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NIIT Ltd: The slow recovery continues - Views on News from Equitymaster
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NIIT Ltd: The slow recovery continues
Jan 22, 2015

NIIT Ltd has announced its third quarter results for 2014-2015. The company's net sales have increased by 6.3% YoY. The net profit has increased by 46.2% YoY for the quarter.

Performance summary
  • Consolidated net sales increased by 6.3% YoY. The continued pressure on the individual learning business once again took a toll on the topline.
  • The operating performance took another big hit in the quarter due to the continued pressure of the company's high operating leverage. The operating margin came in at 2.3% compared to 6.1% in 2QFY15. The operating profit decreased by 59.4% YoY.
  • The poor operating performance was compensated to an extent in the quarter by Rs 4 m in other income (due to recovery of doubtful receivables) as well as a 17.4% YoY fall in depreciation. The net profit came in at Rs 19 m. However, the standalone business continues to be in the red.

Consolidated financial snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Sales 2,336 2,482 6.3% 7,182 7,339 2.2%
Expenditure 2,193 2,424 10.5% 6,692 6,972 4.2%
Operating profit (EBITDA) 143 58 -59.4% 490 367 -25.1%
Operating profit margin (%) 6.1% 2.3%   6.8% 5.0%  
Other income/(expense) (46) 4   (204) (70)  
Depreciation 184 152 -17.4% 571 470 -17.7%
Profit before tax (87) (90)   (285) (173)  
Tax 14 4 -71.4% 64 23 -64.1%
Profit after tax/(loss) (101) (94)   (349) (196)  
Share of associates' net profit 114 113 -0.9% 388 324 -16.5%
Net profit after tax/(loss) 13 19 46.2% 39 128 228.2%
Net profit margin (%) 0.6% 0.8%   0.5% 1.7%  
No. of shares (m)         165.2  
Diluted earnings per share (Rs)*         1.6  
P/E ratio (x)*         28.3  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in 3QFY15?
  • The company's individual learning business continues to remain under pressure. Revenues from this segment were down 16.1% YoY. The management stated that this pressure will continue for a few more quarters. Non-IT sectors now contribute 33% of ILS revenues. The reducing dependence on the IT sector bodes well for the company. The corporate training division continues to fire. This segment now contributes more than half (i.e. 55%) of the company's revenues.

    Segment wise performance
    (Rs m) 3QFY14 3QFY15 Change
    Individual learning solutions
    Net Revenue 917 769 -16.1%
    EBITDA 15 (99)  
    EBITDA margin 1.6% N.A  
    School learning solutions
    Net Revenue 355 314 -11.5%
    EBITDA 20 8 -60.0%
    EBITDA margin 5.6% 2.5%  
    Corporate learning solutions
    Net Revenue 1059 1,360 28.4%
    EBITDA 133 157 18.0%
    EBITDA margin 12.6% 11.5%  
    Skill Building solutions
    Net Revenue 5 39 680.0%
    EBITDA (25) (8)  
    EBITDA margin N.A N.A  

  • The high operating leverage continues to have an adverse effect on the margins. The individual learning business especially carries high operating leverage (i.e. high fixed costs, including marketing costs due to the rollout of the 'Cloud Campus'). However, a pickup in ILS revenues will result in an improvement in operating margins.

  • At the net level, the standalone business remained in the red but the company posted a profit of Rs 19 m in the quarter due to the contribution of profits from associate NIIT Technologies.
What to expect?
At the current price of Rs 45.35, the stock is trading at 28.3 times its trailing twelve months (TTM) earnings.

As we have stated before, the company's road to recovery will be a slow one. To take charge of the process, the company has brought in former senior employee and industry veteran, Rahul Patwardhan. He will take over as CEO from 1st April 2015.

The ILS business continues to remain under pressure as the company scales up its cloud campus. Enrollments in the cloud campus stand at 97,800 across 265 centers. As the new academic year kicks off in a few months time, the management sounded confident of scaling up revenues quickly. As this business has high operating leverage, any pick up in revenues will be positive for the company.

In the school business, the company continues to de-emphasize government school contracts. The total order intake in this segment was Rs 130 m in the quarter, up 41% YoY. The margins from this segment will remain under pressure until the company winds down its legacy government school contracts. In 3QFY15, non-government schools contributed to 61% of revenues in this division.

The corporate learning business continues to exceed expectations. CLS now contributes over half of the company's revenues. The operating margins from this business are stable at around 12%. The total revenue visibility from this division is US$ 177 m while the order book stands at US$ 64.5 m. The order pipeline clearly points to significant deal momentum in this space.

Considering the slowly improving fundamentals, we maintain our hold view on the stock.

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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