May 10, 2018 ICICI Securities Ltd | Retail Equity Research Result Update Large deal momentum to remain strong… US$ revenues grew 4.7% QoQ to $122.2 million, better than our expectation of 2.7% and $119.8 million. Revenues in constant currency grew 4.3% QoQ Rupee revenues increased 4.3% QoQ to | 788.8 crore, better than our estimate of | 771.2 crore At 18.0%, EBITDA margins expanded 90 bps QoQ, above our 60 bps expansion and 17.7% estimate mainly on account of increased digital and product business as well as operational efficiencies Reported profit grew 13.7% sequentially to | 86.1 crore, ahead of our estimates of | 83.1 crore on account of a better-than-expected operating performance. However, it was partly offset by a higher effective tax rate (22.8% vs. 16.5% in Q3FY18) Organisation changes driving acceleration in growth… The management has undertaken a restructuring exercise to drive growth through changes in the leadership team, reorganising itself as a vertical driven organisation and modifications in incentive structure. These changes are visible in NTL key metrics such as Order intake: improved from $110 million in Q1 to $145 million in Q4FY18; Number of $ mn clients increased from 72 in Q1FY18 to 80 in Q4FY18; traction in large deal momentum (H1:2, H2FY18:5 deals); Digital contribution as % of revenues inching up from 21% in Q1FY18 to 26% in Q4FY18 and Top 5 clients concentration reducing from 33% in Q1 to 29% in Q4FY18. Going ahead, the management remains positive of winning at least seven large deals in FY19E. Expects double digit revenue growth (CC) on organic basis in FY19E… The company reported healthy growth in the quarter, driven by growth in insurance segment and digital engagements. Insurance segment grew 12.8% QoQ, led by growth in the NITL business and digital pipeline. Digital, which now forms 26% of revenues (vs. 21% in Q4FY17) grew 9% QoQ, 37% YoY. NTL reported 9.7% YoY topline growth in constant currency (CC) terms. For FY19E, the management expects double digit growth in revenue on an organic basis in CC terms. The healthy outlook is on the back of order book attained in FY18, deal win momentum and positive stance for travel & transport and BFSI. Overall, we expect its dollar revenues to grow at 12.1% CAGR to US$582 million in FY18-20E. Healthy margin led by revenue growth, beats estimates… EBITDA margins expanded 90 bps to 18% in the quarter owing to healthy revenue growth, growth in high margin segments of digital and optimisation of SG&A. On the back of healthy outlook on the revenue front and increasing contribution of high margin digital segments, the management expects margins in FY19E to be better compared to FY18. NTL ended FY18 with EBITDA margins of 16.8%. Overall, we build in EBITDA margin at 17.2% and 17.5% in FY19E and FY20E, respectively. Growth potential seems to be captured in stock; maintain HOLD… NIIT Tech reported Q4FY18 results wherein it reported a much better- than-expected operating performance. The commentary on the outlook front is positive with strong order intake. Hence, we tweak our estimates and now anticipate rupee revenue, PAT to grow at a CAGR 12.5%, 17.6%, respectively, in FY18-20E. However, after the sharp run up in the last six months, the stock now captures the growth potential leaving limited upside at the current level. Hence, we maintain our HOLD rating with a revised target price of | 1075 (17x FY20E EPS). NIIT Technologies (NIITEC) | 1049 Rating matrix Rating : Hold Target : | 1075 Target Period : 12 months Potential Upside : 2% What’s changed? Target Changed from | 775 to | 1075 EPS FY19E Changed from | 52.2 to | 52.9 EPS FY20E Changed from | 59.8 to | 63.2 Rating Unchanged Quarterly performance Q4FY18 Q4FY17 YoY (%) Q3FY18 QoQ (%) Revenue 789 745 5.9 757 4.3 EBITDA 142 156 (9.3) 130 9.4 EBITDA (%) 18.0 21.0 -301 bps 17.1 85 bps PAT 86 109 (21.0) 76 13.7 Key financials | Crore FY17 FY18E FY19E FY20E Net Sales 2,802 2,991 3,371 3,785 EBITDA 485 501 580 662 Net Profit 250 280 325 388 EPS (|) 40.8 45.6 52.9 63.2 Valuation summary FY17 FY18E FY19E FY20E P/E 23.4 23.0 19.8 16.6 Target P/E 24.0 23.6 20.3 17.0 EV / EBITDA 6.3 5.6 4.4 3.3 P/BV 3.5 3.5 3.1 2.7 RoNW (%) 14.8 15.1 15.4 16.1 RoCE (%) 29.8 32.8 38.1 44.7 Stock data Particular Amount Market Capitalization (| Crore) 3,758.4 Total Debt (| Crore) 6.4 Cash and Investments (| Crore) 410.8 EV (| Crore) 3,354.0 52 week H/L 1190 / 463 Equity capital 61.2 Face value 10.0 Price performance 1M 3M 6M 12M TechMahindra 4.3 5.0 43.4 53.4 MindTree 23.1 44.9 109.8 104.9 KPIT Tech 16.8 25.7 66.3 101.4 NIIT Tech 17.6 26.8 64.8 98.7 Research Analyst Deepak Purswani, CFA [email protected]Deepti Tayal [email protected]
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May 10, 2018
ICICI Securities Ltd | Retail Equity Research
Result Update
Large deal momentum to remain strong…
US$ revenues grew 4.7% QoQ to $122.2 million, better than our
expectation of 2.7% and $119.8 million. Revenues in constant
currency grew 4.3% QoQ
Rupee revenues increased 4.3% QoQ to | 788.8 crore, better than
Manfacturing, Med & Others 3.6 11.7 -0.6 12.2 -5.3 12.5
Government NA 0.1 0.0 0.0 0.5 -0.7
Source: Company, ICICI Direct Research
EMEA led the quarterly growth with strong 11.7%
growth on a QoQ basis on account of growth in the NITL
business. This was followed by RoW, which grew on
the back of growth in the GIS business and growth in
the APAC region
BFSI grew 7.2% QoQ driven by growth in the insurance
segment
Travel & transportation was flat sequentially owing to a
delay in start of new projects
ICICI Securities Ltd | Retail Equity Research Page 5
Exhibit 3: Service mix break up
Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18
Revenue by service mix (%)
SI & PI 4.0 6.0 5.0 6.0 5.0 4.0
IP Assets 7.0 6.0 6.0 7.0 7.0 7.0
Managed Services 17.0 17.0 18.0 18.0 19.0 19.0
Application Development & Management 67.0 66.0 66.0 64.0 65.0 66.0
BPO 5.0 5.0 5.0 4.0 4.0 4.0
Growth QoQ (%)
SI & PI 32.8 61.4 -17.1 25.3 -15.3 -16.2
IP Assets -0.4 -7.8 -0.6 21.8 1.7 4.7
Managed Services -0.4 7.6 5.3 4.4 7.3 4.7
Application Development & Management -1.9 6.0 -0.6 1.3 3.3 6.3
BPO -0.4 7.6 -0.6 -16.5 1.7 4.7
Source: Company, ICICI Direct Research
Exhibit 4: Client & human resource matrix
Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18
Client metrics
Between 1 to 5 million 55 55 52 55 59 60
Between 5 to 10 million 10 10 14 13 12 13
Above 10 million 8 8 6 6 7 7
Headcount, Utilization, Attrition
Total Employees 8809 8853 8,963 9,022 9,081 9,423
Utilization 80.0 81.0 81.2 79.5 79 79.5
Attrition 12.6 12.7 12.1 11.4 10.6 10.5
Source: Company, ICICI Direct Research
Growth in digital engagements led the growth for ADM
Attrition rate continues its declining spree since Q4FY17
and declined 10 bps QoQ to 10.5% in the quarter
ICICI Securities Ltd | Retail Equity Research Page 6
Financial story in charts
Exhibit 5: Digital contribution as a percentage of overall revenues continues to inch up
18.0%19.0% 19.0%
21.0% 21.0%
23.0%
25.0%26.0%
10.0%8.8%
-0.4%
18.9%
-0.6%
14.0%
11.0%
8.9%
-2.0%
8.0%
18.0%
28.0%
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
%
Digital as a % of revenue Growth, QoQ
Exhibit 6: Dollar revenues may grow at 12.1% CAGR during FY18-20E
388
100 103 103 111
416
110 115 117
464
519
582
411
122
1.3
9.8 11.3
1.1
6.0
-1.1 -1.5 -0.7
8.6
13.610.6 11.3 11.9 12.3
0
100
200
300
400
500
600
FY15
FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
FY18E
FY19E
FY20E
$ m
illion
-20
-10
0
10
20
30
40
50
%
Dollar revenue Growth, YoY
Source: Company, ICICI Direct Research
ICICI Securities Ltd | Retail Equity Research Page 7
Exhibit 7: EBITDA margin expands 90 bps QoQ to 18%
14.6
17.3
15.3
16.216.9
21.0
17.3
15.616.1
17.1
18.0
16.817.2
17.5
10
13
16
19
22
FY15
FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
FY18E
FY19E
FY20E
%
EBITDA margin
Source: Company, ICICI Direct Research
Exhibit 8: PAT expected to grow at 17.6% CAGR in FY18-20E
193.8
264.35
31.3
59.6 65.4
109
250.1
51.367.1
75.786.1
280.2
324.6
387.7
0
100
200
300
400
FY15
FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
FY18E
FY19E
FY20E
| c
rore
PAT
Source: Company, ICICI Direct Research
ICICI Securities Ltd | Retail Equity Research Page 8
Outlook and Valuation
NIIT Tech reported Q4FY18 results wherein it reported a much better-
than-expected operating performance. Among verticals, BFSI witnessed
growth of 5.4% QoQ owing to a ramp up in top accounts. Also, Digital
revenues grew 9% QoQ contributing 26% to total revenues in Q4FY18.
NIIT Tech reported Q4FY18 results wherein it reported a much better-
than-expected operating performance. The commentary on the outlook is
positive with the strong order intake. Hence, we tweak our estimates and
now anticipate rupee revenue and PAT to grow at a CAGR 12.5% and
17.6%, respectively, in FY18-20E. However, after the sharp run up in the
last six months, the stock now captures the growth potential leaving
limited upside at the current level. Hence, we maintain our HOLD rating
on the stock with a revised target price of | 1075 (17x FY20E EPS).
Exhibit 9: One year forward rolling PE
0
200
400
600
800
1000
1200
May-0
8
Nov-0
8
May-0
9
Nov-0
9
May-1
0
Nov-1
0
May-1
1
Nov-1
1
May-1
2
Nov-1
2
May-1
3
Nov-1
3
May-1
4
Nov-1
4
May-1
5
Nov-1
5
May-1
6
Nov-1
6
May-1
7
Nov-1
7
May-1
8
Price 15 12 9 6 3
Source: Company, ICICI Direct Research
Exhibit 10: Valuations
Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE
(| cr) (%) (|) (%) (x) (x) (%) (%)
FY16 2,682 13.1 43.3 36.2 24.1 7.2 16.8 24.3
FY17 2,802 4.5 40.8 (5.7) 23.4 6.3 14.8 29.8
FY18E 2,991 6.8 45.6 11.9 23.0 5.6 15.1 32.8
FY19E 3,371 12.7 52.9 15.8 19.8 4.4 15.4 38.1
FY20E 3,785 12.3 63.2 19.5 16.6 3.3 16.1 44.7
Source: Company, ICICI Direct Research
ICICI Securities Ltd | Retail Equity Research Page 9
Recommendation History vs. Consensus
100
300
500
700
900
1,100
May-
18
Mar-
18
Feb-
18
Dec-
17
Nov-
17
Sep-
17
Jul-
17
Jun-
17
Apr-
17
Mar-
17
Jan-
17
Dec-
16
Oct-
16
Sep-
16
Jul-
16
Jun-
16
Apr-
16
Feb-
16
Jan-
16
Nov-
15
Oct-
15
Aug-
15
Jul-
15
May-
15
Apr-
15
(|
)
0.0
20.0
40.0
60.0
80.0
100.0
(%
)
Price Idirect target Consensus Target Mean % Consensus with BUY
Source: Bloomberg, Company, ICICI Direct Research
Key events
Date Event
Apr-15 Acquires 51% stake in Incessant Technologies for ~$17 million. The company could generate $17 million revenues with 20%+ margins in FY15E.
Jul-15 Reports healthy revenue growth in services segment led by Incessant and international business partially offset by decline in domestic revenues (PFR)
Oct-15 Reports Q2FY16 earnings with 3.5% QoQ growth, in line with estimates, led by BFSI, transportation and manufacturing, while at 17.6%, margins were better
Feb-16 NIIT Tech launches intelligent automation for business operations,by partnering with a software company UiPath, specialized in Robotic process Automation
Mar-16 Secures best service provider award from ICT subsidiary of German railways
Jan-17
According to media article, NIIT Technologies appoints Joel Lindsey as global head of digital services. NITL also appoints Adrian morgan as head of NIIT Insurance
Technologies
Apr-17
Implements settlement agreement with the government and receives part payment of | 41.9 crore, with revenue recognition of | 27.1 crore for services contracted
and reversal of provisions of | 13.15 crore to be accounted in FY17
Mar-16 Secures best service provider award from ICT subsidiary of German railways
May-17
Partners with an artificial intelligence and autonomous automation firm 'Arago'. NIIT would integrate Arago’s general AI technology HIRO into its automation offering,
TRON Smart Automation. This partnership could enable company to deliver a superior automation experience by bringing in cutting-edge machine reasoning
technology optimised by machine learning
Jun-17
NIIT Technologies subsidiary Incessant Technologies signs a definitive agreement to acquire a 55% stake in US-based business process management firm RuleTek
LLC. This acquisition could help Incessant expand its footprint in North America and strengthen its digital integration capabilities. RuleTek has 65 employees and
reported revenues of $6.47 million for FY17
Source: Company, ICICI Direct Research
Top 10 Shareholders Shareholding Pattern
Rank Name Latest Filing Date % O/S Position (m) Change (m)
ICICI Securities Ltd | Retail Equity Research Page 13
ANALYST CERTIFICATION
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accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or wil l be directly or indirectly related to the specific recommendation(s) or
view(s) in this report.
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