NIIT Tech: results a pleasant surprise, but will the performance be sustained?
Investors are far from being convinced that the performance in the March quarter will be sustained
NIIT Technologies Ltd disappointed investors in each of the preceding four quarterly results, causing its shares to underperform the CNX IT index by about 27% in the past one year. So, when nearly all IT companies reported results that were below expectations for the March quarter, NIIT Tech’s shares, too, started pricing in the possibility of another disappointment.
To everyone’s surprise, the company’s revenue grew at a brisk pace and its profit margins rose handsomely, instead of an expected decline in margins. NIIT’s shares rose sharply after its results, but lost some of their gains on Wednesday, when markets were weak. Despite this, shares are still down by about 8.7% in the past year, compared with a 17.5% increase in the CNX IT index.
Needless to say, investors are far from being convinced that the performance in the March quarter will be sustained. For perspective, revenue grew by 3.3% in constant currency terms sequentially, on the back of a healthy 3% growth in volumes. And the operating profit margin rose by over 180 basis points (bps); analysts at Emkay Global Financial Services Ltd, for instance, had estimated a 60 bps decline in margins. A basis point is 0.01%.
But as analysts at Dolat Capital Market Pvt. Ltd point out, the company’s order intake last quarter was modest and the value of orders executable in the next 12 months has grown by just 2% year-on-year. “Overall, we believe there are no visible factors in its operating metrics—flat headcount over last 8 quarters, onsite effort mix intact, million dollar clients are flat-to-down, order intake stuck in $100 run rate for some time—which makes us believe that it would need a couple of quarters to build up and support the momentum."
On the positive side, the company has made an acquisition in the digital space, which is also expected to be accretive at the earnings per share level in fiscal year 2016-17. But as far as organic growth goes, it seems best to wait and watch to see if the March quarter’s performance isn’t a flash in the pan.
The writer doesn’t own shares in the above-mentioned companies.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!