NIIT Technologies - Management meeting highlights

NTL remains cautious about the impact of global macro issues on its clients. However, most clients, which were in a 'wait-and-watch' mode earlier in the year, have now assessed spending priorities, with increased preference for offshore-led engagements. Management believes none of its clients are in bankruptcy or takeover situations. The new ROOM solutions version looks on track for an early October launch; order intake should pick up in the March 2009 quarter after one or two implementations are completed. The BPO practice has been fully restructured and is now aligned to IT Services. Management expects to hold margins in FY09 through operational efficiency and scale-up of the non-linear business, mitigating the impact of potential revenue loss from its US$222m hedge position. Overall, we retain our view of NTL reporting a top-line recovery in 2H09 and holding margins in FY09. The stock appears to be pricing in perpetually negative earnings growth, which we believe is pessimistic. The stock offers 7% trailing dividend yield at current prices. 

Key highlights 

.. Overall, NTL remains cautious about the macro challenges facing clients, but is confident about growing in line with the IT services sector. None of its clients are facing bankruptcy/consolidation situations, so far. Management believes that clients have now re-assessed their spending priorities, with several travel and transportation clients looking to invest in offshore-led engagements. 

.. NTL expects to maintain FY09 operating margins around FY08 levels though improved operational efficiency, building in potential hedging losses to be accounted in revenues in FY09 (hedge position of US$222m at end-1Q09, at Rs40.11/US$). Management expects to achieve this by raising utilisation to 80%+ levels by end-FY09 (78% in 1Q09), raising the share of non-linear service revenues and improving offshore effort mix by 1% per quarter in FY09. 

.. The next version of the ROOM solutions platform looks on track for an early October launch. While initial uptake in 3Q08 will likely be limited to one to two clients,management expects order intake to start gathering pace in 4Q09, once a successful implementation is completed.