A select set of mid-sized IT companies have navigated the difficult business environment in developed markets well. By targeting clients and deal sizes that they are comfortable with, these players have been able to tap into higher customer spends.

NIIT Technologies is one such player that has steadily increased its presence in segments such as government and transportation, as a result of which it has witnessed continued deal traction.

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

At Rs 262, the stock trades at a little over six times its likely FY14 per share earnings. This level is at a discount to mid-tier software players such as Infotech Enterprises, MindTree 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.

The rupee’s continuing weakness is an added positive for the company and is likely to aid margins.

In FY13, the company’s revenues increased by 28.2 per cent over the previous fiscal to Rs 2,021 crore, while net profits rose 8.1 per cent to Rs 213 crore.

Slower profit growth

The slower pace of profit growth was largely due to a 55.5 per cent increase in depreciation and amortisation as the full impact of capitalising its Greater Noida facility came into play, as also due to the assets it took over when it entered into a deal with Morris Communications. NIIT Technologies has an attractive service mix. Its portfolio of offerings includes application development and maintenance (62 per cent of revenues), IP-based services (10 per cent), as well as managed services (12 per cent), among a few others.

This gives the company a blend of volume-based as well as high-margin services. This mix of revenues, with application services taking a lion’s share, also makes it more immune to discretionary spends of clients.

The company’s IP-based offerings and managed services are non-linear in nature, and the 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 61 to 68. Its top five customers have grown faster than the company at 37 per cent and each of them accounts for over $20 million. The company has increased its focus on domestic deals with large contracts bagged from Airports Authority of India and from the Andhra Pradesh Government to build a financial management system.

These are multi-million dollar deals, spread over many years. The AAI deal is a pure services contract, while that from the Andhra Pradesh Government has a large hardware component in it. But both these deals do not involve any significant margin pressure, according to the company.

Thus, the company has been able to expand its client base and also mine its existing customers quite well. This trend also indicates the robust execution capabilities of NIIT Technologies.

Growth across segments

In terms of geographic-mix, America (38 per cent of revenues) and the EMEA (Europe and Middle-Eastern Area-39 per cent of revenues) are key regions, besides the Asia Pacific region and India.

All these regions, except Asia Pacific grew at or faster than the company revenue rate in FY13. Despite the troubled macro-environment in Europe, the company’s revenues in the region have grown quite well.

NIIT Technologies’ operates in two large verticals — BFSI and Travel and Transport (32 per cent and 40 per cent of revenues respectively).

BFSI declined through much of FY13 as some of the projects were completed. But in the recent fourth quarter, the company once again witnessed deal wins in the space. The transportation vertical grew at a hectic pace though.

The company’s focus 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 $252-million (more than 60 per cent percent of FY13 revenues) worth of business spread across geographies to be executed over FY14.

This provides it considerable revenue visibility. Operationally, the company is also increasing the proportion of projects executed offshore to optimise costs.

Price competition from other players which target similar segments such as MindTree and Hexaware may cause dents in realisations and subsequent margin pressures.

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