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May 8, 2015

NIIT Technologies Ltd’- Edelweiss

s (NIIT Tech) Q4FY15 revenue grew by 2.1% QoQ to USD 98.1mn was inline with our estimates. EBITDA margins improved 180bps QoQ to 16.3% mainly due to higher revenue growth. Growth during the quarter was driven by BFSI and Manufacturing, which grew by 2.7% QoQ and 17.3% QoQ, respectively. NIIT Tech won fresh deals worth USD 89mn (down 18% QoQ) during the quarter. NIIT Tech announced its foray into digital integration by acquiring 51% stake in Incessant Technologies (USD 15mn FY15 revenues). The company sees increased discretionary spends from US and improved pipeline driving its growth in FY16 for both T&T and BFSI verticals. We maintain our ‘BUY’ rating, with a TP of INR 450.
Revenues in line, PAT lower due to exceptional loss 
NIIT Tech Q3FY15 revenues grew by 2.7% QoQ at INR 611cr, was ahead of our estimate.  EBITDA margins improved 180bps QoQ to 16.3% mainly due to higher revenue growth and productivity gains. New order intake of USD 89mn (US: $39 mn, EMEA: $29 mn and RoW: $21 mn) led to an executable order backlog of USD 295 mn over the next 12 months. NIIT Tech reported a loss of INR 17.5cr, led by exceptional loss of INR 80 cr which was partially offsetted by lower tax expenses.  
Performance largely driven by BFSI and Manufacturing; IMS & IP based deals foster growth
During the quarter, NIIT Tech witnessed good traction in BFSI and Manufacturing verticals, which grew by 2.7% and 17.3% QoQ, respectively. However, there was a decline of 2.5% in the T&T vertical led by seasonal weakness. During Q4FY15, the company’s Top 5 clients grew by healthy 2.7% QoQ, while Top 10 clients grew by 0.5% QoQ. ADM, the largest service line (59% of revenue), grew 1% QoQ, while IP-based and managed revenues grew by 2.7% QoQ. Management expects T&T and BFSI verticals to drive incremental growth for the full year led by managed services.
Worst may be over on operating margins, Incessant acquisition to aid margin expansion
Current level of operating margins is expected to be the bottom. We note that increasing cost of lateral employees and absorption of costs from acquisitions, along with an increase in sales and marketing personnel has led to successive disappointment on the operating margin front. We note that NIIT Tech is taking steps and increasing operational efficiency. With expected hiring from campus, better SG&A leverage, higher utilization, recovery in GIS business, we expect margins improvement to continue. Moreover, NIIT Tech has announced its foray into digital integration by acquiring a 51% stake in Incessant Technologies which has operating margins of around 20%.
Outlook and valuations: Attractive; Maintain – BUY with TP of INR 450
At CMP of INR 372, the stock is currently trading at P/E of 10x and EV/EBITDA of 5x on FY16E and at P/E of 9x and EV/EBITDA of 4.5x on FY17E. While these valuations are lower than peer group valuation of 12-16x, we believe its P/E ratio will expand as it delivers on its stated strategy, improves margins and revenue growth. We maintain Buy rating on the stock.

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