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NIIT Ltd.: No recovery in sight - Views on News from Equitymaster
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NIIT Ltd.: No recovery in sight
Jan 17, 2014

NIIT Ltd has announced it's third quarter results for the financial year 2013-2014 (3QFY14). The company's net sales have declined by 11% QoQ. While the net profit increased by 0.5% QoQ.

Performance summary
  • Consolidated net sales fell by 11% QoQ. Both the school business as well as the individual learning business was responsible for the decline.
  • Operating margins continued the declining trend witnessed in the previous quarter and dropped by 3.2% QoQ during the quarter. The operating profits on an absolute basis fell sharply by 41.2% on a QoQ basis.
  • Largely due to the poor operational performance, the profit before tax (PBT) was negative at Rs 87 m.
  • Profit from associate, NIIT Technologies continued to have a positive impact on the net profit of NIIT Ltd. However despite this contribution, the net profit fell by 89.9% QoQ.

Consolidated financial snapshot
(Rs m) 2QFY14 3QFY14 Change 9MFY13 9MFY14 Change
Sales 2,624 2,336 -11.0% 7,392 7,182 -2.8%
Expenditure 2,381 2,193 -7.9% 6,940 6,692 -3.6%
Operating profit (EBITDA) 243 143 -41.2% 452 490 8.4%
Operating profit margin (%) 9.3% 6.1%   6.1% 6.8%  
Other income/(expense) (77) (46)   (329) (204)  
Depreciation 177 184 4.0% 641 571 -10.9%
Profit before tax (11) (87)   (518) (285)  
Tax 17 14 -17.6% (384) 64 -116.7%
Profit after tax/(loss) (28) (101)   (134) (349)  
Share of associates' net profit  147 113 -23.1% 369 388 5.1%
Net profit after tax/(loss) 119 12 -89.9% 235 40 -83.0%
Net profit margin (%) 4.5% 0.5%   3.2% 0.6%  
No. of shares (m)         165.1  
Diluted earnings per share (Rs)*         0.4  
P/E ratio (x)*         67.8  

What has driven the performance in 3QFY14?
  • NIIT's sales fell by 11% QoQ due to the continued weakness in its primary business segment of Individual learning solutions (ILS) which contracted by 18.5% QoQ.

  • The School learning solutions (SLS) business saw sales decline marginally by 0.8% QoQ. The contribution of private schools now contributes a majority of revenues (58%). Revenue from government schools fell 51% as many such contracts were executed in the quarter.

  • However the corporate learning solutions (CLS) business continued to grow strongly. This segment grew by 6.6% QoQ helped by strong demand for Managed training services (MTS). MTS now contributes 82% of CLS revenue.

  • The contribution from associate company NIIT Technologies was Rs 113 m for the quarter which helped the company post a small profit of Rs 12 m down nearly 90% QoQ.

    Segment wise performance
    (Rs m) 2QFY14 3QFY14 Change
    Individual learning business
    Net Revenue 1,269 1,034 -18.5%
    EBITDA 121 (34)  
    EBITDA margin 9.5% N.A  
    School learning solutions
    Net Revenue 358 355 -0.8%
    EBITDA 23 20 -13.0%
    EBITDA margin 6.4% 5.6%  
    Corporate learning solutions
    Net Revenue 993 1059 6.6%
    EBITDA 124 133 7.3%
    EBITDA margin 12.5% 12.6%  
    Skill Building solutions
    Net Revenue 4 5 25.0%
    EBITDA (25) (25)  
    EBITDA margin N.A N.A  

  • At the operational level the company had a weak quarter as operating margins fell 3.2% on a QoQ basis. This was largely due to the sharp fall in sales and the company was unable to keep expenses as a percentage of sales at the same level as the last quarter.

  • The bottom line saw a sharp fall of nearly 90% on a QoQ basis. Only the contribution of profit from associate NIIT Technologies helped the company post a profit in this quarter.
What to expect?
At the current price of Rs 27.5, the stock is trading at 67.8 times its trailing twelve months (TTM) earnings.

The company's woes in their primary business Individual learning solutions (ILS) continued during the current quarter as well. The management said that software companies would start hiring significantly only from the next quarter.

Also, 3QFY14 is seasonally weak quarter for the company and the management was cautiously optimistic of a pick-up in business performance from the next quarter.

The cloud campus witnessed a huge ramp up in terms of number of centers, number of courses offered as well as the number of student enrolments in this quarter. The management was hopeful that their efforts would start to show in the financials from the next quarter.

The corporate training solutions (CLS) segment in now the largest segment for the company. It has maintained the growth momentum in this quarter, with a small improvement in operating margins. The company is seeing strong growth coming from banks (both private and public sector) for managed training.

The school business is finally showing signs of throwing off its dependence from government school contracts. Revenues from private schools now contribute nearly 60% of the revenues in this segment. The management has stated that this percentage would rise continuously every quarter as the company completes contracts from government schools.

This was a seasonally weak quarter for NIIT Ltd therefore a sequential comparison has throw up a bad picture. However on a YoY basis there are early signs that the revenue profile might be improving. The operating margin was also higher by nearly 3% on a YoY basis. However, even though we are maintaining our 'Buy' view on the stock from a long term perspective for now, we will watch the performance very closely on a quarterly basis from now on for further signs of improvement.

We would like to gently remind our subscribers that their allocation to equities should be decided upon after keeping aside some safe cash. Also within their overall exposure to equities they should kindly ensure that our suggested asset allocation is broadly followed and that no single mid cap stock comprises more than 4-5% of their portfolio.

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