According to media reports, the promoters of NIIT Group are looking to sell the 25% stake in NIIT Technologies (NIIT Tech) that is currently held by NIIT Limited. This much-awaited trigger in the stock is likely to unlock value for the shareholders, as the transaction is expected to be negotiated at a significant premium to the prevailing valuations. Premium for transfer of majority stake The divestment of the 25% stake by the NIIT group would essentially mean that the majority stake would get transferred to the acquirer. Post transaction, the current promoter's (NIIT group) stake would get diluted to 14% from the current level of 39%.
On the other hand, the acquirer would get 25% stake and would also have to give an open offer for an additional 20% stake in the company. Thus, the acquirer would gain the management control of the company and thereby pay a premium for the acquisition of the same. Benchmark valuation indicates huge upside The premium to gain the majority management control could be quite significant considering the fact that the acquisition of comparable companies like Mphasis BFL and Kanbay was done at 2.5x-3x their revenue multiples. For instance, Capgemini acquired the Nasdaq listed India-based IT services company Kanbay for USD 1.25 billion which amounted to 3.1x its annual revenues of around USD 400 million.
On the other hand, the NIIT Tech trades at the enterprise value to sales (EV/sales) of just 1.8x at the current level. This is quite attractive for a company with a revenue base of Rs886 crore in FY2007 and an employee base of over 4,500 professionals. Valuation At the current market price the stock trades at 10.7x FY2008 and 9x FY2009 estimated earnings. We maintain Buy call on the stock with target price of Rs 690.
On the other hand, the acquirer would get 25% stake and would also have to give an open offer for an additional 20% stake in the company. Thus, the acquirer would gain the management control of the company and thereby pay a premium for the acquisition of the same. Benchmark valuation indicates huge upside The premium to gain the majority management control could be quite significant considering the fact that the acquisition of comparable companies like Mphasis BFL and Kanbay was done at 2.5x-3x their revenue multiples. For instance, Capgemini acquired the Nasdaq listed India-based IT services company Kanbay for USD 1.25 billion which amounted to 3.1x its annual revenues of around USD 400 million.
On the other hand, the NIIT Tech trades at the enterprise value to sales (EV/sales) of just 1.8x at the current level. This is quite attractive for a company with a revenue base of Rs886 crore in FY2007 and an employee base of over 4,500 professionals. Valuation At the current market price the stock trades at 10.7x FY2008 and 9x FY2009 estimated earnings. We maintain Buy call on the stock with target price of Rs 690.
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