The Hindu Business Line : NIIT Technologies: Buy

At Rs 198, the NIIT Technologies stock is a good choice for investors with a one/two-year horizon. The stock trades at a multiple of 11 times its trailing consolidated four-quarter per-share earnings. Investors can use any weakness linked to the broad market to step up exposure.

The company's focus on select key verticals such as BFSI (banking, financial services and insurance) and transportation, a strong order-book position, the balanced geographic mix and the recent acquisition of the UK-based Room Solutions is encouraging. The risks to our recommendation are the integration issues surrounding Room Solutions, any sharp rupee appreciation vis-a-vis the dollar and supply-side manpower-related issues affecting mid-size companies.

Financial contours

In the quarter ended June 30, the company reported a 15 per cent sequential (quarter-on-quarter) growth in revenues to Rs 191 crore. This, however, includes the revenue contribution from its acquisition, Room Solutions, from May. If we ignore that, the sequential growth works out to 4.3 per cent.

Over the past four quarters, the sequential organic growth has been declining, which is not so healthy, but the operating profit margin has remained stable in the 19-20 per cent bracket.

In the latest quarter, the OPM has fallen marginally to 19 per cent largely on account of Room Solutions (with higher onsite revenues) from 20 per cent on a sequential basis.

Despite a 17-per cent hike in offshore salaries and 5-6 per cent onsite, the company has managed to maintain its operating margins.

This has been aided to some extent by a reduction in SG&A (selling, general and administrative) expenses.

NIIT Technologies can use multiple levers such as an improvement in BPO margins, enhanced contribution from offshore, and better control over SG&A to shore up margins. At present, the BPO segment contributes only about 6 per cent of revenues, with the balance coming from software services.

The company has $90 million worth firm orders executable over the next 12 months. In the latest quarter, the company won new business worth $38 million, including a $20-million order from an existing client in the transport space.

This highlights the cross-selling opportunities and mining the potential of NIIT Technologies' top five or top ten clients.

The acquisition pep

In early May, the company acquired 51 per cent in Room Solutions, a UK-based IT solutions firm (with intellectual property) focussed on the insurance space.

Through this acquisition that focuses on the property and casualty space, NIIT is trying to plug a gap in its insurance portfolio. With revenues of $25 million, NIIT Technologies will be acquiring Room Solutions for about one times revenues.

This is also likely to complement the company's presence in life and pension space. Since Room Solutions has a large client base in the property and casualty space evenly spread out, it opens up cross-selling possibilities, the impact of which will be felt over the next one year.

According to NIIT Technologies, there will be near-term margin pressures on account of integration and transition costs of Room Solutions, but that will be recovered over the next couple of quarters.

Apart from building its offerings around an integrated IT and BPO platform, the company also recently forayed into the emerging area of remote infrastructure management and managed services.

It announced last week that it has set up a 50:50 joint venture with the Switzerland-based Adecco, a global major in HR services.

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