Healthy service-mix, strong client additions, and growth in key verticals and geographies are positives for the company.

Mid-sized IT companies such as NIIT Technologies have negotiated the difficult macro-environment quite well. By focussing on clients of the size that they can manage and targeting select segments, these players have been able to capitalise on customer spends.

Investors with a two-year horizon can consider buying the stock of NIIT Technologies, given the relatively robust business outlook for the company and attractive valuations.

At Rs 279, the share trades at eight times its likely FY13 earnings. This level is at a discount to mid-tier software players such as Infotech Enterprises and Hexaware Technologies.

Healthy service-mix, strong client additions, and growth in key verticals and geographies are positives for the company. NIIT Technologies’ order flow too is robust, lending it considerable revenue visibility.

In FY12, the company’s revenues increased by 27.9 per cent over the previous fiscal to Rs 1576.5 crore, while net profits rose 8.2 per cent to Rs 197.2 crore.

The slower pace of profit growth was largely due to a 97.4 per cent increase in tax outflows to Rs 63.8 crore, as the sunset clause for STPI facilities came into play.

Ascending in value

NIIT Technologies has an attractive service-mix. Its portfolio of offerings include application development and maintenance (62 per cent of revenues), IP-based services as well as managed services (13 per cent each), among a few others. This gives the company a blend of volumes-based as well as high-margin services. Along with providing the company holistic revenue streams, this also makes it more immune to discretionary spends of clients.

The company’s IP-based offerings and managed services are also non-linear in nature, in the sense that growth in these segments is not directly related to headcount addition. This offers scope for margin expansion.

Over the past one year, NIIT Technologies has witnessed an increase in million-dollar clients from 48 to 61.

The company also has a good track record in implementing complex projects such as the multi-million, multi-year contracts for customers such as Eurostar and Morris Communication. All these facts suggest that the company is climbing the value chain steadily.

Broad-based growth

In terms of geographic-mix, America (37 per cent of revenues) and the EMEA (Europe and Middle-Eastern Area-38 per cent of revenues) are key regions. Asia Pacific region is the other key geography. All these regions grew for the company in FY12.

Despite the troubled macro-environment in Europe, the company’s revenues in the region have grown faster than its overall revenue rate.

India is the only area where there was a sharp decline in revenues. This was due to the company having completed a large project towards the end of the previous fiscal (FY11). However, this fall was made up by the growth in other regions.

NIIT Technologies’ two key verticals of operation — BFSI and Travel & Transport (37 per cent of revenues each) have grown faster than the company’s revenue rate. Travel & Transport grew quite strongly at around 68 per cent.The focus of the company has been on targeting select clients in these key verticals. For example, it focuses on mid-sized banks that look for moderate sized IT vendors. This has helped NIIT Technologies win a new set of customers. The company’s order book is also fairly healthy. It has $243 million (more than 85 percent of FY12 revenues) worth of business spread across geographies to be executed over FY13. This provides it considerable revenue visibility.

Operationally, the company is also increasing the proportion of projects executed offshore to optimise costs.

Pricing competition from other players who target similar segments may cause margin pressures.

(This article was published on July 14, 2012)
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