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NIIT: Disappoints

Jan 24, 2001

Though NIIT did not show a huge YoY growth in revenues the performance showed positive signs with 4% improvement in operating margins. Contribution of software services (that includes services and products) to the revenues was 56% and the remaining 44% was from the educational services division. On a consolidated basis (global) operating margins for the software services division was 18.7% and the figure was 10.8% for the educational services division. The software services operating margin was way below the industry standard of 33%. This was mainly due to the poor operating margins of the products business, which accounts for 21.5% of the revenues from the software services. The operating margins for the products division was 5%. This is surprising, considering the fact that on the same day Visualsoft posted results with 53% operating margins due to more than 50% of its revenues coming from products. The operating margins for software services alone are 22.3%. These figures have not changed significantly compared to 1QFY00. However, there is a slight improvement.

(Rs m) 1QFY00 1QFY01 Change
Sales 1,231 1,558 26.5%
Other Income 29 48 69.2%
Expenditure 978 1,195 22.2%
Operating Profit (EBDIT) 253 363 43.4%
Operating Profit Margin (%) 20.6% 23.3%
Interest - -
Depreciation 77 85 11.2%
Profit before Tax 205 326 59.0%
Tax 20.0 28.0 40.0%
Profit after Tax/(Loss) 185 298 61.1%
Net profit margin (%) 15.0% 19.1%
Diluted number of shares 38.7 38.7
Diluted Earnings per share* 19.2 30.9
*(annualised) 91 57

Exports accounted for 61% of the revenues. Of this the major contribution was from the US, which accounted for 58% of the exports. The figure was up 4% compared to same quarter last year. Europe accounted for 25% of the revenues. This is contrary to the trends shown by most of the other software companies who have tried to reduce their exposure to the US economy in wake of a slow down.

The billing rates for the company are a major concern. According the company, onsite rates are US $ 80 in the US. But the average billing rates are US $ 56. Whereas for the offshore effort the companies billing rates are US $27 for the US and the average is around US $ 25. This would definitely raise concerns about NIITís ability to improve billing rates in the future. The onsite effort contributed 29% to the revenue while offshore contributed 71%.

The second concern with the company would be increase in revenues. The companyís performance has been nowhere near the other software companies. To address this the companyís future growth strategy includes development of new businesses, inorganic growth through alliances and acquisitions, transition to new technologies and portfolio management. NIIT plans to generate over 30% of its business each year from initiatives started in the previous 3 years.

Presently from a situation where NIIT has achieved all its growth through organic means, the company now is looking at inorganic growth. This would be from the recently constituted NIIT Ventures team, which will contribute over 15% of the business. It aims to achieve its targets through strategic alliances and acquisitions, within the next 2 years. The technology focus at NIIT will be Wireless, Knowledge Management and Cognitive Systems. All these have vast market potential.

At a market price of Rs 1,643 the company is trading at a P/E multiple of 28 times it 1QFY01 annualised earnings.

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