NIIT Tech has made rapid strides in its business in the last few years that has seen revenue run rate accelerating, deal momentum gathering pace and operating margin improving from 14% in FY15 to 18% now.
In the past two years, the stock price of NIIT Technologies has risen by over 200 percent, thanks to the superlative performance under a dynamic revamped leadership team. Unlike the promoters of Mindtree, who are unwilling to let it go, the promoters of NIIT Technologies have decided to offload their close to 30.58 percent stake (NIIT Ltd 23.5 percent, Pawar Family Trust 3.53 percent, Thadani Family Trust 3.53 percent) to Baring Private Equity Asia for a total consideration of approximately Rs 2,627 crore or Rs 1,394 per share.
The deal is therefore valued at close to 17.5X FY20e earnings of NIIT Technologies, valuing the total business at Rs 8,587 crore.
In accordance with the regulator SEBI's regulations, Baring will make an open offer to the public shareholders of NIIT Technologies to purchase up to 26% additional shareholding at a price of Rs 1,394 per share. The aggregate consideration for the deal for the acquirer could turn out to be Rs 4,890 crore based on ownership of approximately 56 percent stake.
For the minority shareholders, the success rate in the open offer is approximately 37%. The key question is: Should minority shareholders tender in the open offer? We feel so.
The price offered by Baring Private Equity is whisker away from the 52-week high price of the stock at Rs 1,425 which is attractive enough for the promoters to exit a promising business.
NIIT Tech has made rapid strides in its business in the last few years that has seen revenue run rate accelerating, deal momentum gathering pace and operating margin improving from 14% in FY15 to 18% now. While the management is still confident of the momentum, given the myriad global headwinds, including concerns about Brexit in the key British market, probability of incremental positive surprise may be limited.
Currency tailwind had been a key margin lever and in the backdrop of dovish stance of global central banks and likely stable political mandate in India, that may not play out meaningfully.
Many of the senior management are new hires and with the ownership change and the private equity owner at the helm, there's a bit of uncertainty regarding stability at the senior management level.
NIIT Tech has shown decent aggression in the past. It has done inorganic acquisition – in 2015 it acquired Incessant and then RuleTek to strengthen its digital presence. Today, the company announced acquisition of 53% stake in Whishworks IT services and consulting company specializing in
MuleSoft and Big Data technologies. The deal is valued at 2x sales, it is value accretive and going to offset the loss on account of selling of GIS product that it also did recently.
While we are enthused with the inorganic move, we would like to see stability under the new owner.
Finally, Baring also owns another mid-sized IT company Hexaware (Market Cap Rs 10,421 crore) where it already owns a controlling 62.66 percent stake. While merging the two businesses is not being mulled at this stage, (for at least two years), that remains a long term possibility.
So while tendering in the open offer, investors should keep an eye on this big picture – of two mid-sized companies coming together at a later date to create a meaningful company in the Indian IT space.
(Moneycontrol Research analysts do not hold positions in the companies discussed here)
