Recovery is expected in Q2; upgraded to ‘Add’ given recent correction and other positives; TP cut to Rs 1,310.
NIIT Technologies (NITEC) reported strong execution in Q4FY20 with revenue growth of 3% q-o-q in CC terms, $180-mn deal TCV reflecting a book-to-bill of 1.16x and 20% y-o-y growth in 12-month executable to $468 mn being the key highlights. Though management expects revenues to decline by single digit percentage on a sequential basis in Q1FY21, a recovery is expected from Q2FY21 with growth projected for full year FY21. Ebitda margin including ESOP expenses though is expected to decline by a sharp ~200bps in FY21 despite an aggressive cost takeout plan.
Though airlines segment within the travel vertical (46% of travel revenues) is likely to see sharp erosion in spends, other sub-segments like airports, rail transportation and travel technology are relatively resilient. Verticals like BFS and Insurance are actually expected to see a sequential increase in revenues even in Q1FY21 as deals won in H2FY20 ramp up. We upgrade NITEC to an Add rating given ~33% correction in the stock price since Q3FY20 results and superior execution relative to peers.
Airlines key area of spend weakness
NITEC has seen project cancellations within the Airlines sub-segment in Q4FY20 itself and expects cancellations to worsen in Q1FY21. However, spends are relatively resilient in other travel sub-segments. More importantly, the company has seen no change in deal ramp-up plans in other verticals especially BFS and Insurance. Given that 12-month executable order book is up 20% y-o-y in Q4FY20 to $468 mn, management is confident of delivering positive CC revenue growth in FY21.
Ebitda margin including ESOPs will see a more material drop in FY21
NITEC is pursuing an aggressive cost takeout programme. Management expects Ebitda margin pre-ESOP expenses to be down at most by 80bps relative to the adjusted Ebitda margin of 17.8% reported in FY20. However, there will be an additional ESOP expense of between 100-130bps in FY21 .
Upgrade to Add
Deal pipeline is robust even in Q1FY21 with many conversations being in advanced stages. NITEC is also more open to buy out smaller captives. Revenue growth is expected to recover from Q2FY21 on timely execution of a strong backlog and as drags from the airlines segment become smaller. Given that valuation is now a more reasonable 14.5x FY22e EPS, Rs 3.37 bn of impending buyback in the next few months and strong relative execution, we upgrade NITEC to Add from Reduce earlier with a revised TP of Rs 1,310 (earlier Rs 1,800) based on 16x Mar’22e EPS (earlier 19x Dec’21e EPS).