NIIT has posted a drop of 88% in net profits for 1QFY03 (compared to 1QFY02). This is largely due to a 30% decline in revenues. The software education companies are not finding many takers for their offerings in wake of the technology slowdown. For FY02, NIIT had posted an 8% drop in revenues and a 57% decline in net profits.
The companyís operating margins have fallen very steeply from 23% in the corresponding quarter last year to 8% in the current quarter. NIIT managed to avoid posting a loss due to a significant other income component.
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NIITís global revenues (NIIT Ltd. and its subsidiaries) stood at Rs 1,750 m. This represents a 42% decline compared to 1QFY02. During the quarter, 58% of the revenues came from the global software business, while the remaining 42% came from the global learning business. The revenues from the software business have declined by 41% on a YoY basis. This is almost as steep as the decline in revenues from the education business, which showed a 44% drop. On a QoQ basis, the revenues from the software business have declined by 26%. However, this includes the systems integration (SI) and products distribution business that the company is gradually getting out of. The software services business declined by 19% sequentially. This indicates that the software services business of the company is also facing a significant weakness in demand. Most of the other software companies have managed to post a sequential topline growth for the quarter ended December.
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In the quarter NIIT added 18 new clients for its software business and had an order intake of Rs 18 m during the quarter. The company broadened its product offerings by entering into alliance with SunGard Planning Systems. NIIT will offer services in the business continuity planning and disaster recovery services for the BFSI (banking, financial services and insurance) verticals. Post Sep 11 corporates are increasingly getting their disaster management systems in place.
NIIT acquired Click2learnís custom development business and has also become its exclusive custom development partner. Click2learn is a provider of enterprise learning platforms. Its customer base includes over half of the Fortune 100 companies. The company has over 300 e-learning platform implementations and an active user base of over 3 m users. Thus, the move will give NIIT an access to a vast business opportunity.
NIIT also bagged a contract in the maintenance space. The company has been engaged by the ODPT, an organisation within the Department of Infrastructure in Australia for maintenance, support and enhancement of its systems. The software project is to be executed over the next three years. NIIT had saw sharp decline in revenues from the software sector in 2QFY02 due to the fact that all its offerings were in relatively newer technologies and the company lacked a presence in the maintenance business. While the company has started providing service in this space, the concern is that the maintenance business is showing signs of slowing down.
To counter the slowdown in demand for the education business the company has launched the GNIIT classic program that guarantees placements to students. The company claims that it is witnessing a recovery in business and has seen 159,000 new enrolments in the quarter. However, while the company may manage to improve volume growth, it is facing tremendous pricing pressure. To improve volumes the company added 30 new centres taking the total to 2,497. In China, NIIT has crossed the 50-centre mark. This country is one of the regions from where NIIT will see strong growth.
At the current market price of Rs 220, the stock is trading at a P/E multiple of 61x its 1QFY03 annualised earnings. The stock price is likely to see further downside due to the weak performance. While in the near future the financials are likely to be disappointing, the fact remains that NIIT is the undisputed leader in the software education industry. The future growth will have to be based on volumes. Thus, reach becomes one of the most critical factors for success. Very few companies in the business can parallel NIIT when it comes to reach.
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