Humble valuations leads to favourable risk return January 17, 2017 Madhu Babu madhubabu@plindia.com +91 22 66322300 Rating BUY Price Rs416 Target Price Rs520 Implied Upside 25.0% Sensex 27,236 Nifty 8,398 (Prices as on January 17, 2017) Trading data Market Cap. (Rs bn) 25.1 Shares o/s (m) 60.2 3M Avg. Daily value (Rs m) 102.3 Major shareholders Promoters 30.84% Foreign 32.04% Domestic Inst. 21.14% Public & Other 15.98% Stock Performance (%) 1M 6M 12M Absolute (2.3) (11.4) (19.5) Relative (5.1) (9.3) (30.9) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2018 45.5 47.0 3.1 2019 49.4 52.7 6.2 Price Performance (RIC: NITT.BO, BB: NITEC IN) (Rs) 600 500 400 300 200 100 0 Jan 16 Mar 16 May 16 Source: Bloomberg Jul 16 Sep 16 Nov 16 Jan 17 NIIT Technologies (NIIT Tech s) Q3FY17 results were marginally above our expectations. USD revenues, Constant currency growth and EBITDA margin beat our estimates. Order book executable over the next twelve months came at US$311m, up 0.6% QoQ and 3.3% YoY. NIIT Tech has recently announced two senior hires to rampup the management team (Mr Joel Lindsay to Head the Digital Business and Mr Adrain Morgan to strengthen the Insurance business). We believe recent senior level additions could add some weight to the Digital capabilities. We also believe the management needs to further invest in strenthening its Digital capabilities in its focused verticals (Travel, BFS, Insuranace). As on Q3FY17, Digital accounted to 19% of total revenues. Management remained buillish on growth outlook for Q4FY17 and guided for further margin expansion. We expect NIIT Tech s USD revenues to remain flat YoY for FY17E (6.5/(1.2)% USD revenue growth delivered in FY16/FY15). We believe a portion of the lower USD revenue growth could be attributable to NIIT Tech s defocus from Government business. We model USD revenues to grow by 0/7% for FY17/FY18E. We retain our EPS estimates at Rs40.6/45.3 for FY17/FY18E. Valuations remain reasonable as stock trades at 9.1x FY18E. Net cash on balance sheet stands at Rs5.57bn (Rs91/sh which represents 21% of Mcap). We see faovrable risk return which leads us to retain BUY. Our TP is retained at Rs520 (11x Sep18E EPS). Revenue and Margin beat: Revenues came at US$101m, down 0.6% QoQ and in line with our estimates (US$100m). In constant currency, revenues grew by 0.6% QoQ. Higher revenues from GIS and traction in Insurance vertical have aided in growth beat. EBITDA margin at 16.7% was up 20bps QoQ and above our estimates (PLe: 16.4%). PAT at Rs624m was 3.5% above our estimates (PLe: Rs603m). Fresh order intake for the quarter came at US$101m (v/s US$123m in Q3FY16). Moderation in debtor days (69 days for 3QFY17 vs 73 days as on 2QFY17) and Capex has aided in strong free cash flow generation for the quarter. Key financials (Y/e March) 2016 2017E 2018E 2019E Revenues (Rs m) 26,824 27,510 29,087 30,932 Growth (%) 13.1 2.6 5.7 6.3 EBITDA (Rs m) 4,733 4,480 4,821 5,104 PAT (Rs m) 2,814 2,484 2,785 3,022 EPS (Rs) 46.0 40.6 45.5 49.4 Growth (%) 44.8 (11.7) 12.1 8.5 Net DPS (Rs) 9.8 8.9 10.0 10.9 Profitability & Valuation 2016 2017E 2018E 2019E EBITDA margin (%) 17.6 16.3 16.6 16.5 RoE (%) 19.1 14.8 14.8 14.5 RoCE (%) 18.8 14.5 14.3 13.9 EV / sales (x) 0.8 0.7 0.6 0.5 EV / EBITDA (x) 4.5 4.3 3.6 3.0 PE (x) 9.1 10.3 9.1 8.4 P / BV (x) 1.6 1.4 1.3 1.2 Net dividend yield (%) 2.4 2.1 2.4 2.6 Source: Company Data; PL Research Q3FY17 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q3FY17: Revenues and Margins ahead of our expectations Variance (PL v/s Y/e March (Rs m) Q3FY17 Q2FY17 QoQ Q3FY16 YoY PLe ACTUAL) Revenue (USD m) 101.0 101.6 0.6% 103.0 2.0% 99.6 1.4% Revenue 6938 6929 0.1% 6787 2.2% 6691 3.7% EBITDA 1162 1145 1.5% 1235 5.9% 1097 5.9% EBITDA Margin 16.7% 16.5% 22 bps 18.2% 145 bps 16.4% 35 bps Pre Tax Income 900 857 5.0% 1014 11.2% 860 4.7% Tax 228 213 7.0% 212 7.5% 206 10.7% Tax Rate 25.3% 24.9% 48 bps 20.9% 443 bps 24.0% 138 bps Adj. PAT 624 590 5.8% 741 15.8% 603 3.5% EPS 10.2 9.6 5.8% 12.1 16.1% 9.8 3.6% * Numbers in the table are in IND AS Revenues marginally above estimates: Revenues came at US$101m, down 0.6% QoQ and marginally above our estimates (US$100m). In constant currency, Revenues grew by 0.6% QoQ. Higher revenues from GIS and traction in Insurance vertical have aided in growth beat for the quarter. Insurance vertical (up 3.7% QoQ) and Manufacturing Media vertical (up 3.4% QoQ) aided in revenue growth. Management guided that Q4FY17 USD revenue growth would be healthy backed by strong traction in key verticals. Exhibit 2: USD revenues and YoY growth (%) USD revenues YoY Growth 104.0 102.0 100.0 98.0 96.0 97.9 96.1 96.6 94.5 100.2 103.0 100.2 101.0 10.0% 8.0% 6.0% 4.0% 2.0% 94.0 0.0% 92.0 2.0% 90.0 4.0% Steady margin beat: EBITDA margin came at 16.7%, up 20bps QoQ and above our estimates (PLe: 16.4%). Adjusted EBITDA margin came at 15.2%, up 20 bps QoQ (NIIT Tech reports hedging gains in revenues, Adjusted margin is calculated adjusted for the same). We note that improving revenue mix of NIIT Tech has been aiding margin trajectory. Management guided for scope for further margin improvement in Q4FY17 as well. We believe that a strong exit margin in 4QFY17 will help NIIT Tech s EBITDA margin outlook for FY18E. January 17, 2017 2
Exhibit 3: EBITDA Margins for the last few quarters Exhibit 4: Adjusted EBITDA Margins EBITDA Margins Adjusted EBIDTA margin(%) 20.0% 18.0% 16.0% 14.0% 13.4% 14.5% 16.3% 18.2% 15.1% 16.7% 20.0% 18.0% 16.0% 14.0% 12.0% 13.3% 13.0% 15.5% 17.9% 14.4% 15.2% 12.0% 10.0% Headcount at the end of the quarter stood at 8809 employees which represents a net reduction of 59 employees. This is the fifth straight quarter of headcount decline. We believe that lower headcount and improvement in utilisation rates have been aiding the margins directionally. Management guided that some portion of reduction in employee count is led by select domestic projects moving to operational and maintenance phase. For Q3FY17, revenues from offshore stood at 40%, up 100bps QoQ. Hence, offshore shift also helped in margin trajectory for the quarter. Exhibit 5: Utilization rates Exhibit 6: Net Employee Addition/(deletion) over past few quarters 82.0% 81.0% 80.0% 79.0% 78.0% 77.0% 76.0% 75.0% 77.3% 80.3% Capacity Utilisation 79.5% 81.0% 78.4% 78.6% 80.0% 78.8% 79.0% 78.0% 77.3% 800 600 400 200 0 200 400 600 8 Q1FY15 6 Q2FY15 229 Q3FY15 Net addition 734 435 364 75 41 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 454 154 59 Q1FY17 Q2FY17 Q3FY17 Order Book improves modestly: Order book executable over the next 12 months came at US$311m, up 0.6% QoQ and 3.3% YoY. We note that crosscurrency moves would have also weighed on the reported order book in USD. Adjusted for the same, order book executable over the next 12 months improved at a higher pace. Fresh order intake for the quarter came at US$101m (v/s US$123m in Q3FY16). January 17, 2017 3
Exhibit 7: Fresh order booking Exhibit 8: Executable order book over next 12 months 150 130 110 90 70 50 124 Fresh Order Intake 123 120 103 109 97 89 80 101 143 101 320 300 280 260 240 220 200 262 265 Order Book 295 296 300 301 307 311 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Exhibit 9: Geographical Break up of Fresh Order Intake Fig in USD mn 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 USA 34 46 61 39 43 29 50 30 42 85 38 Europe 27 21 25 29 31 34 55 61 30 45 51 ROW 63 36 23 21 23 17 18 28 29 13 12 Fresh Order Intake 124 103 109 89 97 80 123 120 101 143 101 Significant improvement in DSO: We note DSO days have improved from high 90 s a few quarters back to 69 days in Q3FY17. Significant improvement in DSO has led net Cash & Cash equivalents to grow to Rs5.57bn for Q3FY17 (v/s Rs4.48bn in Q2FY17). Management guided that considering the strong balance sheet, it could pursue an acquisition strategy to boost its revenue mix in favour of Digital Services. Exhibit 10: DSO days improved to 69 days in the quarter DSO Days 100 95 90 85 80 75 70 65 60 91 94 94 93 92 89 90 80 78 73 69 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 January 17, 2017 4
Valuation and View View: We expect NIIT Tech s USD revenues to remain flat for FY17E. However, led by traction in core verticals, we see scope for NIIT Tech to deliver 7% USD revenue growth in FY18E. Improving business mix and operational efficiencies can help sustain EBITDA margins at respectable levels. We model reported EBITDA margin at 16.3/16.6/16.5% for FY17/FY18E/FY19E. With strong net cash on balance sheet (Rs5.57bn), NIIT Tech has the potential to pursue acquisitions to strengthen its service offerings in favour of Digital. Stock has high room for safety in our view. Maintain BUY. Exhibit 11: NIIT Tech One year forward P/E Chart Exhibit 12: NIIT Tech v/s Mindtree (discount)/premium chart 14 12 NIIT Tech Vs Mindtree (Discount)/ Premium 10 8 6 4 0.0% 20.0% 40.0% Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 P/E Mean + Std Dev Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Mean Mean - Std Dev Jan-17 60.0% 80.0% Jul/14 Dec/14 May/15 Oct/15 Mar/16 Aug/16 Jan/17 Operating Metrics Exhibit 13: Revenues from Geography (%) Geography Mix (%) Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Americas 44% 44% 44% 44% 45% 46% 46% 45% 48% 49% 48% EMEA 36% 38% 35% 35% 35% 35% 34% 33% 32% 34% 34% RoW 20% 18% 21% 21% 20% 19% 20% 22% 20% 18% 18% Exhibit 14: Sequential decline across geographies USD m Q3FY17 Q2FY17 QoQ Q3FY16 YoY Americas 48.5 49.8 2.6% 47.4 2.3% EMEA 34.3 34.5 0.6% 35.0 2.0% RoW 18.2 18.3 0.6% 20.6 11.8% January 17, 2017 5
Exhibit 15: Revenues by Verticals (%) Vertical Mix (%) Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 BFS 16% 16% 16% 15% 16% 16% 17% 19% 19% 19% 18% Insurance 18% 17% 17% 18% 20% 21% 21% 21% 22% 23% 24% Transport 39% 42% 40% 38% 37% 37% 36% 32% 32% 33% 32% Manu, Media, Others 27% 25% 27% 29% 27% 26% 26% 28% 26% 25% 26% Exhibit 16: Vertical wise revenues and Growth (%) USD m Q3FY17 Q2FY17 QoQ Q3FY16 YoY BFS 18.2 19.3 5.8% 17.5 3.8% Insurance 24.2 23.4 3.7% 21.6 12.0% Transport 32.3 33.5 3.6% 37.1 12.9% Manu, Media, Others 26.3 25.4 3.4% 26.8 2.0% Exhibit 17: Revenues by Services (%) Service Mix (%) Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 ADM 62% 63% 60% 59% 63% 66% 67% 65% 66% 68% 67% IP assets 9% 9% 9% 9% 8% 9% 8% 8% 7% 7% 7% Managed services 16% 18% 18% 18% 16% 16% 16% 18% 18% 17% 17% SI and PI 7% 4% 7% 9% 8% 4% 4% 4% 3% 3% 4% BPO 6% 6% 6% 5% 5% 5% 5% 5% 5% 5% 5% Exhibit 18: Service wise revenues and growth (%) USD m Q3FY17 Q2FY17 QoQ Q3FY16 YoY ADM 67.7 69.1 2.1% 69.0 2.0% IP assets 7.1 7.1 0.6% 8.2 14.2% Managed services 17.2 17.3 0.6% 16.5 4.2% SI and PI 4.0 3.0 32.5% 4.1 2.0% BPO 5.0 5.1 0.6% 5.2 2.0% Exhibit 19: Headcount Metrics Billable Personnel Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Onsite 1,781 1,785 1,855 1,845 1,874 1,902 1,901 1,906 1,857 Offshore 5,606 6,037 6,662 7,008 6,910 6,841 6,374 6,203 6,180 Total Billable 7,387 7,822 8,517 8,853 8,784 8,743 8,275 8,109 8,037 Sales & Marketing (Excl GIS) 134 137 139 144 136 127 132 141 139 Sales & Marketing (GIS) 52 65 65 68 63 72 72 76 82 Others 486 470 507 527 534 534 543 542 551 Grand Total 8,059 8,494 9,228 9,592 9,517 9,476 9,022 8,868 8,809 Net addition /(Decline) (229.0) 435 734 364 (75) (41) (454) (154) (59) January 17, 2017 6
Income Statement (Rs m) Net Revenue 26,824 27,510 29,087 30,932 Raw Material Expenses 16,896 17,752 18,969 20,261 Gross Profit 9,928 9,758 10,118 10,672 Employee Cost Other Expenses 5,195 5,278 5,297 5,568 EBITDA 4,733 4,480 4,821 5,104 Depr. & Amortization 1,101 1,283 1,264 1,237 Net Interest Other Income 183 231 370 320 Profit before Tax 3,815 3,428 3,926 4,187 Total Tax 831 746 982 1,005 Profit after Tax 2,984 2,682 2,945 3,182 Ex Od items / Min. Int. 144 198 160 160 Adj. PAT 2,814 2,484 2,785 3,022 Avg. Shares O/S (m) 61.2 61.2 61.2 61.2 EPS (Rs.) 46.0 40.6 45.5 49.4 Cash Flow Abstract (Rs m) C/F from Operations 3,299 3,474 3,723 3,911 C/F from Investing (3,040) (860) (1,000) (1,000) C/F from Financing (727) (656) (735) (798) Inc. / Dec. in Cash (467) 1,958 1,987 2,113 Opening Cash 2,238 2,790 4,110 5,518 Closing Cash 2,933 4,891 6,878 8,991 FCFF 776 3,642 3,937 4,098 FCFE 791 3,642 3,937 4,098 Key Financial Metrics Growth Revenue (%) 13.1 2.6 5.7 6.3 EBITDA (%) 37.0 (5.3) 7.6 5.9 PAT (%) 45.1 (11.7) 12.1 8.5 EPS (%) 44.8 (11.7) 12.1 8.5 Profitability EBITDA Margin (%) 17.6 16.3 16.6 16.5 PAT Margin (%) 10.5 9.0 9.6 9.8 RoCE (%) 18.8 14.5 14.3 13.9 RoE (%) 19.1 14.8 14.8 14.5 Balance Sheet Net Debt : Equity (0.3) (0.3) (0.4) (0.5) Net Wrkng Cap. (days) 45 38 39 39 Valuation PER (x) 9.1 10.3 9.1 8.4 P / B (x) 1.6 1.4 1.3 1.2 EV / EBITDA (x) 4.5 4.3 3.6 3.0 EV / Sales (x) 0.8 0.7 0.6 0.5 Earnings Quality Eff. Tax Rate 21.8 21.8 25.0 24.0 Other Inc / PBT 4.8 6.7 9.4 7.6 FCFE / PAT 28.1 146.6 141.4 135.6. Balance Sheet Abstract (Rs m) Shareholder's Funds 15,907 17,736 19,786 22,010 Total Debt 64 64 64 64 Other Liabilities 1,493 1,691 1,851 2,011 Total Liabilities 17,464 19,491 21,700 24,084 Net Fixed Assets 8,372 8,089 7,824 7,587 Goodwill Investments Net Current Assets 7,747 9,947 12,311 14,822 Cash & Equivalents 4,102 6,060 8,047 10,161 Other Current Assets 8,672 9,101 9,747 10,451 Current Liabilities 5,027 5,214 5,483 5,790 Other Assets 1,345 1,455 1,565 1,675 Total Assets 17,464 19,491 21,700 24,084 Quarterly Financials (Rs m) Y/e March Q4FY16 Q1FY17 Q2FY17 Q3FY17 Net Revenue 6,847 6,707 6,929 6,938 EBITDA 1,261 1,015 1,145 1,162 % of revenue 18.4 15.1 16.5 16.7 Depr. & Amortization 287 326 317 321 Net Interest Other Income 39 83 29 59 Profit before Tax 1,013 411 857 900 Total Tax 184 80 213 228 Profit after Tax 790 646 590 624 Adj. PAT 790 1,007 590 624 Key Operating Metrics Revenue ($ mn) 408 406 434 469 Growth (%) 6.5 (1.0) 6.7 7.7 Average INR Dollar rate 65.5. January 17, 2017 7
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