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NIIT Ltd.: Volumes drive a weak quarter - Views on News from Equitymaster

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NIIT Ltd.: Volumes drive a weak quarter
Jan 21, 2011

NIIT has announced its 3QFY11 results. The company has reported 6% YoY growth in sales and a 36% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Sales grow by 6% YoY during the quarter.
  • Operating margins improved by 1.3% YoY, mainly on account of better margins from individual learnings solutions as well as the corporate learnings solutions businesses.
  • Net profits grow by 36% YoY due to higher operating margins as well as higher other income during the quarter.
  • Adds 99 employees during the quarter taking the total headcount to 3,973.

Consolidated financial snapshot
(Rs m) 3QFY10 3QFY11 Change 9MFY10 9MFY11 Change
Sales         2,836      3,007 6.0%  9,044 9,245 2.2%
Expenditure         2,524       2,637 4.5% 7,950 8,056 1.3%
Operating profit (EBITDA)  312          370 18.6%  1,094 1,189 8.7%
Operating profit margin (%) 11.0% 12.3% 12.1% 12.9%  
Other income/(expense)  (93) (83) (272)  (256)  
Depreciation  190 222 16.8%   561  641 14.3%
Profit before tax  29 65 124.1%   261 292 11.9%
Tax  15 41      28    63 125.0%
Profit after tax/(loss)  14 24 71.4%   233 229 -1.7%
Share of associates' net profit   81 105 29.6%   218  315 44.5%
Net profit after tax/(loss)  95 129 35.8%   451 544 20.6%
Net profit margin (%) 3.3% 4.3%   5.0% 5.9%  
No. of shares (m)       165.1 165.1  
Diluted earnings per share (Rs)*           4.8  
P/E ratio (x)*         11.8  
* Trailing 12 months basis

What has driven performance in 3QFY11?
  • NIIT recorded a 6% YoY growth in net sales during the quarter. The ‘individual learning solutions' business and the ‘corporate learning solutions' business witnessed a growth of 12% YoY and 8% YoY respectively during the quarter. The ‘school learning solutions' business saw a decline of 18% YoY during the quarter.

  • NIIT's ‘individual learning solutions' saw a 8% growth in global enrolments and a 12% growth in Indian IT enrolments. The pending order book executable over next 12 months for this segment stands at Rs 1,242 m. Margins improved slightly to 21.2% during the quarter as compared to 19.7% seen during the same period last year. Going forward the management will focus on SAP, ERP training and infrastructure management. The '99 days' diploma programme continued to drive the growth in enrollments during the quarter. This is expected to continue in the quarters to come.

  • NIIT's ‘School Learning Solutions' segment (SLS) witnessed a decline of 18% YoY during the quarter. This was mainly due to the decline in the government school side of the business. The segment saw significant margin erosion with margins declining to 12.7% as compared to 17.6% seen during the same period last year. Added 385 non-Government schools in the total 9 month period ended December 2010. This pending order book stands at Rs 4,424 m out of which 30% is executable within the next 12 months. Going forward, the management would be concentrating on the private school business. The reason for this is that the state governments have not had a very good history in terms of collection payments. Till there was more clarity on this, the company would prefer to stay away from the government school business. The company, however, continues to derive nearly 62% of its revenues in the schools segment from the government schools

  • NIIT's ‘Corporate Learning Solutions' (CLS) segment witnessed an 8% YoY growth in sales. This was due to the 13% growth in volumes in the business. This in turn was driven by the growth in training outsourcing as well as online learning products. The margins improved by 1.8% YoY despite the adverse currency movements as well as step increase in people related costs during the quarter. Going forward, the management expects the volume growth to continue. Pending order book stood at US$ 92.5 m, with around 58% executable in the next 12 months.

  • Revenue from the new businesses segment catering to long-duration courses in banking and financial services had a strong growth during the quarter. The FMT (finance & management training) enrolments grew signaling an accelerated hiring in the banking sector. Although the business still continues to make losses, total losses as a percentage of total revenues has come down during the quarter.

    Segment-wise revenue breakup
    (Rs m) 3QFY10 3QFY11 Change
    Individual learning business (IT)      
    Net Revenue   964      1,077 11.7%
    Operating profit    190 228 20.0%
    Operating profit margin 19.7% 21.2%  
    School learning solutions      
    Net Revenue   442 363 -17.9%
    Operating profit      78    46 -41.0%
    Operating profit margin 17.6% 12.7%  
    Corporate learning solutions      
    Net Revenue         1,339       1,446 8.0%
    Operating profit       88  121 37.5%
    Operating profit margin 6.6% 8.4%  
    Finance & Management training (ILS-New Businesses)      
    Net Revenue      91  121 33.0%
    Operating profit    (45) (25)  
    Operating profit margin -49.5% -20.7%  

  • NIIT's operating margins improved 1.3% YoY during the quarter. This was due to lower operating expenses. Margins were aided by the improved business mix during the quarter.

  • NIIT's net profits increased by 35.8% due to higher operating income as well as higher share of profits from the associates.

What to expect?
At the current price of Rs 57, the stock is trading at a multiple of 9.3 times our estimated FY11 earnings. The management expects growth in all of its segments. With growth in volumes and higher realizations per student, they expect margins to improve going forward. The management has maintained its full year guidance that was given during the last quarter.

We had recommended a 'Buy' on the stock in December 2008 and the target price has already been breached. At the current levels, we have a cautious view on the stock.

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