NIIT Tech Logs Decent Q3 Numbers On Strength In Key Operating Areas

NIIT Technologies announced a decent set of numbers for Q3FY13 post market hours yesterday (Jan 15). The company's financials were broadly in line with expectations. Sequentially, while there was growth in revenues and net profit, the operating margins were pressured. Overall, the numbers were slightly on the better side. The stock prices of NIIT Tech ended the day higher by 0.51%, closing at Rs 277.35 apiece.

Its revenues grew by 2.86% as compared to the previous quarter, to touch Rs 514.4 crore. The net profit, aided by a difference in exchange rates, rose by 29.93% to Rs 56 crore in the same period. However, the operating margins were pressured, reducing by 117 basis points to 15.79%. With this, its operating profit came down by 4.25% to Rs 81.2 crore.

While NIIT Tech saw strength in the Transport vertical, from which it derives 42% of its revenues, there was also a significant uptick in revenues from Government projects. From 5% contribution (as of Q2FY13) to revenues, the share of the Government vertical shot up to 8% in Q3FY13.

In terms of service offerings, Managed Services and Systems Integration & Package Implementation were the strong points of the company. Sequential revenue growth for the two offerings was 12.21% and 14.29% respectively. Application Development and Management, which contributes to 63% of its revenues, grew moderately by 1.25%. IP Assets saw a decline to the extent of 7.43%. The company's management said that the customer base in this offering primarily consisted of reinsurers, which have been severely affected by recent calamities.

Geographically, there was strength seen in Europe and India. The volume growth stood at close to 1% for the US and 5.7% for Europe. Performance in India was boosted heavily by government projects.

The order book of NIIT Tech looks subdued as compared to that in the previous quarter. Fresh order intake stood at USD 83 million, down from USD 93 million in the previous quarter. This dragged the executable order book over the next 12 months down by 4.35% to USD 242 million.

On the employee front, the company added 265 employees during the quarter. Utilisation was seen reducing a little from 79.8% in Q2FY13 to 78.4% in Q3FY13. Attrition seemed flat at 12.5%.

Overall, results have been decent but the order book looks soft due to weakness in Banking, Financial Services and Insurance (BFSI) and low orders from the Americas. However, the management is expecting higher growth and improvement in margins beginning FY14. Moreover, signs of improvement in Europe have been visible through various sources, and NIIT Tech, which gets 40% of its revenues from this region, is likely to benefit out of it. Thus, we recommend that investors hold the stock owing to a positive outlook in the medium term.

Exclusive From Earnings Conference Call

Constant currency growth for Q3FY13 was 4.4%. It was negatively affected by currency fluctuations to the extent of 1.5%, thus bringing revenue growth to 2.86%. The operating margins were pressured due to softness in the GIS business and on account of transition costs. The GIS business, which normally runs at 25% plus margins, operated at a negative margin of 7% in Q3FY13. This turned into major downward pressure for the overall operating margins.

Weakness was also seen in the BFSI verticals, affected by macroeconomic conditions and due to the effects of Hurricane Sandy. At the same time, the prospects in the Transport vertical remained unchanged and demand seemed to improve. The Government vertical showed massive outperformance, and this will be the area of focus for NIIT Tech.

Although margins have been affected in the quarter under review, an improvement is expected by two quarters. The outlook for FY14 remains positive, and the management sees growth on the upper end of NASSCOM’s guidance of 11%-14%.