Buy NIIT Technologies, target Rs 1,540: JM Financial

JM Financial has a buy call on NIIT Technologies with a target price of Rs 1,540.

The current market price of NIIT Technologies is Rs 1,298.20.

Time period given by the brokerage is one year when NIIT Technologies price can reach the defined target.


View of the brokerage-
BPEA to acquire up to 56 per cent stake in NITEC: BPEA has signed a binding agreement to acquire 30.58 per cent in NITEC held by NIIT Limited and the promoter family trust at Rs 1,394 per share in an all-cash deal. This will be followed by a mandatory open offer for an additional stake of 26 per cent, also at Rs 1,394. The total purchase consideration of $709mn (including $328mn for the open offer) values NITEC at an enterprise value of $1,253mn vs. the market cap of $1,203mn.

Concurrent investment + divestment by NITEC: NITEC has also announced the acquisition of Whishworks, a Hyderabad-based company with Mulesoft implementation capabilities for $41.6mn (2.7x FY18 revenues). Whishworks has c.250 employees with a strong EMEA centric sales presence. NITEC has announced the sale of its stake (c.89 per cent) in Esri India to Esri Inc. for $13mn (0.8x FY18 revenues). The divested unit is the India reseller of Esri’s GIS products and accounted for c.4 per cent ($19mn) of NITEC’s FY18 revenues. The two transactions while concurrent to BPEA’s stake purchase appear largely unconnected. We like the Whishworks acquisition which adds to NITEC’s digital capabilities; the company grew at 31 per cent CAGR between FY16-18 and has higher margin than NITEC. The parallels with the 2015 Incessant acquisition are hard to miss. The divestment of the Esri subsidiary appears in line with NITEC’s intention to de-focus on the non-core businesses.

NITEC/HEXW merger – an eventuality or an option?: BPEA also has 62 per cent stake in HEXW that is of comparable size as NITEC and has a largely complementary portfolio with limited vertical/client overlap. While BPEA has not stated a plan to consolidate its holdings, we believe a merger is an eventuality. The new management team at NITEC has worked extensively to improve the financials over the last 2 years which reflects in the stock’s 180 per cent/120 per cent O/P to the Nifty IT/peers over this period. With revenue growth ahead of peers (15 per cent $revenue CAGR over FY18-20F) and in-line margins (9MFY19 EBITDA margin at 18 per cent vs. 15-20 per cent for peers), we see limited scope for organic incremental improvement. Thus, potential cost synergies from an integration would be critical for BPEA to generate a reasonable return on its investment, especially given the high purchase valuations (18x FY20F EPS vs. 15x median for mid-cap peers), in our view. That said, we expect the integration only over time post the typical cooling-off period/regulatory approvals.