NIIT Tech Stock Analysis

Detailed Analysis of NIIT Tech Q2 FY20 Results

Introduction

In this article, we are going to do NIIT Tech stock analysis. Also, Q2 FY20 results, major changes in shareholding pattern and the current valuation of the company are analysed in detail.

NIIT Tech Stock Analysis

Company Profile

• NIIT Technologies is a leading global IT solutions organization. It delivers services around the world directly and through its network of subsidiaries and overseas branches.
• It has built deep specialization in its focus verticals :
  1. Banking and Financial Services : Includes Asset and Wealth Management, Banking
  2. Insurance : Includes property & casualty, Life, Annuities Retirement & Supplement
  3. Travel & Transportation : Includes Airlines, Airport, Travel Technology, Travel Distribution, Hospitality
• The company is engaged in Application Development and Maintenance (ADM), Data & Analytics, Geographic Information System, Managed Services, Cloud Computing, Digital Services and Business Process Outsourcing to organizations.
• Thus, NIIT Technologies render above services in a number of sectors viz. Financial Services, Insurance, Travel, Transportation and Logistics, Manufacturing and Distribution and Government.

Q2 FY2019-20 Results

• Gross Revenue
  • In Q2 FY20, the Gross Revenue is increased by almost 19% YoY to Rs.1,038.5 Cr from Rs.872.3 Cr in Q2 FY19. While the QoQ rise is 8.2% from Rs.960 Cr in last quarter.
• Gross Margin (%)
  • Gross Margin is improved marginally to 34.6% in Sept-2019 quarter. The Gross margin numbers in Q2 FY19 and Q1 FY20 were 34.4% and 33.9% respectively.
• Operating Profit
  • In spite of 19% growth in the Gross revenue, operating profit has increased by 22.2% YoY. It indicates the improved efficiency resulting into the lower growth in operating expenses.
  • Operating profit was Rs.189.8 Cr in Q2 FY20 from Rs.155.4 Cr last year. While the QoQ performance is also very good giving operating profit growth of almost 15.7%.
  • Operating profit margin is also improved to 18.3% in September 2019 quarter from 17.8% last year and 17.1% last quarter.
• Profit Before Tax (PBT)
  • PBT was increased just by 4.6% YoY from Rs.145.9 Cr to Rs.152.7 Cr in Q2 FY20. However, the sequential growth QoQ was significant 16%.
• Net Profit
  • On account of reduced tax from 24% to 18%, the net profit increase by 17% YoY and 12.2% QoQ. PAT in Q2 FY20 was Rs.119.5 Cr.
  • Significant Improvement in operating profit has helped to increase the net profit YoY as well as QoQ.

Business Verticals, Geography & Revenue Mix

1. Business Verticals Mix

• The revenue mix is shown in above chart. In Q2 FY20, banking and financial services (BFS), Insurance and Travel, Transportation and Hospitality (TTH) were having 17%, 31% and 28% contribution in the Gross Revenue.
• Insurance sector was the highest revenue offering sector amongst the all 3 sectors.
• The above 3 core sectors contributions are growing YoY as well as QoQ as we can see in the given pie chart.

2. Geography Mix

• America is the highest revenue contributing region with a stable % of 49% in Q2 FY19, Q1 FY20 and Q2 FY20.
• After America, EMEA (Europe, the Middle East and Africa) region is contributing 34% for Q2 FY20. The % contribution from EMEA region is decreasing subsequently YoY as well as QoQ.
• ROW (Rest of World) is contributing 17% in Q2 FY20, 16% in Q1 FY20 and 14% Q1 FY20. Thus, a continuous improvement is seen in its % figures.

3. Revenue Mix

• In Q2 FY20 and Q1 FY20, revenue from onsite business was 34% and that from offshore business was 66%.
• However, last year Q2 FY19, the % contribution from onsite and offshore business were 64% and 36% respectively.

Fresh Order Intake

• Order intake or Deal wins during the quarter out-scaled the revenue with order intake of $176 Mn. Strong deal wins is a result of micro focus on select verticals and changes in the sales incentive structure.
• Order intake measures how much value a contract is worth once executed. This value reflects true bookings instead of revenue predictions.
• The geographical breakdown of this $176 Mn is :
• USA = $65 Mn
• EMEA = $41 Mn
• ROW = $70 Mn
• During the quarter Q2 FY20, NIIT Tech won $70 Mn deals from APAC (Asia-Pacific Region). It contributes almost 16% to total revenues.
• Thus, the executable order book for ext 12 months reached at $405 Mn from $395 Mn in last quarter and $363 Mn last year.

Client Data

• The repeat business % is improved marginally to 90% in Q2 FY20 from 89% in last quarter. But it has decreased from 96% last year (Sept-2018).
• The distribution of new clients addition is given in detail in above table. Thus, USA is offering more new clients than EMEA and APAC region.

Revenue Concentration & Client Size

• The revenue concentration from top 5 clients is improved subsequently in Q2 FY20 YoY and QoQ. It is increased to 29% from 27% in Q2 FY19 and 28% Q1 FY20.
• Client size (number of clients) between 1 Mn and 5 Mn is improved to 70 in Q2 FY20 from 66 and 63. Also, The client size above 10 Mn is also increased to 9 from 8 in Q2 FY19 and 7 Q1 FY20.
• While, client size in middle range (5 Mn to 10 Mn) is decreased to 16 in Q2 FY20.

People Resources

• From Q2 FY19, after having net addition of 261, the net addition numbers were declining and last quarter it has reached to 34. But In Q2 FY20, total 533 new resource addition is done.
• Attrition rate (%) is increased YoY but decreased QoQ at 12.3% in Q2 FY20.
• Utilization % is also improving sequentially YoY as well as QoQ. It is 80.7% in Q2 FY20. It indicates the company is in a position to keep its 20% resources on bench. That means company is having a very good order intake in coming quarters.

NIIT Tech – Current Statistics & Valuation

• The company is almost debt-free (very negligible debt). The interest coverage ratio is also very good 44.67. It is a very positive sign for the company.
• There was a significant changes in the shareholding pattern on the company in September 2019 quarter. % changes in stake of key shareholders are :
  1. Promoters have increased stake from 33.91% in June-19 to 70% in Sept-19
  2. FIIs have decreased stake from 35.26% in June-19 to 14.89% in Sept-19
  3. DIIs mainly Mutual Funds have decreased stake from 14.48% in June-19 to 5.79% in Sept-19

Valuation

The current Price to Earnings ratio is much greater than its historical average PE ratios for 3, 5, 10 years as shown in above table. The stock is currently overvalued as compared to its historical valuation.