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Soft quarter but encouraging commentary; retain ADD
NIIT Technologies’ (NITEC) 4QFY19 earnings were soft both on revenues and margins led by project delays in Insurance and weakness in GIS (amid lower procurement before elections). Commentary suggests the demand environment across key verticals (BFS, I, Travel) remains encouraging and the current margin profile is sustainable. We are modestly raising revenue estimates as organic growth led by bookings and WHISHWORKS contribution (for 8 months) could offset GIS revenue losses. However, we maintain (1) EPS estimates to account for lower other income, and (2) ADD rating with a Mar’20 TP of Rs 1,344 (unchanged) set at an 18x Mar’20 (unchanged) TTM EPS of Rs 76.6. Though open offer would anchor shares in the medium-term persistent weakness in Insurance could be a key risk to estimates.
Bookings, execution lead to estimate revision:
US$ revenues grew 2.3% qoq/12.9% yoy led by growth in BFS and T&T while CC revenues grew a modest 1.3% qoq amid project delays in Insurance and weakness in GIS. Fresh order intake increased 3% qoq and 17% yoy to US$ 170mn, taking the executable order book over the next 12 months to US$ 390mn. US/EMEA/RoW saw bookings of US$ 94mn/US$ 45mn/US$ 31mn. The company added 11/40 new customers in 4Q/FY19 (six in US, five in APAC). Healthy bookings and execution lead to a 1% change in our FY20E US$ revenue estimates.
Broad-based growth in 4Q:
BFS (16.2% of revenues) grew 5.3% qoq with large client addition and three new logo wins; T&T (27.1% of revenues) grew 2.5% driven by growth in key accounts in the US and 4 new logo wins, while others (29.0%, +1.7%) growth was driven by EMEA even as GIS declined. Insurance (27.7%) declined 6.5% qoq on lower NITL revenues. Growth across geos was broad-based (2.3% qoq each) along with flat sequential revenue contribution (US 49%, EMEA 33% and RoW 18%). Across services, ADM (+5.3% qoq) led, followed by System Integration & Package Implementation and BPO (+2.3% qoq each), while Managed Services (-3.4%) and IP revenues (-14.7%) were weak.
18% margin commentary encouraging; raising FY20E assumptions:
EBITDAM declined 103bps qoq to 17.6% (EE: 18.7%) due to higher SG&A and a strong rupee. That said, they declined ~50bps qoq adjusted for non-recurring charges. We are raising FY20E assumptions by 36bps to 18.1% as the commentary suggests an 18% margin profile is sustainable. EPS impact is neutral led by a change in other income assumption.
Deal activity continues to be encouraging, portfolio challenges are abating, while management focus seems to be on profitable execution. That said, valuations are pricing in most of these positives and we would prefer sell-offs to accumulate shares.
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