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NIIT Limited: Another good performance

Jan 19, 2006

Performance Summary
NIIT Limited (NIIT) recently reported results for 3Q and 9mFY06. The topline was driven mainly by the Individual business, which showed good traction. Margin expansion was also witnessed due to improved operating performance of the Institutional segment. However, due to a forex loss and higher taxes, net profit growth was slower, albeit still growing at a good pace. The 9mFY06 performance has also been enthusing.

Consolidated financial performance: A snapshot
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
System-wide revenues 1,327 1,494 12.6% 4,707 5,274 12.0%
Net revenues 861 1,052 22.2% 2,938 3,357 14.3%
Expenditure 769 933 21.3% 2,578 2,919 13.2%
Operating profit (EBDITA) 92 119 29.3% 360 438 21.7%
Operating profit margin (%) 10.7% 11.3% 12.3% 13.0%
Other income 7 (5) -164.3% 66 57 -14.3%
Depreciation 84 96 13.7% 250 272 8.7%
Profit before tax 15 19 26.7% 176 223 26.6%
Tax 0 9 9 22 150.0%
Extraordinary items - - - -
Share of profits from associates 34 45 32.4% 107 118 10.3%
Profit after tax/(loss) 48 55 14.1% 274 319 16.3%
Net profit margin (%) 5.6% 5.2% 9.3% 9.5%
No. of shares (m) 19.3 19.3 19.3 19.3
Diluted earnings per share (Rs)* 20.7
P/E ratio (x)* 13.6
* On a trailing 12-month basis

What is the company's business?
NIIT is India's premier IT training company and is thrice the size of its next-largest competitor, Aptech. The company has a major presence in the fast-growing retail segment, which, by and large, caters to the staffing requirements of the Indian IT and BPO sectors. The company derives a significant share of its revenues from the international retail segment as well. NIIT also operates in the institutional/government segment, where it executes projects relating to provision of IT education to schoolchildren throughout the country. Apart from the above segments, the company earns 39% of its revenues from the corporate segment, where it provides learning solutions, e-learning and content development solutions to technology and other companies mainly in the US and the UK. NIIT earned about 53% of its revenues from international operations in FY05.

What has driven performance in 3QFY06?
It's retail again: NIIT recorded a 12.6% YoY growth in gross revenues, while net revenues saw a much better 22.2% YoY growth, mainly due to better performance of NIIT's own centres, compared to the franchisee centres. As a matter of fact, at the end of 3QFY06, NIIT had 504 retail centres, of which 45 were company-owned. The proportion of self-owned centres increased to 8.9% from 8.7% last quarter. Centre rationalisation continued, as NIIT looks to reduce the number of unprofitable centres with lower capacity. The retail business grew net revenues at an impressive 30% YoY. Business fundamentals continue to look robust, with a 47% YoY growth in India and 36% YoY growth in China, which contributed 20% to this business on a system-wide basis. Overall enrolments were up by as much as 46% YoY to 61,685 and the ‘Careers' segment grew at 50% YoY, enrolments for which were up by 61% YoY.

The Corporate segment's gross revenues declined by 2% YoY, while net revenues grew at 17% YoY. It should be noted that the business model has changed slightly in this business in favour of a greater amount of corporate training as opposed to training through higher education universities. The company is targeting technology companies, where traction appears to be good. In this quarter, NIIT's UK subsidiary commenced operations, winning a corporate training solutions order from a large European electronics major. The outstanding order book in this segment stands at US$ 22.6 m, with 70% executable over the next 12 months. The company recorded an order intake of US$ 10.4 m this quarter.

The Institutional segment has managed to record a decent growth this quarter, after the difficult second quarter. This business saw revenues growing by 19% on a gross basis and 21% on a net basis. This was also partly due to a lower base, with the Tamil Nadu contract getting completed by September last year and thus, not being part of the revenues in the corresponding quarter last year. The revenues from the new contracts also started to get reflected, and the company also started to bill annual milestones. The total order book was at Rs 1.5 bn, with 42% executable over the next 12 months.

Segment-wise performance…
(Rs m) 3QFY05 % of total 3QFY06 % of total Change
Individual
System-wide revenues 578 43.6% 707 47.3% 22.3%
Net revenues 271 31.5% 352 33.4% 29.6%
OP 4 4.8% (1) -0.5% -114.8%
OPM 1.6% -0.2% -1.8%
Institutional
System-wide revenues 249 18.8% 296 19.8% 18.9%
Net revenues 243 28.2% 294 27.9% 20.9%
OP 41 44.9% 77 65.0% 87.8%
OPM 16.9% 26.3% 9.4%
Corporate
System-wide revenues 500 37.7% 491 32.9% -1.8%
Net revenues 347 40.3% 407 38.6% 17.2%
OP 46 50.3% 42 35.5% -8.4%
OPM 13.3% 10.4% -2.9%
Total
System-wide revenues 1,327 1,494 12.6%
Net revenues 861 1,052 22.1%
OP 92 119 29.7%
OPM 10.6% 11.3% 0.7%

Institutional segment drives margins: NIIT witnessed a 63 basis points margin expansion during the quarter. This was primarily on account of a strong operating performance from the Institutional segment. Margins in this segment expanded by an impressive 9.4%, as can be seen in the table above. However, in the retail segment, due to issues such as higher provisioning due to delayed implementation, one-time expenses and expenses on marketing due to product launches by Microsoft (resulting in NIIT having to develop the expertise to provide training on these products like Visual Studio 2005 and SQL Server 2005), margins in the retail segment were slightly in the negative.

However, we believe that these are one-time expenses that should not be repeated. In any case, these expenses are with a view to long-term sustainability of the business and hence, are on the right track.

Forex loss, higher taxes restrict net profit: Though NIIT's profit growth was decent at 14.1% YoY, this was considerably lower than the growth in net revenues. This was mainly due to a forex loss and higher taxes due to the fringe benefits tax (Rs 5 m).

Performance in the recent past…
1QFY06 2QFY06 3QFY06
System-wide revenue growth (%, YoY) 12.0 12.1 12.6
Net revenue growth (%, YoY) 10.0 11.9 22.2
Operating margins (%) 13.4 14.1 11.3
Profits growth (%, YoY) 21.0 11.7 14.1
Employees (Nos.) 1,964 1,995 2,103
Retail centres (Nos.) 548 531 504
Of which, own centres (Nos.) 46 46 45

What to expect?
At the current price of Rs 283, NIIT's stock is trading at a price to earnings multiple of 8.2 times our estimated FY08 earnings. Given the pick-up in the IT training industry in FY05 and its continuing recovery so far in FY06, NIIT's market leadership position, improvement in sentiment for IT as a career, favourable trends in recruiting IT personnel and strong growth in the IT industry as a whole, we expect the company to be a major beneficiary. The increase in corporate spends on training in the US, new product launches by technology majors like Microsoft and greater interest in training outsourcing from European corporates also provides NIIT with a good opportunity to grow at a faster rate in the medium to long term.

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