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Business News/ Market / Mark-to-market/  NIIT Technologies: US revenues grow strongly, margins improve
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NIIT Technologies: US revenues grow strongly, margins improve

Margins increase by 120 basis points, resulting in an 8% sequential rise in operating profit

In the December quarter, reported revenue was flat, but that was largely due to an expected drop in work done by NIIT with the Indian government. Photo: Pradeep Gaur/MintPremium
In the December quarter, reported revenue was flat, but that was largely due to an expected drop in work done by NIIT with the Indian government. Photo: Pradeep Gaur/Mint

NIIT Technologies Ltd’s shares have risen by over 35% in the past three months, compared with a 10% rise in the National Stock Exchange’s CNX IT index. Investor expectations of an improvement in the company’s performance appear to be playing out. In the December quarter, reported revenue was flat, but that was largely due to an expected drop in work done by NIIT with the Indian government.

This work included a large proportion of low-margin hardware sales, or what is known as PFR (purchase for resale). The PFR component reduced as some projects went live.

The higher-margin services business grew 3.6% sequentially, thanks to a sharp 8.2% increase in the banking, financial services and insurance vertical. Transport and logistics, the other large vertical for the company, grew revenue by 2.3% sequentially. In addition, revenue from the US region grew strongly and NIIT said that demand for its services is looking up in the region.

Margins increased by 120 basis points, resulting in an 8% sequential rise in operating profit. A basis point is one-hundredth of a percentage point. Of course, some analysts say that the increase in margins should have been higher, given the number of tailwinds in the company’s favour—such as the drop in the PFR portion of the business.

The company also announced a $300 million (around 1,845 crore today) deal win last quarter from its top client. This entails an annual run rate of $30 million, and it is not clear how much of this will be over and above the current revenue contribution from the top client, since NIIT has described it as a renewal and vendor consolidation deal. The disconcerting part about the deal win, as one analyst pointed out in the company’s conference call, was that the client invited other bids, suggesting that the renewal with NIIT as a vendor didn’t happen automatically.

Of course, all’s well that ends well. Even so, the episode highlights the risks involved for smaller IT firms, where client concentration can sometimes result in rude shocks. The NIIT stock trades at only 10 times estimated earnings for fiscal 2014-15, reflecting the risks that are typically associated with mid-sized and small IT firms.

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Published: 14 Jan 2014, 10:28 PM IST
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