months EBIDTA/Capex ratio stood at 1.6x below peers. Post the 2Q miss, we trim our EPS estimates by 12.3/4% for FY15/FY16E, led by both revenue and margin downgrades. Our TP is lowered by 4% to Rs 406/sh (10x FY16E EPS). Retain NEUTRAL 2QFY15 Highlights : Revenues for 2QFY15 were at USD 95.6mn, down 0.9% QoQ and in-line with our estimates (USD 95.3mn). Revenues in INR stood at Rs 5.88bn, up 1.9% on a sequential basis. EBIDTA margin at 14% was up 60bps QoQ and in-line with our estimates. PAT came in at Rs 401mn (9% below est) owing to weaker other income and higher depreciation. Valuation and View : NIIT Tech s growth has been disappointing for the sixth quarter in a row. Management indicated that FY15 is a period of transition for the company and guided for a pick in momentum in FY16. We model 0.8/7.7% USD revenue growth for FY15/FY16 (vs. 3.3/9% modeled earlier). NIIT Tech s revenue growth for FY15 would be the lowest amongst peers. While the company s margin performance has remained muted for the past three years, deterioration in free cash flow generation over the past six quarters is an incremental negative. Stock might remain cheap owing to weak operating metrics. Retain NEUTRAL FINANCIAL SUMMARY (Rs mn) 2QFY15 1QFY15 QoQ (%) 2QFY14 YoY (%) FY14 FY15E FY16E FY17E Net Sales 5,883 5,776 1.9 5,870 0.2 23,047 23,827 25,508 27,012 EBITDA 822 775 6.1 883 (6.9) 3,513 3,544 4,185 4,322 PAT 400 433 (7.6) 621 (35.6) 2,305 1,928 2,481 2,680 Diluted EPS (Rs) 37.8 31.6 40.6 43.9 P/E (x) 10.4 12.4 9.7 9.0 EV / EBITDA (x) 6.0 6.0 4.8 4.4 RoE (%) 19.1 13.8 16.0 15.5 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
Weakness in Government and BFSI vertical hurts revenue growth : NIIT Tech indicated that weakness in a large insurance client has hurt growth in the BFSI vertical. Insurance (down 6.4% QoQ) was weak on the vertical front. Revenues from Government vertical in India have also declined steeply on a QoQ basis, owing to the CCTNS project moving from build out to operation and maintenance phase. Government vertical revenues were down 51% QoQ and accounted for 3% of overall revenues. ROW (down 11% QoQ) owing to weakness in India. Order book position : Order book executable over the next 12 months came at USD 298mn, up 1.0% QoQ and 20% YoY. Fresh order intake for the quarter was at USD 103mn with higher intake from USA and rest of the world. Key metrics : Exit headcount came at 8,288 with a net addition of 6 employees for the quarter. Attrition at 15.8% LTM was up 40bps QoQ. Management guided for an uptick in attrition in the overall sector owing to improved demand. Utilization rates came at 78.6%, up 60bps QoQ. Net cash on balance sheet came at Rs 2bn as of 2QFY15 (vs. Rs 1.8bn in 1QFY15). Hedge position stood at USD 51.26mn at an average rate of 65.26. Revenues at USD 95.6mn were down by 0.9% QoQ, inline with our estimates (USD 95.3mn). EBIDTA margin came at 14%, up 55bps QoQ and in-line with estimates. NIIT Tech s adjusted EBIDTA margins came at 12.5%, down 110 bps QoQ (company reports hedging gain/ (loss) in revenues) QUARTERLY FINANCIALS SNAPSHOT (Rs mn) 2QFY15 1QFY15 QoQ (%) 2QFY14 YoY (%) USD Revenues 95.6 96.5 (0.9) 97.2 (1.6) Net Sales 5,883 5,776 1.9 5,870 0.2 Cost of sales 3,877 3,846 0.8 3,669 5.7 SG&A Expenses 1,124 1,148 (2.1) 968 16.1 EBIDTA Profits 822 775 6.1 883 (6.9) Depreciation 254 189 155 Other Income (4) 36 182 PBT 564 622 (9.3) 910 (38.0) Minority Interest 10 27 20 Tax 154 162 269 APAT 400 433 (7.6) 621 (35.6) MARGIN ANALYSIS Margin Analysis (%) 2QFY15 1QFY15 QoQ (%) 2QFY14 YoY (%) Cost of Software Development as a % Sales 65.9% 66.6% (68) 62.5% 340 SG&A as a % of Sales 19.1% 19.9% (77) 16.5% 262 EBIDTA Margin (%) 14.0% 13.4% 55 15.0% (107) Net Profit Margin (%) 6.8% 7.5% (70) 10.6% (378) Tax Rate (%) 27.3% 26.0% 126 29.6% (226) Page 2
EMEA delivered higher growth on geographic front Travel vertical delivered higher growth on the geographic front. Government vertical remained on a declining trend, which is a key positive Ramp up in the Airport Authority of India deal (AAI deal) has led to higher traction in Managed services GEOGRAPHICAL REVENUE MIX (%) 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 Americas 37 37 36 38 37 38 39 41 44 45 44 44 EMEA 39 37 39 39 40 37 35 36 38 38 36 38 ROW 24 26 25 23 23 25 26 23 18 17 20 18 VERTICAL REVENUE MIX (%) 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 BFS 13 13 13 12 12 12 14 17 17 16 16 Insurance 21 21 20 19 19 18 19 18 18 18 17 Transport 39 40 42 42 37 36 37 38 37 39 42 Manufacturing 6 7 6 6 6 7 6 7 7 7 7 Government 7 8 5 8 11 13 10 6 5 6 3 Others 14 11 15 13 15 14 14 14 16 14 15 SERVICE LINE MIX (%) 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 ADM 61 61 64 63 61 60 62 66 64 62 63 IP assets 11 12 10 9 8 9 9 8 9 9 9 Managed services 13 12 11 12 12 13 12 13 12 16 18 SI and PI 9 9 9 10 13 13 12 7 9 7 4 BPO 6 6 6 6 6 5 5 6 6 6 6 Page 3
Order book executable over next twelve months came at USD 298mn up by 20% YoY Net headcount remained stable on a sequential basis. Attrition (LTM) stood at 15.8% and has remained on a steady uptrend over the past six quarters Order book executable over the next 12 months 350 300 250 200 150 100 US$ mn 149 141 137 169 200 Source : Company, HDFC sec Inst Research 232 245 243 240 253 242 252 262 248 265 290 295 298 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 Headcount 9,000 8,500 8,000 7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 4,585 4,994 5,358 5,806 6,265 6,733 6,978 7,362 7,444 Source : Company, HDFC sec Inst Research 7,617 7,882 8,158 8,207 8,017 8,160 8,290 8,282 8,288 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 FRESH ORDER INTAKE Fig in USD mn Q1FY12 Q2FY12 Q3FY12 Q4FY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 Fresh Order Intake 86 200 75 92 83 93 83 110 145 84 377 144 124 103 Fresh order intake stood at USD 103mn. Company had strong deal wins from USA USA 14 99 17 35 25 43 31 42 44 16 320 89 34 46 Europe 47 31 56 17 30 44 34 30 26 51 43 30 27 21 ROW 25 70 2 40 28 17 18 38 75 17 14 25 63 36 Source : Company, HDFC sec Inst Research Page 4
PEER VALUATION CMP Mcap EPS P/E EV/EBIDTA ROE(%) (Rs) (Rs bn) FY13 FY14 FY15E FY16E FY13 FY14 FY15E FY16E FY13 FY14 FY15E FY16E FY13 FY14 FY15E FY16E Mphasis 415 87.2 35.4 14.4 32.3 33.4 11.7 NA 12.9 12.4 6.5 NA 7.0 6.8 15.9 15.2 12.9 12.5 eclerx 1,365 40.8 57.0 82.9 86.1 101.4 24.0 16.5 15.9 13.5 14.8 10.5 10.1 8.7 44.0 49.8 40.1 38.4 Hexaware* 182 54.2 10.9 12.6 10.5 13.2 16.7 14.4 17.4 13.8 12.2 9.3 10.9 9.2 29.5 28.1 20.6 23.8 NIIT Tech 394 23.6 35.1 37.8 31.6 40.6 11.1 10.3 12.4 9.6 6.2 5.9 5.9 4.7 21.3 19.1 13.8 16.0 Mindtree 1,035 86.8 40.9 53.8 63.8 78.4 25.4 19.3 16.3 13.3 16.8 13.2 10.9 8.3 29.9 30.5 29.1 29.0 KPIT Tech 161 31.0 10.6 13.0 13.2 15.8 15.2 12.4 12.2 10.2 8.3 7.5 7.1 5.8 22.8 21.6 19.0 19.2 CYIENT 450 50.2 20.81 23.8 32.8 36.8 21.6 18.9 13.7 12.2 13.0 10.50 9.4 7.2 18.6 18.3 20.9 20.3 Source : Company, HDFC sec Inst Research, *Hexaware s EPS projections are for CY12, CY13,CY14E and CY15E respectively, Mphasis FY14 EPS is for 5 months only Owing to steep PAT miss of 9% in 2QFY15, we downgrade our profit estimates for the company Revenue downgrade accompanied by higher depreciation (vs. earlier assumptions) leads us to revise our earnings downwards CHANGE IN ESTIMATES (Rs mn) FY15E FY16E New Old % Change New Old % Change Sales 23,827 24,049 (0.9) 25,508 25,992 (1.9) EBIDTA 3,544 3,705 (4.3) 4,185 4,199 (0.3) PAT 1,928 2,197 (12.3) 2,481 2,583 (3.9) Source : HDFC sec Inst Research ASSUMPTIONS FY12 FY13 FY14 FY15E FY16E FY17E USD Revenue Growth 21.1% 14.6% 3.4% 0.8% 7.7% 8.8% Average Exchange Rate(USD vs INR) 48.21 53.93 59.47 60.97 60.6 59 Cost of Sales 62.7% 65.1% 65.8% 66.1% 65.5% 0.0% SG&A/ Sales 20.3% 18.6% 19.0% 19.1% 18.1% 0.0% EBIDTA Margin (%) 17.0% 16.3% 15.2% 14.9% 16.4% 16.0% Source : Company, HDFC sec Inst Research Page 5
INCOME STATEMENT (Rs mn) FY13 FY14 FY15E FY16E FY17E USD Revenues 374.8 387.5 390.8 421.0 457.8 Growth (%) 14.6 3.4 0.8 7.7 8.8 Average Exchange Rate 53.9 59.5 61.0 60.6 0.0 Revenues 20213 23,047 23,827 25,508 27,012 Growth % 28.2 14.0 3.4 7.1 5.9 Cost of Development 13,159 15,166 15,744 16,701 18,098 S&G&A Expenses 3,758 4,368 4,539 4,622 4,592 EBIDTA 3,296 3,513 3,544 4,185 4,322 EBIDTA Margin % 16.3 15.2 14.9 16.4 16.0 EBIDTA Growth % 22.9 6.6 0.9 18.1 3.3 Depreciation 567 619 918 905 810 EBIT 2,729 2,894 2,626 3,281 3,512 Other Income 207 288 92 160 200 PBT 2936 3182 2718 3441 3712 Tax 751 803 730 912 984 PAT 2,185 2,379 1,989 2,529 2,728 Minority Interest / Adj 52 75.0 61.0 48.0 48.0 APAT 2,133 2,304 1,928 2,481 2,680 APAT Growth (%) 8.3 8.0 (16.4) 28.7 8.0 Diluted EPS 35.5 38.1 31.6 40.6 43.9 EPS Growth (%) 7.0 7.3 (16.4) 28.7 8.0 BALANCE SHEET (Rs mn) FY13 FY14 FY15E FY16E FY17E SOURCES OF FUNDS Share Capital 602 607 607 607 607 Reserves 10,339 12,632 13,995 15,751 17,647 Total Shareholders Funds 10,941 13,239 14,602 16,358 18,254 Minority Interest 173 189 250 298 346 Long Term Debt 60 53 53 53 53 Short Term Debt - - - - - Total Debt 60 53 53 53 53 Long Term Provisions 279 310 310 310 310 TOTAL SOURCES OF FUNDS 11,453 13,790 15,215 17,018 18,962 APPLICATION OF FUNDS Net Block 4,661 5,820 6,302 6,298 6,387 Investments 820 551 551 551 551 Deferred Tax Assets 122 223 223 223 223 LT Loans & Advances 369 555 665 775 885 Inventories 4 52 52 52 52 Trade Receivables 4,538 5,644 5,745 6,150 6,513 Cash & Equivalents 2,329 2,212 2,147 3,259 4,426 ST loans & Advances 933 1,316 1,466 1,616 1,766 Other Current Assets 1,612 1,641 1,941 2,241 2,541 Current assets 9,413 10,813 11,299 13,265 15,246 Trade Payables 1,798 1,837 1,501 1,747 1,850 Other Current Liabilities 1,172 1,552 1,430 1,403 1,486 Provisions 965 836 946 996 1,046 Current Liabilities 3,935 4,224 3,877 4,146 4,382 Net Current Assets 5,478 6,588 7,422 9,120 10,864 APPLICATION OF FUNDS 11,453 13,790 15,215 17,018 18,962 Page 6
CASH FLOW (Rs mn) FY13 FY14 FY15E FY16E FY17E Reported PAT 2,186 2,380 1,989 2,529 2,728 Non operating & Int. Income (22) (93) (120) (120) (120) Other EO Items 75 151 0 0 0 Depreciation 567 619 918 905 810 Working Capital Change (453) (1,606) (1,009) (696) (687) OPERATING CASH FLOW ( a ) 2,353 1,451 1,778 2,617 2,731 Capex (969) (1,399) (1,400) (900) (900) Free cash flow (FCF) 1,384 52 378 1,717 1,831 Investments (164) 402 120 120 120 INVESTING CASH FLOW ( b ) (1,133) (997) (1,280) (780) (780) Share capital Issuance 87 38 - - - Debt Issuance (414) (17) - - - Interest expenses (21) (14) - - - Dividend (566) (547) (564) (726) (784) FINANCING CASH FLOW ( c ) (914) (540) (564) (726) (784) NET CASH FLOW (a+b+c) 306 (87) (66) 1,112 1,168 Effect of chg in Exchange rates 65 214 - - - Closing Cash & Equivalents 2,329 2,212 2,147 3,259 4426 KEY RATIOS PROFITABILITY (%) FY13 FY14 FY15E FY16E FY17E Gross Margin 34.9 34.2 33.9 34.5 33.0 EBITDA Margin 16.3 15.2 14.9 16.4 16.0 EBIT Margin 13.5 12.6 11.0 12.9 13.0 APAT Margin 10.6 10.0 8.1 9.7 9.9 RoE 21.3 19.1 13.8 16.0 15.5 RoCE 20.8 19.2 14.0 16.2 15.6 ROIC 26.9 24.8 17.1 19.6 19.9 EFFICIENCY Tax Rate % 25.6 25.2 26.8 26.5 26.5 Asset turnover (x) 1.79 1.73 1.63 1.55 1.48 Unbilled Revenues 22.0 20.5 20.5 20.5 20.5 Debtor (days) 82.0 89.4 88.0 88.0 88.0 Payables (days) 32.0 29.0 23.0 25.0 25.0 Cash conversion cycle (days) 71.6 80.8 85.5 83.5 83.5 Debt/EBITDA (x) 0.02 0.01 0.01 0.01 0.01 Net D/E (0.28) (0.20) (0.18) (0.23) (0.27) VALUATION EPS (Rs/sh) 35.5 38.1 31.7 40.6 43.9 CEPS (Rs/sh) 44.8 48.2 46.9 55.8 57.5 BV (Rs/sh) 181.6 218.1 240.6 269.5 300.7 DPS (Rs/sh) 8.5 9.0 7.9 10.2 11.0 P/E 11.5 10.7 12.4 9.6 8.9 P/BV 2.2 1.9 1.6 1.5 1.3 EV/EBITDA 6.5 6.3 6.0 4.8 4.4 Dividend Yield (%) 2.1% 2.2% 2.0% 2.6% 2.8% FCFE/Mcap(%) 5.6% 0.2% 1.6% 7.2% 7.7% OCF/EV(%) 11.0% 6.6% 8.4% 13.0% 14.4% FCF/EV(%) 6.4% 0.2% 1.8% 8.5% 9.7% Page 7
RECOMMENDATION HISTORY NIIT Tech 500 400 300 200 100 TP Date CMP Reco Target 17-Oct-13 278 BUY 315 18-Dec-13 350 BUY 425 15-Jan-14 389 BUY 454 10-May-14 415 BUY 457 16-Jul-14 408 NEU 425 16-Oct-14 394 NEU 406 0 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HDFC Securities Ltd or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HDFC Securities Ltd. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HDFC Securities Ltd may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HDFC Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HDFC Securities Ltd, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HDFC Securities Ltd and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organisations described in this report. HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park,Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171 7330 www.hdfcsec.com Page 8