3Q09 results showed good margin management despite a sluggish top line and forex losses. With long-term contracts securing revenue stability, we find current valuations too pessimistic. However, given the reality of tiered valuations, we move to a peer-group valuation with a lower target price of Rs74. Reiterate Buy.
Large contracts secured, but revenue growth remains challenging
NIIT Technologies’ (NTL) 3Q09 constant currency revenues were down 4% qoq, with lower volumes and realisation, on higher offshore effort share. The 9M09 order intake was 16% higher than in FY08, as large engagements with key clients were converted to multi-year contracts. With pricing on renewals stable, we estimate a 4% negative revenue impact in FY10 on greater offshoring.
Aggressive bench management key to margin expansion; potential to sustain gains
NTL cut staff 13% in 9M08, pushing up utilisation 650bp and gross margin 472bp. We expect muted salary hikes in FY10, NTL’s recruitment strategy and savings on rent through campus consolidation to support margins, mitigating potential pricing pressure.
Potential margin upside diluted by FX losses, loan losses
We raise our EBITDA margin estimates about 5% for FY10/11 in light of the 339bp expansion in 3Q09. However, we now build estimated hedging losses into our income statement (which we earlier deducted from fair value/share). These reduce our FY10/11F EPS by 32% and 25%, respectively. An unrecognised loss of Rs95m on a loan to the NIITians Welfare Trust could also increase if NTL/NIIT’s share price slips further.
Switching to peer group valuations, Buy rating maintained
NTL’s valuations have hit all-time lows of <3x>
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