NIIT Technologies' (NIIT Tech's) Q3FY17 results were marginally above our expectations. USD revenues, Constant currency growth and EBITDA margin beat our estimates. Order book executable over the next twelve months came at US$311m, up 0.6% QoQ and 3.3% YoY. NIIT Tech has recently announced two senior hires to ramp-up the management team (Mr Joel Lindsay to Head the Digital Business and Mr Adrain Morgan to strengthen the Insurance business). We believe recent senior level additions could add some weight to the Digital capabilities. We also believe the management needs to further invest in strenthening its Digital capabilities in its focused verticals (Travel, BFS, Insuranace). As on Q3FY17, Digital accounted to 19% of total revenues. Management remained buillish on growth outlook for Q4FY17 and guided for further margin expansion.
Revenue and Margin beat: Revenues came at US$101m, down 0.6% QoQ and in line with our estimates (US$100m). In constant currency, revenues grew by 0.6% QoQ. Higher revenues from GIS and traction in Insurance vertical have aided in growth beat. EBITDA margin at 16.7% was up 20bps QoQ and above our estimates (PLe: 16.4%). PAT at Rs624m was 3.5% above our estimates (PLe: Rs603m). Fresh order intake for the quarter came at US$101m (v/s US$123m in Q3FY16). Moderation in debtor days (69 days for 3QFY17 vs 73 days as on 2QFY17) and Capex has aided in strong free cash flow generation for the quarter.
Valuation and View: We expect NIIT Tech’s USD revenues to remain flat for FY17E. However, led by traction in core verticals, we see scope for NIIT Tech to deliver 7% USD revenue growth in FY18E. Improving business mix and operational efficiencies can help sustain EBITDA margins at respectable levels. We model reported EBITDA margin at 16.3/16.6/16.5% for FY17/FY18E/FY19E. With strong net cash on balance sheet (Rs5.57bn), NIIT Tech has the potential to pursue acquisitions to strengthen its service offerings in favour of Digital. Stock has high room for safety in our view. Maintain “BUY”.
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