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Please refer to Disclosures and Disclaimers at the end of the Research Report.

NIIT Technologies Daring to be different will pay off

IT Services: Initiating Coverage 26 September 2014

PhillipCapital (India) Pvt. Ltd.

Niche in TTL domain; strong traction in insurance NIIT Tech has created a strong presence in the travel, transport and logistics (TTL) domain, with end‐to‐end value‐added solutions in its kitty. It has top‐tier clients in aerospace (British Airways, Lufthansa, Emirates) and insurance verticals and continues to bag large deals. It has an annual revenue run rate of US$ 145mn (37% of total revenues) from the TTL vertical – second only to TCS (US$ 464mn) and the largest among midcaps. Bold initiatives to achieve US$ 1bn revenues in the next 5 years NIIT Tech aspires to achieve US$ 1bn in revenues by the end of FY19 on the back of huge opportunities from the US and opening up of fresh deals in Europe. It has adopted a four‐pronged strategy to execute its set corporate agenda, which seems pragmatic. It has created new senior management positions, which should strengthen its focus on execution levels.

It has appointed Mr Sudhir Chaturvedi, an IT veteran and ex Infoscian as its Chief Operating Officer and moved multiple segments under his charge. It has also separated TTL as an independent unit to focus better on large deals. These bold initiatives should help achieve its performance targets over the next 5 years. Multiple margin tailwinds ahead; strong S&M base boosts growth We see the following tailwinds to its margins: 1) productivity improvements through increase in utilisations, 2) gaining large deals from high‐margin regions (western markets), and 3) incremental offshoring. New initiatives on cost rationalisations to reduce G&A costs and an improvement in its GIS business will provide additional support to margin expansion; GIS margins (GIS business contributes 6‐7% of total EBITDA) saw an expansion from 5% to 20% (average) during FY13‐14.

Higher S&M spends will help it gain large deals in its focus verticals — NITEC’s S&M spends remain the highest amongst its midcap peers. While its overall revenue CAGR of 13% (in the last 4 years) was primarily driven by its top‐10 accounts (14% CAGR), its non‐top accounts’ growth was not far behind (12% CAGR). It continues to mine all its accounts while adding new large deals to its pipeline. Outlook and valuations – definite case for FURTHER re‐rating NITEC’s executable orderbook has grown by 15% in FY14 and continues at a pace of 12% yoy in Q1FY15. While it could face some client‐specific challenges in H1FY15, it should regain momentum in H2. We expect its new orderbook revenue to flow through from Q4FY15 leading to a 12% growth in FY16. EBITDA margins should be stable at 15‐16% with PAT growth of 23% in FY16.

On our estimates, the stock is trading at 11x FY15 and 9.3x FY16 earnings. While it has run up 46% over the last 12 months, it still trades at a significant discount to its midcap peers. With a rich profile of built up orderbook, its visibility for growth in FY16 and FY17 is secured, with better margins. With a highly value‐adding price model, it has a higher chance of adding high‐margin large deals to its portfolio.

We value the company at 10x average of FY16‐FY17 earnings – inline with our multiple for midcap IT companies including KPIT Technologies. Our price target of Rs 490, represents 27% upside from current levels. We initiate with a BUY rating.

BUY NITEC IN | CMP Rs 387 TARGET Rs 490 (+27%) Company Data O/S SHARES (MN) : 61MARKET CAP (RSBN) : 26MARKET CAP (USDBN) : 0.452 ‐ WK HI/LO (RS) : 487 / 273LIQUIDITY 3M (USDMN) : 2.3FACE VALUE (RS) : 10

Share Holding Pattern, % PROMOTERS : 31.1FII / NRI : 34.4FI / MF : 15.9NON PROMOTER CORP. HOLDINGS : 4.1PUBLIC & OTHERS : 14.6

Price Performance, % 1mth 3mth 1yrABS 17.6 1.8 53.6REL TO BSE 14.6 ‐6.6 19.3

Price Vs. Sensex (Rebased values)

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Apr‐11 Mar‐12 Feb‐13 Jan‐14NIIT Tech BSE Sensex

Source: Bloomberg, Phillip Capital Research

Other Key Ratios Rs bn FY15E FY16E FY17ENet Sales 23,745 26,614 30,249EBIDTA 3,503 4,117 4,960Net Profit 2,159 2,641 3,274EPS, Rs 35.6 43.4 53.8 PER, x 11.2 9.1 7.4 EV/EBIDTA, x 6.3 5.1 4.1 P/BV, x 0.9 0.8 0.7 ROE, % 14.6 15.8 17.2 Source: Phillip Capital India Research Varun Vijayan (+ 9122 6667 9992) [email protected] Vibhor Singhal (+ 9122 6667 9949) [email protected]

26 September 2014 / INDIA EQUITY RESEARCH / NIIT TECHNOLOGIES INITIATING

Key charts in the report

Bringing geographical share to an ideal range… US – the major contributor to revenue…

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Exit growth in orderbook of 14‐15%…

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Source: PhillipCapital India Research

– 2 of 18 –


– 3 of 18 –

Investment Thesis Our investment thesis on NIIT tech rests on the following pillars: 1) Leading TTL vendor – with differentiated play on non‐linear models NITEC is a niche player in the TTL space with an annual revenue run rate of US$ 384mn, to which the TTL vertical contributes to around 37% (US$ 145mn); this makes its TTL revenue second only to TCS (US$ 464mn) in the Indian IT industry. It provides platform and IP‐based solutions for key verticals with strong domain expertise in fleet handling (cost‐side) and customer interface and ticketing (revenue‐side) platforms. It has differentiated itself as a value provider to its clients by employing outcome‐based and transaction‐based operating models along with the traditional T&M model. We expect NITEC to deliver strong growth in H2FY15 and FY16 (4% CQGR in 3QFY15E‐4QFY16) with average EBITDA margins of 16%. PAT should see 6.2% CQGR, enabling the company to deliver ROEs of around 17% by FY16. 2) Four‐pronged strategy to tackle growth; aspires to achieve US$ 1bn in 5 years NITEC aspires to achieve US$ 1bn in revenues by the end of FY19 on the back of huge opportunities from a reviving US market and gain in fresh deals from Europe. It has significant business opportunities such as tapping into new accounts, both in the TTL and insurance space, in the western markets and increased focus on managed services combined with disruptive technologies, which forms a potential US$ 160bn market. NITEC has structured a four‐pronged strategy to tackle growth – 1) shift in portfolio to western markets, especially to the US, 2) IMS separated as an independent unit, 3) gaining leadership in TTL and winning mega deals, and 4) strong focus on SMAC (social, mobility, analytics and cloud). 3) Strong visibility in order book – improved focus on winning large deals NITEC had strong deal wins in FY14, adding 16 fresh orders worth US$ 750mn in total contract value (TCV), a growth of 103% over FY13. The orderbook executable in the next 12 months has grown significantly in FY14 (+15% yoy), with 3 large deal‐wins in the US$ 25mn+ category and a mega deal worth of US$ 300mn executable over 8 years. It has also added 3 new deals from the US with a TCV of US$ 469mn, 5 from Europe (TCV of US$ 150mn), and 8 from RoW (TCV of US$ 131mn), indicating a clear preference for western markets. The management expects a strong H2FY15 with a robust pipeline of new deals (large and medium), which will improve growth visibility. 4) Higher S&M spends lead to strong mining in all accounts… NITEC leads its peers with a highly incentivised structure by spending 19% of its revenues in strengthening its sales and marketing base. As a result of an aggressive stance on creating a strong S&M team, it has gained in terms of revenue productivity from all its accounts over the past 5 years. While its revenue CAGR of 13% was primarily driven by its top‐10 accounts (14% CAGR), its non‐top accounts were not far behind at 12% CAGR. It continues to mine all its accounts while adding new large deals to its pipeline.

5) Multiple margin tailwinds NITEC finds multiple margin levers such as: 1) productivity improvements through increase in utilisations, 2) getting large deals in high‐margin regions (western markets) and 3) incremental offshoring. New initiatives on cost rationalisation such as process automation, curtailing G&A costs, and an improvement in its GIS business will provide additional support to margin expansion; GIS margins (GIS business contributes 6‐7% of total EBITDA) saw an expansion from 5% to 20% (average) during FY13‐14.


Leading TTL vendor – with differentiated play on non‐linear models NITEC is a niche player in TTL with an annual revenue run rate of US$ 384mn, of which around 37% or US$ 145mn comes from TTL, second only to TCS’ US$ 464mn TTL revenue. It provides platform and IP‐based solutions for its key verticals, with strong domain expertise in customer interface, ticketing (revenue‐side) and fleet handling (cost‐side) platforms. It has differentiated itself as a value provider to its clients by deploying outcome‐based and transaction‐based operating models along with the traditional T&M model. Some of the key clients in its portfolio using a non‐linear model include Morris Communications, Carey International, and Caesars Entertainment.

NITEC has a large ADM practice (66% ofrevenues); but its new aspirations haveled to a shift in focus to managedservices (IMS).

Over last six months, the company has seen ramp downs in key accounts and delay in execution of AAI project (deferred to 1QFY15), which led to a muted revenue growth in FY14 (up by only 3% yoy). While these challenges persist, the management expects a revival of the spending cycle from H2FY15. We expect NITEC to deliver strong revenue growth in H2FY15 and FY16 (4% CQGR in this period) with average EBITDA margins of 16%. PAT should see a CQGR of 6.2% over this period, improving ROEs to 17% by FY16.

See strong growth in FY14‐16… PAT to grow faster than revenues…

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RoE % RoCE %

Source: PhillipCapital India Research, Company

– 4 of 18 –


Four‐pronged execution strategy to tackle growth NITEC’s management aspires to achieve US$ 1bn in revenues by the end of FY19 on the back of huge opportunities in the US market and the opening up of fresh outsourcing deals in Europe. Its strategy is: 1) tapping into new accounts both in the TTL and insurance space in western markets and 2) increasing focus on managed services combined with disruptive technologies, which forms a potential US$ 160bn market. Four‐pronged strategic initiatives adopted for tackling growth: • Shift in portfolio towards western markets, especially to the US. • IMS as an independent unit. • Gain leadership in TTL by winning mega deals. • Strong focus on SMAC. 1) Shift in portfolio towards western markets The IT industry is seeing a revival in outsourcing and discretionary budgets in the western markets. The change in the landscape of information technology — advent of disruptive technologies (SMAC) and transformation in business models necessitating cost rationalisations — drives IT spends in these markets. Although widely penetrated, we believe the West would continue to be the keystone for broad‐based recovery in growth for the Indian IT industry. With its niche capabilities in PPS (platform, product, and solutions) and outsourcing, NITEC has strategized to target its major verticals (TTL and large insurance) in these regions.

Bringing geographical share to an ideal range… US: Becoming a major contributor to revenue…

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HCL tech

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Americas Europe R‐o‐W

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Currently a higher proportion of its revenue comes from Europe and RoW vs. its larger peers. However, its recent large deal wins and management commentary indicates that NITEC intends to shift more towards the US. We gather that it aims to achieve more than 50% revenue from the US vs. 42% currently, keeping European revenues stable at 30‐35%, and reduce its domestic government businesses. It currently derives about 80% of its revenues from the western world. Its US business has seen a CQGR of 3.4%+ in the last 8 quarters, while Rest of the world declined at a rate of 4.3%, with domestic businesses declining at 2.4%.

– 5 of 18 –


2) IMS separated as an independent unit The potential market for managed services/infrastructure management services (IMS) is about US$ 160bn. With their cost advantage, Indian IT companies are set to target rebid markets and newer opportunities while gaining size to bid against IT giants such as IBM and Accenture. NITEC has decided to make lucrative‐but‐risky managed services as its next‐level growth driver. With its expertise in handling non‐linear models, we believe it can manage the risk involved in this line of business. It has carved out its IMS practice (which contributes to about 13% of its revenues) as an Independent Business Unit (IBU) so as to implement decisions better.

IMS is now a separate unit amongst service lines…

CEO

COO

IMS US

BPM CEUR

NITL UK

Asia/ANZMarketing

ADM

EPM

Process & ICT

Digital Services

TIC

Verticals CSO

Strategic Alliances

T&T Large Deals

CDO CPO CFO


Management expects IMS to contribute more than 20% of NITEC’s overall revenues. It has structured out a highly incentivised S&M base for targeting lucrative large deals from select verticals such as TTL and BFSI. With a differentiated practice of RIMS (Remote Infrastructure Management through cloud) and near‐shore infrastructure management among peers, the company is set to compete with larger brands in the business. 3) Gaining leadership in TTL through winning mega deals and strong client mining With a practice of US$ 143mn, NITEC is India’s second‐largest IT services vendor for the TTL vertical, next to only TCS (US$ 464mn). It has a differentiated play in this vertical with a unique portfolio of platforms and IP‐based solutions providing end to end services for its clients. To improve its focus and gain leadership in TTL, the management has restructured its TTL segment into an autonomous business unit reporting directly to the CEO. The company aspires and aims to acquire mega deals (US$ 100mn+ each).

Currently, NITEC has large clients(British Airways, Cathay Pacific andVirgin Atlantic) in its TTL vertical

Unlike its peers, NIIT Tech has created solutions and platforms to target both the revenue‐side (ticketing and customer reservation systems) and the cost‐side of its clients’ business (fleet‐management systems and cargo‐handling platforms). These niche services provide a strong sticky relationship with its clients and improve its chances of mining its existing client base while retaining an upper hand in negotiating the rate‐cards for future projects. This structure has helped NITEC to win some large deals such as the AAI project (worth US$ 70mn) and the Changi International Airport project (US$ 50mn+).

– 6 of 18 –


Second‐largest TTL player in the Indian IT space…

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TCS Infosys WPRO TechM HEXW Cyient NITEC

US$ mn

TTL ‐ revenues% contribution to revenues


Platforms and solutions dedicated to the TTL vertical Platforms & Solutions Category Industry Business impact

Route Profitability Analyser Data Analytics ‐ pre‐flight analysis Airlines Cost‐side

Revenue Analytics Analytics ‐ Simulation on customer behaviour Airlines Revenue‐side

Revenue Accounting Accounting tool Airlines Cost‐side

Fare Audit Auditing tool All Both

Crew Management & Flight Operations All‐in‐one integrated airline operation solution Airlines Cost‐side mCrew Mobile app for scheduling crew, duty roster Airlines Cost‐side

TravelMate Customer based solutions ‐ mobile and online Airlines Revenue‐side

Crew Wings Mobile app for better customer experience solution Airlines Cost‐side

ACH‐compliant Monalisa PRA Revenue accounting solution Airlines Revenue‐side

Simplified Interline Settlement For exchange of information, ex paper records All Cost‐side Fleet Management Fleet management solution, reduce turnaround time Airlines Cost‐side Track & Trace App for better resource utilisation ‐ Mobile & online All Cost‐side

Source: Company, PhillipCapital India Research 4) Strong focus on SMAC Since 2008, NITEC has nurtured a dedicated organisation eco‐system for SMAC technologies, initiating with its ‘Cloud as a Services’ program. It has gained domain expertise in cloud services and mobility, while making additional investments for improving its capabilities in analytics and social media. In our recent interaction, the management indicated that it expects strong growth from big data and analytics services. NITEC unveiled its first multi‐faceted software‐as‐a‐service (SaaS) solution offering in Feb 2008. Introduction of smart devices such as tablets, smartphones and other digital products enhances the ability to manage different processes in an industry, offline or on‐the‐go. Vendors as well as customers could be live 24/7 and participate in any operations on‐the‐go. Travel‐related industries can analyse live market changes and customer needs, so that they can improve their services immediately. We note that this transition in technology interface is gaining significant traction in many industries including TTL, BFSI, and manufacturing.

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Potential of SMAC

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Some of NITEC’s top accounts havealready adopted SMAC technology: • Carey International: Digital

transformational services • Caesers Entertainment: Cloud pay‐

per‐use model • SATS Foods: Inflight catering

control systems using mobility andcloud

Source: PhillipCapital India Research Restructured the senior management for better execution NITEC has restructured its senior management by separating key focus verticals and initiatives as independent units for better execution of decisions. It also created a new position of Chief Operating Officer (COO) by appointing Mr Sudhir Chaturvedi, a visionary in financial services and ex‐Infoscion. S&M, delivery operations of all geographies, and non‐traditional units such as IMS, BPM, and NITL report directly to him. It carved out its TTL vertical and made it an IBU that focuses on large deals. This linearization improves the efficiency of the key executive positions in the company.

Non traditional units under COO position...

CEO

COO

IMS US

BPM CEUR

NITL UK

Asia/ANZMarketing

ADM

EPM

Process & ICT

Digital Services

TIC

Verticals CSO

Strategic Alliances

T&T Large Deals

CDO CPO CFO


Mr Sudhir Chaturvedi, an ex‐Infoscian (Senior VP and Head of FS – Infosys’ Americas Business Unit) was appointed as the COO on 26th Aug 2013. Mr Chaturvedi has strong relationships and robust experience in handling the US and Insurance domains, which could be utilised for NITEC’s strategy to strengthen its position in the US markets. His initiative to attract large deals from key verticals – TTL and Insurance – and to place NITEC as an IT partner for the leading companies in each industry in focus would pay off in a long run.

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Strong visibility in order book NITEC had strong deal wins in FY14 adding 16 fresh orders worth US$ 750mn TCV, a growth of 103% over FY13. The orderbook executable in the next 12 months has grown significantly in FY14 (up 15% yoy), with 3 large deal wins (US$ 25mn+) and a mega deal worth US$ 300mn (executable over 8 years). It added 3 new deals from the US with a TCV of US$ 469mn, 5 from Europe (TCV of US$ 150mn), and 8 from the RoW (TCV of US$ 131mn), indicating a clear preference for western markets. The management expects a strong H2FY15 with a robust pipeline of new deals (large and medium), thereby improving its growth visibility.

Large deals won in FY14 Company Vertical Region Span TCV Project typeAAI TTL India Multi years US$59mn Implementation of Airport Operation Control CentresUnknown Insurance US 10 years US$300mn Transformational project, ADMS and operationsUnknown Insurance US Multi year US$25mn+ Insurance SolutionsUnknown BFS US Multi year US$25mn+ AMS, operations

Source: Company Going into H2FY15, NITEC has a new deal orderbook worth of US$ 295mn executable in 12 months — this indicates strong visibility for FY16. Challenges such as ramp downs from existing business impacted 1QFY15. However, the company expects this scenario to bottom out by 2QFY15. We see a clear correlation of growth to the executable orderbook growth with the exception of ramp downs. Exit growth in orderbook of 14‐15%…

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The marked portion indicates ananomaly in the exit growth oforderbook by the end of FY12 andrevenue growth for FY13. This disparitywas due to industry‐specific changes inthe decision cycle.

Source: PhillipCapital India Research The graph above indicates the exit growth for orderbook (executable in 12 months) at the end of a fiscal year, which gives visibility on the revenue growth for the succeeding year. FY15 revenues are expected to have a significant impact from unanticipated ramp downs in two key accounts (BFSI space). Both the accounts have re‐considered on their IT spends for new projects, which would impact the H1FY15 and Q3FY15 – bringing FY15 growth close to 3% yoy (a disparity from the orderbook growth).

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Strong S&M team = strong client mining NITEC leads its peers with a highly incentivised structure by spending 19% of its revenues in strengthening its sales and marketing base. As a result of this aggressive stance, it has gained in terms of revenue productivity from its top and non‐top accounts over the past 5 years. While its overall revenue CAGR of 13% was primarily driven by top‐10 accounts (CAGR of 14%), its non‐top accounts growth was not far behind (12% CAGR). It continues to mine all its accounts while adding new large deals to its pipeline.

Top account CAGR vs. peers Non‐top accounts growth vs. peers

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10%12%

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NIIT Tech HEXW KPIT Polaris FT

Top 10 account ‐ rev CAGR

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With its highly incentivised S&M team, NITEC gained more large deals and market share vs. its peers in focused verticals – both domestic and MNC. Its recent large deal wins are a testament of the aggression of its sales and business development team. NITEC’s SGA spends vs. peers..

19%

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23%


SGA as a % of revenues

With implementation of automationand additional G&A cost rationalisation,it has been able to maintain the SGAspends at around 19%; the cost cuttinghas also provided a cushion for moreinvestments in S&M


– 10 of 18 –


Multiple margin tailwinds NITEC has a higher proportion of Indian government projects in its portfolio vs. most of its midcap peers. With elongated operating cycles and low realisations, the domestic business is a drag to the company’s margins while posing higher risk. It has diverted its focus on western markets by tapping large deals in its leading verticals, which would push both revenues and margins higher.

Government business forms around 80%of its total domestic business

Better realisations and higher volumes from western markets should drive margins. NITEC is also looking at changing the bidding strategy for its domestic businesses by becoming more selective in terms of ROIs that the projects generate. Improvement in utilisations to support margin expansion The company currently operates at 73.2% offshore utilisation excluding trainees and 78.3% blended. In FY14, blended utilisation rates fell to lows of 77.3% on account of: 1) ramp downs in two large TTL accounts, which dragged onsite realisations, and 2) delay in execution of other key projects (got deferred to Q1FY15). We believe that with robust deal wins and a strong pipeline of executable projects, NITEC has the potential to improve its utilisation to peak levels once the projects are re‐assessed and offshoring picks up.

Blended utilisation has bottomed out in FY14… Offshore utilisations ex‐trainees

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Source: Company, PhillipCapital India Research

According to the management, utilisation levels (blended) could comfortably be around 80‐81% going forward. We calculated that every 1% positive change in utilisation adds 50bps to EBITDA margins (EBITDA) and 4.0‐4.4% to EPS. Automation and cost rationalisations to reduce overall SGA Implementation of process automation and other cost rationalisations such as reducing expenses in G&A expenses will support margins. NITEC’s SG&A costs are currently 18‐19% of sales and overall S&M spends are around 10‐11%. While keeping its focus on further investments in sales and marketing intact, the management intends to reduce its G&A costs by implementing severe cost rationalisation methods like re‐shifting the secondary‐level‐delivery employees from onsite to offshore and automating internal processes.

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Improvement in GIS margins GIS business, which forms around 5% of NITEC’s organic revenues, has shown a CQGR of 1.3% in the past 8 quarters with margins improving from 5% to 17% (average) in FY13‐14. Margins hit a low of ‐7% (in 3QFY13) due to sub‐contracting losses incurred in a government‐related project. Currently GIS margins have wound back to 24%, which is a comfortable range in the business. We believe that the company will be able to maintain GIS margins at 24‐25% with new IP solutions and low‐risk non‐government orders bringing in better realisations.

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Inorganic businesses gaining strong momentum NITEC currently derives 16‐17% of its revenues through the inorganic businesses that it acquired through 2006‐11. In the past three years, inorganic revenues have seen a CAGR of 22.2% with 13‐14% margins. NIIT Media Tech (formerly a JV between Morris and NIIT), which forms approximately 38% of inorganic revenues, has gained strong momentum and reported a revenue CQGR of 5.7% for the past 8 quarters (INR) higher than the company’s average of 3.6%. However, its average margins at 13% are lower than the company’s average. It acquired Madrid‐based software services company, Proyecta Sistemas de Informacion SA that specialises in the travel and financial services segments in 2011. Proyecta currently forms 20% of its inorganic revenues and has seen a CAGR of 40% in 3 years, but its margins are still below 10% (7‐8%). The management expects a gradual improvement in these margins. NITL, its insurance business unit, has been lagging in terms of growth for the past three years (0.2% CAGR, with an average margin of 20%). We believe that with additional large fresh orders from insurance companies, this business will gain growth momentum leading to a robust margin expansion.

Mergers & Acquisitions Company Country Date Value Stake Acquisition proposition

AD Solutions AG Germany 15‐Nov‐02 NA 100% Key element to entry into the European market; footprint in Germany ROOM Solutions UK 9‐May‐06 ~$55mn 100% Enhance capability in the non‐life‐insurance space, forays into UK and

other European markets for its insurance vertical Softec GmbH Germany 29‐Feb‐08 NA 100% Major market share holder in TTL services; will reinforce the domain

expertise of the company Morris‐NIIT Tech (JV) US 13‐Jul‐11 $85mn 60% Formed NIIT Media Technologies. Gained capabilities in communication

and media technology; added Morris as a large client. Proyecta Sistemas Spain 16‐Aug‐11 US$7mn 100% Enhance footprint in Europe, with additional capabilities in TTL and

financial services. Sabre Philippines Development centre

Philippines 11‐Sep‐12 NA 100% Enhance global delivery capability through offshoring – near‐shore centrefor APAC business

Source: Company, PhillipCapital India Research Additional M&A plans in the arsenal To achieve its revenue target of US$ 1bn in 5 years, NITEC’s management is open to pursuing inorganic growth through acquisitions. In our recent interaction with the management, it became clear that the company is looking at acquisition targets in the US and Europe for expanding its IMS and SMAC businesses. We believe that, to achieve the target, it would opt for few small acquisitions (size of US$ 50‐100mn). The inorganic route has proven to be successful in the growth story of the company and should continue to gain scale.

Management attributed to be keen onbecoming the leader in TTL in the IndianIT industry along with gaining strongmarket share in insurance – mainlytargeting SMEs

In addition to the existing IP‐based products and platforms, the company is also set to acquire new IP products, which would complement the existing business and add value to its services. This would also help the company to foray into new domains and geographies. IP‐based business currently contributes to only 9% of its overall revenues.

– 13 of 18 –


Valuation In FY14 and 1HFY15, NITEC saw ramp‐downs from multiple accounts, which led to a slow revenue CQGR – only 0.2% – and an EBITDA margins contraction of 150bps. On the other hand, it added large deals worth US$ 750mn (TCV), which pushed its executable contract value by 15% yoy. Its more expensive peers such as Cyient and KPIT also faced similar issues from their top accounts and saw reversals in the IT spend cycle. We believe that this industry‐wide phenomenon is related to internal changes in a company or M&As and should reverse soon, thereby improving the IT‐spend‐decision cycle.

Currently, the stock trades at 8.2x FY16 EPS – marginal premium to its historical average. Its improved orderbook (with a better nonlinear revenue component) is expected to start flowing in from the second half of FY15 with major improvement from Q4FY15. Changing trend in IT spends in the western markets and incremental nonlinear component in new deals provide a cushion for margin expansion and imply better valuation potential.

While a 20% P/E re‐rating has already happened for the IT midcap sector, the stock continues to get valued close to its historical averages due to the challenges factored in. However, the improved visibility in orderbook and strong margin levers for H2FY15 and FY16 gives us confidence to value the company at 10x average FY16&FY17 earnings. That gives us a price target of Rs 490, representing a 27% upside from current levels. We initiate with a BUY rating.

P/E band EV/EBITDA band

4x

8x

12x

16x

0

100

200

300

400

500

600

700

800(Rs)

P/E

2x

4x

6x

8x

0

5000

10000

15000

20000

25000

30000

35000 (Rs mn)

EV/EBITDA

Valuation Table CMP M‐Cap _______ROE (%)______ _______P/E (x)_______ _______P/BV (x)_______ _____EV/EBITDA (x)_____ Companies Rs Rs bn FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15ENIIT Tech 391 23.7 14.5 15.8 11.0 9.0 1.6 1.4 6.2 5.0Hexaware 197 59.2 28.4 30.7 14.2 13.0 4.0 4.0 9.9 9.0Polaris 253 25.2 14.7 14.9 10.0 8.6 1.5 1.3 4.5 3.8Cyient 450 50.1 18.7 18.6 14.6 12.6 2.7 2.3 8.7 7.4Mastek 300 6.8 9.3 10.4 11.6 9.6 1.1 1.0 6.1 5.0Persistent 1,382 55.3 21.8 22.3 13.3 10.8 2.9 2.4 8.4 6.9KPIT 162 32.4 18.1 17.4 10.7 9.2 1.9 1.6 6.8 5.9

Source: PhillipCapital India Research Estimates

– 14 of 18 –


Appendix: Business Profile Revenue profile

Americas, 42% EMEA, 37%

APAC, 7%

India, 14%

BFSI, 33% TTL, 37% Manuf, 7%

Govt, 8%

Others, 15%

ADM, 63%IMS, 12%

IP, 9%

SI & PI, 10%

BPO, 6%

Offshore, 35% Onsite, 65%

Geographies

Verticals

Service lines

Revenue mix

Employee mix and client profile

Top 5, 35%Top 6‐10, 13%

Top 11‐20, 17%Non Top 20, 35%

Onsite, 24% Offshore, 76%

Clientwise

Employee mix

Utilisations and attrition

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

75%

76%

77%

78%

79%

80%

81%

82%

83%

84%

FY10 FY11 FY12 FY13 FY14

Utilisations ex trainees Attrition

Source: Company, PhillipCapital India Research

– 15 of 18 –

– 16 of 18 –


Financials

Income Statement Y/E Mar, Rs mn FY14 FY15E FY16E FY17ENet sales 23,050 23,745 26,614 30,249Growth, % 14.0 3.0 12.1 13.7Employee expenses 0 0 0 0Other Operating expenses ‐19,534 ‐20,242 ‐22,497 ‐25,289EBITDA (Core) 3,516 3,503 4,117 4,960Growth, % 6.7 ‐0.4 17.5 20.5Margin, % 15.3 14.8 15.5 16.4 Depreciation ‐619 ‐745 ‐775 ‐836EBIT 2,897 2,758 3,342 4,123Growth, % 6.2 (4.8) 21.2 23.4 Margin, % 12.6 11.6 12.6 13.6 Interest paid 0 0 0 0Other Non‐Operating Income 288 237 288 377Pre‐tax profit 3,185 2,995 3,630 4,500Tax provided ‐803 ‐755 ‐908 ‐1,125Profit after tax 2,382 2,240 2,723 3,375Others (Minorities, Associates) ‐75 ‐80 ‐82 ‐101Net Profit 2,307 2,159 2,641 3,274Growth, % 8.2 (6.4) 22.3 24.0 Net Profit (adjusted) 2,307 2,159 2,641 3,274 Wtd avg shares (m) 60 61 61 61 FY14 FY15E FY16E FY17EUS$ Revenue ($ mn) 383.7 396.0 443.6 504.1Growth, % 3.0 3.2 12.0 13.7Re / US$ (rate) 60.1 60.0 60.0 60.0 Balance Sheet Y/E Mar, Rs mn FY14 FY15E FY16E FY17ECash & bank 1,878 2,114 3,097 3,948Marketable securities at cost 0 0 0 0Debtors 5,643 5,985 6,635 7,459Inventory 4 4 4 4Other current assets 2,088 2,111 2,424 2,827Total current assets 10,975 11,742 13,888 16,213Investments 996 996 996 996Net fixed assets 5,820 6,645 6,670 7,034Non‐current assets 0 0 0 0Total assets 18,014 19,600 21,771 24,460 Total current liabilities 4,497 4,437 4,623 4,850Non‐current liabilities 89 74 84 95Total liabilities 4,586 4,511 4,706 4,945Paid‐up capital 607 607 607 607Reserves & surplus 12,632 14,213 16,107 18,456Minorities 189 269 351 452Shareholders’ equity 13,428 15,089 17,065 19,515Total equity & liabilities 18,014 19,600 21,771 24,460

Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY14 FY15E FY16E FY17EPre‐tax profit 3,185 2,995 3,630 4,500Depreciation 619 745 775 836Chg in working capital ‐1,534 ‐591 ‐977 ‐1,247Total tax paid ‐904 ‐749 ‐908 ‐1,125Other operating activities 0 0 0 0Cash flow from operating activities 1,366 2,399 2,520 2,965Capital expenditure ‐1,778 ‐1,570 ‐800 ‐1,200Chg in investments 0 0 0 0Chg in marketable securities 0 0 0 0Other investing activities 0 0 0 0Cash flow from investing activities ‐1,778 ‐1,570 ‐800 ‐1,200Free cash flow ‐412 829 1,720 1,765Equity raised/(repaid) 5 0 0 0Debt raised/(repaid) 29 ‐15 9 12Dividend (incl. tax) ‐640 ‐640 ‐747 ‐925Other financing activities 626 62 0 0Cash flow from financing activities ‐39 ‐593 ‐738 ‐913Net chg in cash ‐451 236 982 851 Valuation Ratios & Per Share Data FY14 FY15E FY16E FY17EPer Share data EPS (INR) 38.2 35.6 43.4 53.8 Growth, % 7.1 (6.9) 22.0 24.0 Book NAV/share (INR) 219.4 244.2 274.8 313.5 CFPS (INR) 17.9 35.6 36.7 42.6 DPS (INR) 9.1 9.0 10.5 13.0 Return ratios Return on assets (%) 14.3 11.9 13.2 14.6 Return on equity (%) 17.4 14.6 15.8 17.2 Return on capital employed (%) 17.7 14.5 15.7 17.3 Turnover ratios Asset turnover (x) 2.3 1.9 2.0 2.0 Sales/Total assets (x) 1.4 1.3 1.3 1.3 Sales/Net FA (x) 4.4 3.8 4.0 4.4 Working capital/Sales (x) 0.2 0.3 0.3 0.3 Receivable days 89.4 92.0 91.0 90.0 Liquidity ratios Current ratio (x) 3.3 3.5 4.0 4.5 Quick ratio (x) 3.3 3.5 4.0 4.5 Dividend cover (x) 4.2 3.9 4.1 4.1 Total debt/Equity (%) 0.7 0.5 0.5 0.5 Net debt/Equity (%) (13.5) (13.8) (18.0) (20.2)Valuation PER (x) 10.4 11.2 9.1 7.4 PEG (x) ‐ y‐o‐y growth 1.5 (1.6) 0.4 0.3 Price/Book (x) 1.8 1.6 1.4 1.3 Yield (%) 2.3 2.3 2.6 3.3 EV/Net sales (x) 1.0 0.9 0.8 0.7 EV/EBITDA (x) 6.3 6.3 5.1 4.1 EV/EBIT (x) 7.7 8.0 6.3 4.9

26 September 2014 / INDIA EQUITY RESEARCH / NIIT TECHNOLOGIES INITIATING COVERAGE

Management

(91 22) 2300 2999(91 22) 6667 9735

Research Engineering, Capital Goods Pharma

Dhawal Doshi (9122) 6667 9769 Ankur Sharma (9122) 6667 9759 Surya Patra (9122) 6667 9768Priya Ranjan (9122) 6667 9965 Hrishikesh Bhagat (9122) 6667 9986

Retail, Real EstateInfrastructure & IT Services Abhishek Ranganathan, CFA (9122) 6667 9952

Manish Agarwalla (9122) 6667 9962 Vibhor Singhal (9122) 6667 9949 Neha Garg (9122) 6667 9996Paresh Jain (9122) 6667 9948 Varun Vijayan (9122) 6667 9992

TechnicalsConsumer, Media, Telecom Midcap Subodh Gupta, CMT (9122) 6667 9762Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Vikram Suryavanshi (9122) 6667 9951Vivekanand Subbaraman (9122) 6667 9766 Production ManagerManish Pushkar, CFA (9122) 6667 9764 Metals Ganesh Deorukhkar (9122) 6667 9966

Dhawal Doshi (9122) 6667 9769Cement Database ManagerVaibhav Agarwal (9122) 6667 9967 Oil&Gas, Agri Inputs Vishal Randive (9122) 6667 9944

Gauri Anand (9122) 6667 9943Economics Deepak Pareek (9122) 6667 9950 Sr. Manager – Equities SupportAnjali Verma (9122) 6667 9969 Rosie Ferns (9122) 6667 9971

Sales & Distribution Kinshuk Bharti Tiwari (9122) 6667 9946 Dipesh Sohani (9122) 6667 9756 Zarine Damania (9122) 6667 9976Ashvin Patil (9122) 6667 9991 Sales TraderShubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747 Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745Sidharth Agrawal (9122) 6667 9934 ExecutionBhavin Shah (9122) 6667 9974 Mayur Shah (9122) 6667 9945

Corporate Communications

Vineet Bhatnagar (Managing Director)Jignesh Shah (Head – Equity Derivatives)

Automobiles

Banking, NBFCs

Contact Information (Regional Member Companies)

SINGAPORE Phillip Securities Pte Ltd

250 North Bridge Road, #06‐00 Raffles City Tower, Singapore 179101

Tel : (65) 6533 6001 Fax: (65) 6535 3834 www.phillip.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd

4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com

UNITED STATES Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

– 17 of 18 –

http://www.phillip.com.sg/

http://www.poems.com.my/

http://www.phillip.com.hk/

http://www.phillip.co.jp/

http://www.phillip.co.id/

http://www.phillip.com.cn/

http://www.phillip.co.th/

http://www.kingandshaxson.com/

http://www.kingandshaxson.com/

http://www.phillipcapital.com.au/

http://www.ashaphillip.net/home.htm

http://www.phillipcapital.in/

– 18 of 18 –

26 September 2014 / INDIA EQUITY RESEARCH / NIIT TECHNOLOGIES INITIATING COVERAGE

Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence/Conflict: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its employees, directors, or affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd may not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd. which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities andExchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Marco Polo Securities Inc. ("Marco Polo").Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

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