Stock Fundamentals

NIIT Technologies: IT’s going digital - Buy

Rajalakshmi Nirmal | Updated on January 20, 2018 Published on June 19, 2016




Investment in the Internet of Things and robotic process automation should pay off

It is the mid- and small-cap stocks that seem attractive in the IT space now. While the requirements of global customers change and the industry is trying to cope by building digital capabilities, the smaller companies are able to adapt faster. One good bet in the small-cap space is NIIT Technologies.

The company’s focus on niche businesses in transport, logistics and aggression to expand into the US should pay off. Lead indicators — new orders, client additions and attrition — suggest a bright outlook for the company in the next few quarters. The stock trades at 11 times its estimated earnings for 2016-17. In the last one year, it traded at an average valuation of 8-9 times.

NIIT Tech was split from NIIT — an IT training company in 2004 — and has since established itself as a player in the IT services segment. NIIT Tech is focused on banking and financial services and travel. At present, the transport segment contributes about a third of the company’s revenue, while banking, financial services and insurance verticals bring in about 20 per cent each.

In 2015-16, the company recorded sales growth of 13.1 per cent and profit at the operating level jumped 37 per cent, thanks to margin expansion.

Growing business

NIIT Tech’s strong point is its expertise in niche segments, such as travel, logistics and insurance (largely commercial insurance). During the 2008 global economic slowdown, the company began taking up government projects to weather the downturn in international business.

The government business was contributing about 8-9 per cent of revenue for the company at one point. But from the beginning of 2015-16, it consciously decided to keep away from bidding for any new government projects as several existing projects faced payment delays.

The company decided to bring focus back on international business, a strategy that has started to pay off. In the last four quarters margins have expanded sharply and there have also been large order wins.

The fresh order intake has been to the tune of about $120 million in the last two quarters, up from the average of $80-90 million in the preceding three quarters. New clients added in 2015-16 was 28, up from 19 in the previous year.

While about 70 per cent of NIIT Tech’s revenue still comes from ADM (application, development and maintenance) and BPO, its new businesses are also doing well. The company’s IP (intellectual property) business, which contributes about 9-10 per cent of revenue, has good growth potential in the next five years.

Here, the company acquires end-of-stage products in the market, invests in them to make them suit customers’ current requirements and re-launches them.

NIIT Tech’s digital business now accounts for about 15 per cent of revenue. Reports suggest that 80 per cent of the incremental spends on IT in the next five years will be in the digital space. NIIT Tech is gearing up by investing in automation and digital solutions, building capabilities in SMAC and re-skilling employees.

The company’s ongoing investments in Internet of Things (IoT) and robotic process automation should also pay off in the next few years. The company has partnered with a leading robot provider — Ui Path — and integrating their robots in solutions provided to clients.

Margin improvement

NIIT Tech’s operating margin has improved sharply in the last four quarters. In the recent March quarter, it stood at 18.4 per cent, up from 16.3 per cent in the same period the previous year. The period of debtor dues outstanding has improved to 80 days in the March 2016 quarter from 93 days in the same quarter last year.

The company’s investment in re-skilling and training employees is showing up in terms of reduced attrition. Attrition in the recent quarter was 12.7 per cent (against Industry average of 16-17 per cent) and down from 15.8 per cent last year.

Published on June 19, 2016
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