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NIIT Ltd.: Job revival aids growth - Views on News from Equitymaster
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NIIT Ltd.: Job revival aids growth
Jan 28, 2010

Performance summary
  • Sales grow by 2% YoY during 3QFY10 primarily on account of robust performance by the school learning solutions and individual learning solutions businesses.
  • Operating margins expand by 3% YoY during the quarter and 2% YoY during 9mFY10. Improvement on the back of efficient cost containment measures.
  • Net profits surge by 73% YoY during the quarter on back of better operating performance as well as higher share of profits from associates.


Consolidated financial snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Sales 2,789 2,836 1.7% 8,479 9,035 6.6%
Expenditure 2,559 2,524 -1.4% 7,656 7,950 3.8%
Operating profit (EBITDA) 230 312 35.7% 823 1,085 31.8%
Operating profit margin (%) 8.2% 11.0%   9.7% 12.0%  
Other income/(expense) (36) (93)   (10) (272)  
Depreciation 184 190 3.3% 456 547 20.0%
Profit before tax 10 29 190.0% 357 266 -25.5%
Tax 6 15 150.0% 64 28 -56.3%
Profit after tax/(loss) 4 14 250.0% 293 238 -18.8%
Share of associates' net profit 51 81 58.8% 228 218 -4.4%
Net profit after tax/(loss) 55 95 72.7% 521 456 -12.5%
Net profit margin (%) 2.0% 3.3%   6.1% 5.0%  
No. of shares (m)       163.6 165.1  
Diluted earnings per share (Rs)*         4.2  
P/E ratio (x)*         16.2  
* Trailing 12 months basis

What has driven performance in 3QFY10?
  • NIIT recorded a 2% YoY growth in net sales during 3QFY10, and 7% YoY in 9mFY10 thus indicating a revival as compared to last year. In QoQ terms, sales declined by 2% during the quarter. Much of the sequential decline can be attributed to the seasonality factor of the IT training business which resulted in a significant dip in volumes during 3QFY10 as compared to 2QFY10.

  • NIIT’s ‘Individual Learning Solutions’ segment (ILS-IT which is 34% of the total sales) registered a growth of 11% YoY partially on account of increase in volumes. This segment saw a 22% growth in enrollments – 64% for ‘Edgineers’, 58% for ‘IMS’, and 21% for GNIIT series. NIIT’s placements grew by 17% YoY. During the quarter, the company tied up with IBM and SAP for offering training in their respective technologies. The pending order book executable over next 12 months for this segment stands at Rs 1,033 m.

  • NIIT’s ‘School Learning Solutions’ segment (SLS) , which accounted for 16% of total sales during the quarter, witnessed a decent growth of 20% YoY during 3QFY10, adding 641 schools from states like Gujarat and Andhra Pradesh. This segment registered an increased pending order book of Rs 3,484 m out of which 30% is executable within the next 12 months. The non-government schools which contribute around one-fourth of this business saw a decent growth of 42% YoY during the quarter. In QoQ terms, it declined by 50%, which was largely on account of high base effect. The company had completed a timely and successful execution of a large government contract covering around 3,500 schools in 2QFY10.

    Segment-wise revenue breakup
    (Rs m) 3QFY09 3QFY10 Change
    Individual learning business (IT)      
    Net Revenue 870 964 10.8%
    Operating profit 165 190 15.2%
    Operating profit margin 19.0% 19.7%  
    School learning solutions      
    Net Revenue 370 442 19.5%
    Operating profit 55 78 41.8%
    Operating profit margin 14.9% 17.6%  
    Corporate learning solutions      
    Net Revenue 1,461 1,339 -8.4%
    Operating profit 43 88 104.7%
    Operating profit margin 2.9% 6.6%  
    Finance & Management training (ILS-New Businesses)      
    Net Revenue 87 91 4.6%
    Operating profit (33) (45)  
    Operating profit margin -37.9% -49.5%  

  • NIIT’s ‘Corporate Learning Solutions’ (CLS) segment which contributed around 47% of its 3QFY10 topline, remained subdued on account of continued weakness in corporate spending globally. The scenario remained particularly weak in the developed economies which are the major target markets for the segment. The order intake for the segment stood at US$ 34.7 m.

  • Revenue from the new businesses segment (3% of the total revenues) catering to long-duration courses in banking and financial services grew by 44% QoQ and 5% YoY during 3QFY10. NIIT’s order book for this segment stood at Rs 61 m for this segment.

  • NIIT improved its operating margins by 2.8% YoY during 3QFY10. High-margin IP-led business aided the operational performance. IP-led revenues contributed 42% to NIIT’s consolidated sales during the quarter. However, on account of topline erosion, NIIT’s margins contracted by 2.6% QoQ despite 19% decline in operating expense.

  • NIIT’s net profits increased by 73% YoY during 3QFY10, largely on the back of better execution and higher share of profits from associates. Excluding the other income, company’s bottomline increased by 37% YoY for 9mFY10. The company recorded a substantial 64% QoQ slump in net profits during 3QFY10. This can be attributed to decreased volumes and higher hedging losses.

What to expect?
At the current price of Rs 68, the stock is trading at a multiple of 11.2 times of our estimated FY11 earnings. The management has attributed the weak sequential performance during 3QFY10 to the seasonality aspect of the IT training business. As a matter of fact, around the calendar year end, schools and corporate seldom initiate new investments in their IT infrastructure and training resulting in subdued performance for last two quarters of the any fiscal. The YoY statistics for the company suggest a decent turnaround in market segments as the macro conditions begin to improve particularly in the emerging markets.

The hiring plans announced by major IT and banking companies in India hint of a decent traction building in the job market. The improvement in enrollments in ILS makes the company confident of improving consumer sentiment going forward. The company remains bullish about the SLS business on back of government’s continuous emphasis on education and skill-development in its policy initiatives. It also sees traction in the non-government private schools market. The company’s new businesses segment continues to look promising.

However, the management remains cautious about the short-term prospects for the job markets and corporate outlook for developed markets like the US and Europe which are still combating recessionary trends. The management has indicated that though the company might not be able to achieve the FY10 target of 10% revenue growth, it find themselves well placed to achieve the targeted improvement at the operating level.

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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