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NIIT: Consolidated gloom!

Feb 27, 2004

NIIT, India's largest IT education and training company, has reported a mixed performance in its December quarter results. On a standalone basis, while the company reported a healthy YoY growth of 19% in its topline, the bottomline growth at 1% has been rather lackluster. However, if one were to remove the tax refund received by the company in 1QFY04, the bottomline performance, too, has been encouraging. Operating margins have improved by 90 basis points and other income has grown by 283%. However, the effect on the bottomline growth has been negated by a 30% rise in interest expenses. NIIT has changed its financial year ending from September to March. We have, however, considered the December quarter as 1QFY05 for comparison purposes. Let us look at the performance in detail.

The standalone picture...

(Rs m) 1QFY04 1QFY05 Change
Sales 807 959 18.9%
Other Income 14 53 283.3%
Expenditure 686 807 17.7%
Operating Profit (EBDIT) 121 152 26.2%
Operating Profit Margin (%) 15.0% 15.9%  
Interest 14 18 30.7%
Depreciation 132 133 1.4%
Profit before Tax (11) 54  
Extraordinary items - -  
Tax (64) -  
Profit after Tax/(Loss) 54 54 0.9%
Net profit margin (%) 6.6% 5.6%  
No. of Shares 38.7 38.7  
Diluted Earnings per share* (Rs) 5.5 5.6  
P/E Ratio (x)   32.3  
*annualised      

On a consolidated basis, NIIT has reported a 24% growth in its revenues and marginal profits after the losses it incurred in the same quarter last year. This growth in the consolidated topline is a factor of strong growth of 33% in the IT services segment (73% of revenues). Also, the Education segment (26% of revenues) reported a 7% growth in revenues. However, the systems integration and product development (SI & PD) segment continued with its string of poor performances, reporting an 8% decline in 1QFY05.

The consolidated picture...
Rs m 1QFY04 1QFY05 Change
Education 480 515 7.3%
IT services 1,108 1,471 32.8%
SI & PD 35 32 -8.6%
Total Revenues 1,623 2,018 24.3%
Operating profit 162 275 69.8%
OPM (%) 10.0% 13.6%  
Profit/(Loss) after Tax (86) 5  
Net profit margin (%) -5.3% 0.2%  

Education business

Growth in this segment has come despite the fact that the company has rationalised on the number of its training centres over the last year. From a total (includes domestic and international) of 2,445 centres at the end of 1QFY04, the company has reached a size of 2,020 centres in 1QFY05. Also, the number of international centres has reduced from 280 in 1QFY04 to 249 at present. This rationalisation has helped the segment improve its operating margins as maintaining a large number of centres, especially the international ones, requires high level of operating expenses.

In 1QFY05, the Education segment also witnessed an increase in contribution from short-term courses (like Futurz and Swift). This led to a decline in revenue contribution from the high-end course like CATS, which provides relatively higher realisations for NIIT. The company faces a high degree of competition from local institutes that are able to offer similar (as NIIT) short-term courses at comparatively lower prices.

Software business

Growth in this segment was aided by a 6% improvement in average onsite billing rates. However, the performance had been better but for a 4% decline in the offshore billing rates. At the end of 1QFY05, NIIT had a pending order book of US$ 137 m, up from US$ 95 m at the end of 1QFY04. NIIT has also been able to improve margins for this segment by around 100 basis points. During the quarter, the company added 11 new customers and 269 employees to the IT services segment. The company has, however, decided to de-merge this business into a separate entity (to be called NIIT Technologies Ltd. (NTL)). In this regard, NIIT's shareholders, for every 100 shares that they hold in the company, would receive 50 shares of the de-merged NIIT and 75 shares of NTL.

At the current price of Rs 180, the stock is trading at a P/E multiple of 32.3 its annualised 1QFY04 standalone earnings. Despite a string of lacklustre performances from the company, the stock is trading at a high premium to the market and to the software sector's valuations. This calls for a high degree of caution from investors. NIIT's board has agreed to the de-merger of the IT services business into a separate entity and this is likely to have an effect on the company's profitability as IT services have relatively higher margins (than education). Also, while the performance of the education segment seems to be improving, it is still to attain some stability. Also, the fact that NIIT's consolidated picture stands in poor light in comparison to standalone, casts doubts about the performance of the company's subsidiaries. Another area of concern is the poor level of disclosures. These factors should weigh heavy on the minds of investors.

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