NIIT Tech reported strong volume growth of 4.7%QoQ; revenues grew 5.5%QoQ to Rs 2,861mn(excluding hardware revenues). Profit growth was driven by strong operating margins and other income.

Strong revenues; positive surprise in EBIDTA margin – NIIT Tech reported revenues of Rs3,006mn (PINCe- Rs2,981mn) which degrew 7.4%QoQ due to lower hardware revenues (Rs145mn). Improved offshoring, higher utilization and lower bought out component led to margin expansion of 242bpsQoQ to 20.7% despite salary hike. EPS grew 9.9%QoQ to Rs8.1 led by higher other income.

Robust growth across key verticals and geographies – Among geographies, EMEA and APAC outperformed with 5.6%QoQ and 13.7%QoQ growth, US was muted with 2.7%QoQ growth. Transport and logistics vertical led by recovery in air traffic surged 9%QoQ; BFSI and other emerging verticals grew 3.1%QoQ and 11.8%QoQ respectively.

Healthy client addition, growth among smaller clients; uptick in non linear services – NIIT Tech added 4 new clients, of which two were in travel and transport and one each in BFSI and government. Non top 10 clients surged 14.4%QoQ. Non linear services grew 8%QoQ and contributed 27% of overall revenues. Acquisition of the new healthcare platform (Preferr) in US will further drive growth in the IP led services.

Outlook – strong deal pipeline, high net adds and stable margins - Deal pipeline is strong across key verticals, travel and transport is expected to improve further going forward. NIIT Tech has had higher net additions in the last few quarters in anticipation of improved demand. EBIDTA margins are expected to improve towards 22% in FY12 due to absence of hardware revenues.

NIIT Tech will continue to lead in terms of profitability among the mid tier Indian IT vendors due to its high exposure towards niche verticals and stronger EBIDTA margins. NIIT Tech currently trades at 6.7x and 6.3x based on FY11E and FY12E respectively. We have introduced FY13E financials. We maintain ‘BUY’ on the stock with a target price of Rs300 based on 9xFY12E earnings.