NIIT Technologies Ltd, created through a spin-off of NIIT Ltd’s technology solutions business in mid-2004, has reported its best financial performance ever. Consolidated revenues grew 46% to Rs886 crore in the year ended March, much higher than the 12% growth recorded in the first two years of the firm’s existence.
Revenues were propped up by the acquisition of London-based insurance solutions provider, ROOM Solutions last May. But even after excluding the business done by ROOM, revenues grew 28%. The growth has led to a re-rating of NIIT Tech’s shares, which have risen a huge 167% in the past year, while NSE’s CNX IT index rose by only 36%.
Much of the increase in share price was to capture the jump in earnings, which have grown 95%. But even its one-year forward price-earnings valuations have jumped from about eight times last year to 12 times now. The jump in net profit was helped by a six-fold jump in other income, but operating profit too grew by a strong 56%. NIIT Tech has managed to improve operating margins by 130 basis points, despite its acquisition of ROOM, whose margins are about one-third that of NIIT.
The profitability of the organic IT solutions business grew by about two percentage points. Also, the small-scale business process outsourcing business turned profitable at the operating level, a smart turnaround considering that its losses amounted to 16% of revenues last fiscal.
Fresh order intake jumped by 70% to over Rs900 crore, which points to a promising future. Analysts expect earnings to grow by over 30% in the next two years. If that happens, NIIT Tech shares still look cheap at about 12 times forward earnings. Needless to add, the bonus issue will also improve sentiment.
Punjab National Bank
Both net and operating profits for the March quarter at Punjab National Bank were lower than in the same period of last year, despite a 20.6% rise in net interest income.
At first glance, the reason seems to be that operating expenses have shot up. But that’s because staff expenses in year-ago quarter were much lower due to a reversal of provisioning made for pension obligations.
Adjusted for this base effect, operating profits would have been higher by 11%.
The attraction of Punjab National Bank is its high proportion of low-cost current and savings accounts, which is why its net interest margin is a high 4.07%.
High margins coupled with high loan growth—29.4% in FY07—translates into higher operating profits and enables the bank to weather the cost push in a rising interest rate environment. Fee income growth too has been very strong in the March quarter.
However, these positive factors did not translate into earnings growth because of the base effect mentioned earlier and because provisions have increased on account of depreciation on the bank’s investments.
The high loan growth, however, has also led to a rise in bad loans. Gross non-performing assets went up from Rs3,268 crore at the end of December to Rs3,391 crore at the end of March, 2007. Also, net non-performing assets went up to 0.76% of net advances from a mere 0.29% of net advances a year ago.
The bank management has said that it will be raising capital this year in order to shore up its capital adequacy norms and to fund its loan growth. The scrip has run up recently, together with other public sector banks stocks.
Provided the bank management checks the growth of NPAs, there’s no reason why Punjab National Bank shouldn’t outperform the sector.