Fullerton Securities' Investment Idea, NIIT Technologies - BUY

October 12, 2010

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NIIT Technologies Ltd BUY

NIIT Technologies which was the software development arm of NIIT Ltd. was spun off as an

independent company in 2004. Over the years, NIIT Technologies has built its expertise,

enhancing its presence in markets such as Application Development and Management and

Enterprise Solutions including Managed Services and BPO. NIIT Technologies provides an

entire gamut of services to its clients including application development and maintenance,

managed services, cloud computing, package implementation and Business Process

outsourcing across multiple verticals including Banking & Financial Services, Insurance,

Travel Transport & Logistics and Manufacturing & retail vertical.

For the year ended FY2010, net revenues are down by 6.6% to Rs 9.1bn as compared

to FY2009. However due to the cost rationalizing exercise done by the company

expenditure decreased by 8.6% Y-o-Y to Rs. 7.4bn. EBITDA for the period stood at Rs.

1.7bn up by 2.3% Y-o-Y. PAT for the period was up by 8.5% Y-o-Y at Rs. 1.26bn.

We expect NIIT Technologies net revenues to grow at a CAGR of 19.9% over FY2010-

12E to Rs 13.1bn in FY2012 from Rs 9.1bn in FY2010. We further estimate that the PAT

would grow at a CAGR of 10.8% to Rs 1.55bn in FY2012.

Based on a PE multiple of 10xFY12E, the fair value for NIIT Technologies

works out to Rs 264.

Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs

Strong Buy

Buy

Hold

Reduce

Sell

Strong Buy – Expected Returns > 20% p.a.

Buy – Expected Returns from 10 to 20% p.a.

Hold – Expected Returns from 0 % to 10% p.a.

Reduce – Expected Returns from 0 % to 10% p.a. with possible

downside riskSell – Returns < 0 %

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NIIT Tech Sensex

BSE Code/NSE Code

Bloomberg Code NTEC:IN

No. of Shares (Mn) 58.8

Sensex/Nifty

CMP Rs (11th October '10) 209.0

Beta 0.9

Market Cap (Rs mn) 12,287

52 Week High-Low 219.3/122.75

2W Avg Volume 134,000

30D 3M 6M 1Y

NIIT Technologies 12.5% 18.7% 21.3% 63.6%

Sensex 5.9% 13.1% 14.1% 18.0%

Nifty 6.5% 13.6% 15.3% 19.9%

Promoter 39.6%

Institution 29.3%

Non Institution 31.2%

Total 100.0%

SHARE HOLDER PATTERN (%)

1 Year Price Performance (Rel. to Nifty)

STOCK DATA

PRICE DATA

STOCK RETURN (%)

20250/6103

532541/NIITTECH

Projections (Rs mn) FY08A FY09A FY10A FY11E FY12E

Net Revenue 9415.1 9799.4 9137.1 11421.4 13134.6

Y-o-Y Growth (%) 4.1 -6.8 25.0 15.0

EBITDA 1762.8 1663.2 1702.5 1942.3 2328.4

Y-o-Y Growth (%) -5.7 2.4 14.1 19.9

Profit After Tax 1371.5 1165.0 1263.7 1325.3 1552.0

Y-o-Y Growth (%) -15.1 8.5 4.9 17.1

EPS Rs 23.4 19.8 21.7 22.5 26.4

BVPS Rs 73.0 61.8 98.6 111.9 126.8

EBITDA Margin (%) 18.7 17.0 18.6 17.0 17.7

PAT Margin (%) 14.6 11.9 13.8 11.6 11.8

ROE (%) 32.0 32.1 22.0 20.1 20.8

PERx 8.9 10.5 9.6 9.3 7.9

P/B Ratio 2.9 3.4 2.1 1.9 1.6

Financial Snapshot

http://www.fullertonsecurities.co.in/

October 12, 2010



NIIT Technologies which was the software development arm of NIIT Ltd. was spun off as an independent company in 2004,

and has a presence across Banking & Financial Services, Insurance, Travel Transport & Logistics and Manufacturing & retail

verticals. For financial year 2010 the BFSI vertical contributed to 43% of the total revenues followed by the transportation

vertical which contributed to 31% of total revenues. Retail & manufacturing vertical contributed to 11% of revenues while

other verticals accounted for the balance 15% of revenues.

On a Geographical basis EMEA accounted for 43% of revenues while America contributed to 33% of revenues. APAC region

accounted for 13% of total revenues while India accounted for the balance 11% of revenues. The US, APAC and India markets

would drive growth while the Europe region is expected to be sluggish. NIIT Technologies has been of late increasing its focus

on non linear business on account of higher margins. Non linear initiatives account for 27% of revenues which is expected to

increase to 30% and 35% of revenues in FY11 and FY12 respectively.

Key Business Areas

Application Development Management: NIIT Technologies offers a whole range of application development and

management services including application development, application management, application renewal, application testing,

data warehousing & business intelligence and application integration.

Managed Services: NIIT Technologies offers its customers an entire gamut of managed services namely Infrastructure

management services, production support and managed security services. The company provides a wide variety of services

for managing IT infrastructure including remote support for systems and databases, network management, managed desktop

services and data center services.

Package Implementations: NIIT Tech has over twenty years of experience in global enterprise application deployment and

management experience across multiple ERP platforms including SAP. The company offers the complete suite of SAP

implementation services across modules for SAP R/3 and mySAP business suite solutions. The company also provides SAP

functional support, SAP production support basis and technical consulting.

BPO: NIIT SmartServe is the BPO arm of NIIT Technologies with broad business expertise in outsourcing. NIIT SmartServe is

currently providing services across multiple verticals including Insurance, Financial Services, Market Research and Direct

Marketing, Real Estate, transportation and Technology verticals.

Cloud Computing: NIIT Technologies offerings in cloud computing offerings can be split across three categories viz. Software

as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS).

Non Linear initiatives account for 27% of revenues which would increase to 35% of revenues byFY12. NIIT technologies cloud computing offerings include SaaS, PaaS and IaaS

BUSINESS PROFILE


October 12, 2010



Strong Growth inQ1FY11…

NIIT Technologies reported strong numbers for the quarter ended June 2011 with revenues up by 21.8% QoQ and 33.6% YoY

on account of higher bought out items. Operating profits for the quarter stood at Rs. 541mn an increase of 37.3% YoY. Net

profits for the quarter stood at Rs. 408mn up by 131.6% YoY. During the quarter the company reported fresh order intake of

USD 40mn leading to USD 149mn of firm business executable over the next 12 months. During the quarter the company

added 3 new significant customers in the travel & transport vertical.

USD 149mn of total firm executable business over the next 12 months

Mid Cap IT companies are trading at a significant discount to the large Caps.

Peer Comparison

We believe that large cap IT stocks have witnessed a sharp run up while the mid cap stocks have underperformed

significantly. The valuation gap between the large cap and mid cap IT stocks are too large. We feel that this is likely to

change in the near future on the back of improving outlook for the industry. NIIT Technologies enjoys one of the highest

operating margins in the mid cap segment and we believe that the stock is due for a re rating in the near future.

BUSINESS PERFORMANCE

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CompaniesRevenues

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EBITDA

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PAT

Margins %P/E P/B CMP ROE %

NIIT Technologies 9,137.1 18.6 13.8 9.6 2.1 209.0 21.8

Mastek 7,138.2 12.2 9.5 9.9 1.2 249.2 12.4

Zensar Technologies 9,527.6 18.7 13.4 5.9 2.1 160.9 38.7

FY10 Consolidated Figures Used

Peer Group Comparison


October 12, 2010



Based on a PE multiple of 10xFY12E, the fair value for NIIT Technologies works out to Rs 264.

VALUATION

We expect NIIT Technologies net revenues to grow at a CAGR of 19.9% over FY2010-12E to Rs 13.1bn in FY2012

from Rs 9.1bn in FY2010. We further estimate that the PAT would grow at a CAGR of 10.8% to Rs 1.55bn in

FY2012.

We expect margins to contract marginally in FY2011 and then improve in FY12 on the back of increasing share of

non linear initiatives.

Based on a PE multiple of 10xFY12E, the fair value for NIIT Technologies works out to Rs 264.

We recommend a ‘BUY’ rating on the stock.

Particulars (Rs mn) FY2008 FY2009 FY2010 FY2011E FY2012E

Net Revenue 9415.1 9799.4 9137.1 11421.4 13134.6

Expenditure 7652.3 8136.2 7434.6 9479.1 10806.2

EBITDA 1762.8 1663.2 1702.5 1942.3 2328.4

Interest 50.9 31.8 8.4 0.0 0.0

PBDT 1711.9 1631.4 1694.1 1942.3 2328.4

Depreciation 388.8 421.7 358.1 376.0 413.6

Other Income 186.1 179.4 84.8 50.0 75.0

PBT 1509.2 1389.1 1420.8 1616.3 1989.8

Less: Tax 137.7 224.1 144.2 290.9 437.8

Profit After Tax 1371.5 1165.0 1276.6 1325.3 1552.0

Minority Interest 0.0 0.0 12.9 0.0 0.0

PAT after Minority Interest 1371.5 1165.0 1263.7 1325.3 1552.0

PAT Margin (%) 14.6 11.9 13.8 11.6 11.8

EBITDA Margin (%) 18.7 17.0 18.6 17.0 17.7

ROE (%) 32.0 32.1 22.0 20.1 20.8

EPS Rs 23.4 19.8 21.7 22.5 26.4

BVPS (Rs.) 73.0 61.8 98.6 111.9 126.8

FY2011E FY2012E

Valuation Ratios (x)

P E R x 9.3 7.9

P/B Ratio 1.9 1.6

Financial Analysis and Projection


October 12, 2010



Director Name Current Position Description

Mr. Rajendra S. Pawar Chairman & Managing Director

Rajendra S. Pawar is a well known face in the Indian IT sector. Recognising skilled manpower to be a very

important prerequisite for the survival of the fledgling Indian IT industry, Mr. Pawar helped pioneer the IT

training segment to fuel its growth. Mr. Pawar has won the Ernst & Young Master Entrepreneur of the Year

Award in 1999. His contributions to the IT industry in India also earned him the “IT man of the Year” award,

instituted by IT industry journal, Dataquest. Mr. Pawar is a part of a panel of six experts in the newly constituted

Prime Minister’s National Council on Skill Development, chaired by the Prime Minister of India.

Mr. Arvind Thakur Chief Executive Officer

Mr. Arvind Thakur is the Chief Executive Officer of NIIT Technologies Ltd., and serves as the Joint Managing

Director on its board. Mr. Thakur graduated in engineering from the Indian Institute of Technology in India.

Thereafter he pursued post graduation in Industrial Engineering from NITIE in Mumbai. He started his career as

an Industrial Engineer with BHEL, a large engineering corporation with work specialization in systems. He joined

NIIT Ltd. in 1985 as a member of the core team, and has since then been handling key organisational roles. He

was the President of its Software business before it was demerged to form NIIT Technologies Ltd.

Mr. Vijay Thadani Director

Mr. Vijay K. Thadani is a co founder of the NIIT group and is currently the Chief Executive Officer of NIIT Ltd. Mr.

Thadani is currently the Chairman of CII National Committee on Education and also serves as the Chairman of

the National Accreditation Board for Education and Training (NABET). Mr. Thadani is a ‘Distinguished Alumnus’ of

the premier Indian Institute of Technology, Delhi.

Mr. Subroto Bhattachrya Director (Independent)

Mr. Subroto Bharrachrya is a Chartered Accountant with over 30 years of experience. A specialist in the field of

Finance and Management Consultancy, he has worked as a part of the core team in several reputed

organisations

Mr. Surendra Singh Director (Independent)

Mr. Surendra Singh is a retired IAS Officer, who has held very senior positions in the Central and State

Governments. Having joined the Public Service in 1959, Mr. Singh has been Special Secretary to the Prime

Minister of India, responsible for all the economic work in the PMO, Cabinet Secretary to the Government of

India, Secretary to the Council of Ministers and Secretary, Ministry of Industry. He was an Executive Director on

the board of the World Bank, representing India, Bangladesh, Sri Lanka and Bhutan. He has also held

directorships on the Boards of the International Finance Corporation (IFC) and the Multilateral Investment

Guarantee Agency (MIGA).

Mr. Amit Sharma Executive Vice President

Mr. Sharma earned his MBA in International Business from the Wharton School, University of Pennsylvania. Mr.

Sharma also holds a master’s degree in Computer Science from the Moore School, University of Pennsylvania,

and a Bachelor of Technology in Mechanical Engineering from the Indian Institute of Technology. Mr. Sharma has

previous ly worked with various companies including Motorola, GE Capital, and McKinsey, New York.

Board Of Directors


Economy & Finance

Fullerton Securities' Investment Idea, NIIT Technologies - BUY