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NIIT Tech: good show, low valuations

NIIT Tech: good show, low valuations
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First Published: Tue, Jul 19 2011. 11 19 PM IST
Updated: Tue, Jul 19 2011. 11 19 PM IST
NIIT Technologies Ltd’s financial performance in the June quarter took a sharp hit, with one of its large projects nearing completion. Year-on-year growth fell to 12.8% in the June quarter, from as high as 32% in the March quarter.
The company has been executing a large project for the Border Security Force in the domestic market, which is now nearing completion.
Also See | Valuation dilemma (Graphic)
Growth has been healthy in the rest of the business. International revenue grew 10% sequentially. The key banking and financial services sector (contributing 41% to revenue) reported 8% growth and the transport sector (35% contribution) posted 9% growth compared with the March quarter.
Margins expectedly fell by 200 basis points sequentially owing to wage hikes given earlier in the year. As a result, operating profit fell by 6% sequentially despite a 4.1% increase in revenue. One basis point is one-hundredth of a percentage point.
The scrip, which had risen by almost 14% in the week until the results announcement, corrected by around 1.5% after the results. The reason the markets are still gung-ho about the company’s prospects are the two large deals the firm recently announced.
Last week, the company announced that it has entered into a joint venture with US-based media firm Morris Communications Corp. The venture will provide information technology (IT) and business process outsourcing services to the media group, with the latter committing to a revenue stream of $85 million (around Rs380 crore today) over the next five years.
It also announced a large infrastructure management services deal with Eurostar International Ltd, which is the operator of the Eurostarservice between London, Paris and Brussels. According to news reports, the deal is worth $35-40 million. In fact, NIIT Technologies’ shares had risen by 14% after these announcements last week.
But despite the recent buoyancy in the company’s shares, valuations continue to be abysmally low at 6.6 times post earnings. Mid-cap IT stocks typically trade at a valuation of around 12 times earnings. Some brokerages such as Sharekhan Ltd have a buy rating on the firm, but even there the target price assumes a multiple of eight times earnings.
According to an analyst, one of the reasons NIIT Technologies gets such low valuations is that it hasn’t been able to scale up its business in a big way despite being in the industry for many years now. Last year, it had revenue of only around $275 million.
Whatever the reasons, it’s worthwhile to note that valuations have traditionally been low and it may be premature to bet that they will improve in a hurry.
Graphic by Yogesh Kumar/Mint
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First Published: Tue, Jul 19 2011. 11 19 PM IST