Barings have earlier acquired Hexaware at inexpensive valuations(10.2x) and then then they improved its capital allocation, offered access to portfolio companies, revenue growth accelerated which helped in re-rating the P/E of Hexaware.
Baring Private Equity Asia is acquiring 30% stake from NIIT and other promoter entities and will make open offer for 26% stake at Rs 1,394/share. The transaction has valued NIIT Tech at 17.9x/15.4x for FY20E/FY21E. NIIT Tech has acquired WHISHWORKS, a MuleSoft and Big Data specialist, for Rs 2.9bn which will strengthen Digital offerings of NIIT Tech with enhancement of Digital Transformation capabilities through automation, data and cloud centric business.
We believe Baring can help NIIT Tech in improving its capital allocation (NIIT Tech dividend payout 40% in FY18). We see no major change in deal wins and revenue momentum, but margin levers are stretched, leaving limited room for upgrade. Barings have earlier acquired Hexaware at inexpensive valuations(10.2x) and then then they improved its capital allocation, offered access to portfolio companies, revenue growth accelerated which helped in re-rating the P/E of Hexaware. We expect 14.9% & 17.5% USD revenue & EPS CAGR for FY19E-FY21E respectively and value NIIT Tech at 17x Mar-21 earnings with unchanged target price of Rs 1,539. Maintain ‘Buy’.
Baring Private Equity Asia will acquire 30% stake (~18.85 mn shares) from NIIT and other promoter entities at a price of Rs 1,394/ share for USD 381 mn (Rs 26.27 bn). Further, Baring will make open offer to public shareholders of NIIT Tech to purchase up to 26% additional shares at a price of Rs 1,394/ share (3% premium to CMP of Rs 1,350). Total consideration (including open offer) for 56% stake is USD 709 mn (Rs 48.90 bn), transaction has been valued at 17.9X/15.4X for FY20E/FY21E.
We have observed in the past that entry of PE funds results in higher cash return to shareholders (combination of dividend and share buy-back) and improves the corporate governance perception.