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NIIT Technologies - Steady Prospects

You may invest in this IT stock with a three-year horizon

NIIT Technologies Limited (NTL) is a leading information technology (IT) solutions organisation. It offers services such as application development and maintenance, managed services, IP asset or platform solutions and business process outsourcing. Its clients belong to sectors such as financial services, travel and transportation and manufacturing .

Strengths
Healthy topline and bottomline: During Q1FY11, NTL had started executing the Border Security Force (BSF) project. The initial phase involved building the infrastructure. This was partially carried out in Q1FY11 and Q2FY11. For the purpose of subsequent revenue analysis, bought-out elements in the projects have been excluded.
In Q2 FY11, revenues, excluding BSF bought-out elements, grew at the rate of 19.7 per cent y-o-y and 9.9 per cent sequentially. Net profits grew 35.6 per cent y-o-y and 6.6 per cent q-o-q.
Broad-based growth: During the second quarter, the company posted sequential growth in all its verticals. According to a recent report from Kotak Securities, “What is encouraging is that revenue growth was experienced across clients, geographies and verticals.”
Macro environment improving: The company witnessed an improvement in the macro scenario, especially in USA and India. “Overall spending on IT is on the rise, buoyed by the release of pent-up demand of the past few quarters,” says the Kotak Securities report.
Fresh order intake: The company received orders worth $60 million during Q2FY11. It added three significant customers, two in the travel industry and one in insurance. Over the next 12 months it has to execute orders worth $141 million.

Opportunities
Capex: In FY11 the company plans to undertake capital expenditure worth Rs 60 crore. Of this Rs 25 crore has been earmarked for developing a special economic zone (SEZ). It has received permission for starting an SEZ unit in its campus which is being developed in Greater Noida.
Non-linear initiatives: The company’s initiatives on the non-linear side include infrastructure management services, platform-based services and managed services. According to the Kotak Securities report, the company plans to introduce ROOM’s platform in the US market. In FY10 the company had announced a partnership with Hitachi Information Systems Ltd. of Japan for offering cloud services. Revenues from this partnership are expected to begin from the second half of FY11.

Concerns
The current economic scenario poses fresh challenges for the industry in the form of currency volatility. In future, the company will have to carefully manage currency risk.
A good part of the revenues in Q2 came from the infrastructure delivered to BSF. Revenue from this source is likely to decline considerably in the third quarter of FY11. However, revenues, excluding those from BSF, will continue to grow.

Valuations
The stock is currently trading at a 12-month trailing price-to-earnings (PE) ratio of 10.9 (as on December 10, 2010), which is lower than its five-year median PE of 11.73. The company’s price-earnings to growth (PEG) ratio is 0.6. Given its attractive valuation and sound growth prospects, you may buy the stock with at least a three-year investment horizon.