Going steady

Higher pricing and breakeven in the BPO concern are likely to drive NIIT Technologies' financials.

In these disruptive modern times for the information engineering (IT) sector, when even the bellwethers of the sector are losing ground, it is rather inappropriate to discourse the prospects of IT stocks.

But there are a few companies which have got got sailed more than or less smoothly through the negative impact of Sri Lanka rupee grasp and still look to have bright prospects in malice of negotiation of a lag in the US, the biggest onsumer of North American Indian IT harvest.

SCALING UP

Rs crore

FY07

FY08E

FY09E

Revenue

885.90

920.00

1060.00

Operating profit

180.30

180.00

212.00

OPM (%)

20.00

19.50

20.00

Net profit

133.00

137.00

170.00

NPM (%)

15.00

15.00

16.10

EPS (Rs)

29.60

18.30

21.30

P/E (x)

7.50

12.13

10.40

It, therefore, goes imperative to happen companies which have got a lesser dependance on the US, and a less proportionality of dollar denominated grosses or more than work carried out onsite.

NIIT Technologies, the software system system arm that was created when NIIT detached its IT instruction and software services business, suits the bill. Just over a 3rd of its grosses come up from the US, and more than than 60 per cent of the work is done onsite, which supplies it a natural hedgerow against the falling dollar.

The company supplies software system application development services, endeavor solutions as well as concern procedure outsourcing services to its clients.

It have also diversified its concern across a figure of industry verticals and have achieved a well balanced geographical spread, which supplies stableness over the long term. It have been investment in its software system services and outsourcing businesses, and is at an inflexion point poised to turn significantly hereon.

Sound mixNIIT Technologies' concern is evenly distribute across the human race with over 50 per cent of grosses coming from Europe, and the remainder distributed between the United States and Asia-Pacific and India.

This assists the company cut down its exposure to the United States dollar. In addition, the company have a higher proportionality of work carried out onsite, to the melody of over 60 per cent. This, however, is the chief ground why the company's profitableness is held low at operating borders of about 19 per cent from its operating border of 20 per cent in FY07.

"We take to increase our offshore constituent by 100 footing points every quarter," states KTS Anand, main fiscal officer, NIIT Technologies. This would assist the company better its borders over the approaching quarters.

In footing of industry verticals, NIIT Technologies have a figure of offers for the fiscal services and coverage sector, traveling and transportation system as well as manufacturing and retail – both in software system solutions and BPO. Its BPO business, however, is yet to breakeven which is expected by Q4 this fiscal.

Reasonable resultsThe seasonally strong 2nd one-fourth for the IT industry had been moderate for NIIT Technologies. Its core concern of software system solutions registered a 3.6 per cent volume growing q-o-q, which in itself is not impressive.

After the consolidation with its recent acquisition Room Solutions, which registered a diminution of 8 per cent in revenues, the overall volume growing was zero. Though amalgamate volumes grew by one per cent, a currency loss of one per cent took even that minimum growing away.

The lag in Room Solutions' grosses is attributed to a electric switch of its solutions from an aged version to a newer one, which caused a letup in new order consumptions as well as service contract renewals.

The company saw an order consumption of $49 million (approximately Rs 193.6 crore) in Q2 FY08, taking the sum executable order book to $101 million (Rs 400 crore) for the approaching 12 months.

NIIT Technologies' raid into the traveling and transportation system section have won it important new clients which could ensue into bigger ticket size orders. Besides, it have also managed to command higher terms for new orders.

"New contracts are coming in at about 5-7 per cent higher prices," claims Arvind Thakur, main executive director officer, NIIT Technologies.

The company now takes to better its operational efficiencies and pushing its use degrees above 80 per cent, as compared with the current 77 per cent over the approaching two-three quarters.

All this is likely to reflect in higher operating borders over the approaching fiscal. Again, going by its past, the company shows a cyclicality registering higher order consumptions in the 3rd and 4th quarters, thus making a lawsuit for continued top line growth.

ValuationThe NIIT Technologies stock have taken a whipping along with the full software system and IT sector, declining over 40 per cent from the degrees of Rs 375 a calendar month ago to Rs 222 now.

At the current price, the stock trades at a price-earning multiple of 12 modern modern times estimated FY08 net income and 10 times estimated FY09 earnings, which is low compared with similar mid-sized peers. Also, its operating border of 19-20 per cent is better than most other mid-cap technical school players.

Fundamentally too, the evaluation looks sensible given that the company's net income are expected to better once the BPO concern starts contributing to the underside line and the top line protected by higher pricing in new contracts.

Lower trust on the United States along with a strong client premix diversified across assorted industries do it immune to major displacements in any 1 of the sectors. Long term investors may desire to include this scrip in their portfolio.