Add NIIT Technologies, target price Rs 1,310: ICICI Securities

ICICI Securities has upgraded NIIT Technologies to add rating from reduce with a target price of Rs 1,310.

NIIT Technologies reported strong execution in the fourth quarter of FY20 with revenue growth of 3 per cent quarter on quarter in constant currency terms, a $180-million deal TCV reflecting a book-to-bill of 1.16 times and 20 per cent year on year growth in 12-month executable to $468 million being the key highlights.

Though the management expects revenues to decline by single digit percentage on a sequential basis in the first quarter of FY21, a recovery is expected from Q2FY21 with growth projected for full year FY21. The EBITDA margin including ESOP expenses is expected to decline by a sharp ~200 bps in FY21 despite an aggressive cost takeout plan.


Though the airlines segment within the travel vertical (46 per cent of travel revenues) is likely to see sharp erosion in spends, other sub-segments like airports, rail transportation and travel technology are relatively resilient. The BFS and insurance verticals are expected to see a sequential increase in revenues even in the first quarter of FY21 as deals won in the second half of FY20 ramp up.

Investment Rationale

The deal pipeline is robust even in the first quarter of FY21 with talks at advanced stages. The company is also more open to buyout smaller captives either from existing clients or in the immediate adjacencies of the verticals that they serve. Worst of the spend weakness in the airlines segment will be evident in Q1FY21.

However, revenue growth is expected to recover from Q2FY21 on timely execution of a strong backlog and as drags from the airlines segment become smaller. Revenue growth in constant currency terms is expected to be positive in FY21. Given that the valuation is now a more reasonable 14.5 times FY22E EPS, the Rs 3.37 billion impending buyback in the next few months and strong relative execution, the brokerage has upgraded to an add rating from reduce earlier.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 1109.30 crore, up 3.34 per cent from last quarter sales of Rs 1073.40 crore and up 14.10 per cent from last year same quarter sales of Rs 972.20 crore. The company reported net profit after tax of Rs 124.20 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 70.10 per cent stake in the company as of March 31, 2020, while FIIs held 14.49 per cent, DIIs 6.79 per cent and public and others 8.62 per cent.