Investor's Eye: Update - NIIT Technologies; Viewpoint - Bharti Infratel

Investor's Eye [July 15, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE     NIIT Technologies Recommendation: Hold Price target: Rs430 Current market price: Rs409   Maintain Hold with a revised price target of Rs430   Key points  For Q1FY2015, NIIT Technologies Ltd (NTL) has reported a disappointing performance across metrics, with a muted revenue growth of 0.3% in dollar terms, an EBITDA margin contraction of 170BPS to 13.4% and a 30% lower net income QoQ. Further, the working capital cycle deteriorated with an increase in debtor days to 95 days from 89 days in Q4FY2014 and the cash balance declined by Rs92 crore QoQ.  During the quarter, two clients in the USA, both from the BFSI vertical, ramped down their projects. In Q4FY2014, one client had ramped down its project in the travel and transport vertical. On the positive side, NTL started booking revenues from its ambitious AAI contract during the quarter. Fresh order intake during the quarter stood at $124 million and the order book to be executed over 12 months stood at $295 million, up 12% YoY.  Owing to the ramp-down by clients the management has given a weak outlook for revenue growth in FY2015 and indicated the margins may remain flattish YoY. Overall, the management has shifted the timeline for transition to FY2016 from FY2015 earlier. We have reduced our earnings estimates for FY2015 and FY2016 by 21% and 9% respectively for the following reasons: (1) a lower revenue growth; (2) a cut in margin assumptions; and (3) an increased depreciation cost owing to a change in the depreciation policy. Consequently, we have reduced our price target for the stock to Rs430 from Rs470 earlier and maintained our Hold rating.     VIEWPOINT   Bharti Infratel  Current market price: Rs262   Runs ahead of fundamentals; book profits with 52% returns    Key points Our investment thesis played out and stock delivered 52% returns in less than six months: We had initiated our positive view on Bharti Infratel on January 24, 2014 at a price of Rs172. Impressed by its strong operational performance in Q4FY2014 and the tie-up with Reliance Jio, we had also reiterated our positive stance on the company in the post-result update in April 2014. Our prime investment thesis rested on the fact that Bharti Infratel with a portfolio of over 1,10,000 tower assets is a proxy play on the strong data opportunity that is getting unleashed in the Indian economy (the listed telecommunications players have witnessed a growth of 90-100% year on year in the data traffic over the last 18 months). Also, the tie-up with Reliance Jio would accelerate asset sweating and lead to higher earnings growth. Taking cognisance of the improving execution and future environment, the market re-rated the stock, which delivered 52% returns in less than six months. Current valuation outruns the near-term fundamentals: At 10x the FY2015E enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA) and 9x the FY2016E EV/EBITDA, the stock no longer appears cheap from the earnings perspective and largely factors in the near-term positives. Hence, we advise investors to book profit with an overall gain of 52%.  Key monitorable: Any potential tower sharing agreement or tie-up of Indus Towers (a subsidiary) with Reliance Jio would result in earnings upgrade and hence boost the stock's performance.    Click here to read report: Investor's Eye     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team