NIIT has joined the undistinguished list of Indian companies issuing profit warnings. It joins Geometric and Mastek to be third in the list. The problem according to NIIT is that two of its clients (in the USA) in the software group have merged leading to project consolidation and delays. Bottomline, earnings are going to be lower than expected. The company feels the US economic slowdown might play a role too and affect its earnings.
It is quite surprising that NIIT is one of the first companies to be affected considering that it has a low exposure to exports. 61% of its income comes from exports the remaining comes from the domestic markets. The Americas account for 58% of the international business. This brings the exposure to Americas to about 35% of the total revenues i.e. exposure to the Americas is 35% for both education and software.
NIIT has been consistently shifting its business portfolio in favour of the software business. The education business that accounted for 47% of the revenues in 1QFY00 had dropped to 44% in 1QFY01, with the software business accounting for the rest. Of the software business 55% comes from the Americas. Therefore, the exposure from Americas to the software business is 31% of the total revenues. Inspite of the reasonable exposure to the Americas the company is concerned because Americas was the region where it had recorded the highest growth of 60% (YoY) in 1QFY01. And particularly for the software business the growth rate was a brilliant 71% (YoY). Obviously, the companyís growth outlook for Q2 would have taken growth rates like these while making projections, which now seem a bit difficult to achieve.
Another very interesting fact is that NIITs operating margins from the software business are quite low. The company is into software services, SI (systems integration) and product distribution. The operating margins from software business for NIIT in 1QFY01 was 19%, which is way below the industry standards. The reasons for such low margins were the SI & product distribution business that had very low operating margins about 5%.
NIIT is experiencing higher sales cycles in the US for large value software projects. This again could be due to better bargaining power of the customers. All these facts imply that NIIT has still not established it self as a strong brand in software services and therefore customers have an upper hand. This could give a clue to what the industry should be doing. To follow the examples set by the likes of Infosys and Wipro, which have established strong brands that customers are looking at these companies to be their strategic partners for delivering all their IT needs. And of course the next imperative for NIIT would be to move up the software value chain.
NIIT is expecting the operating margins to take a hit in terms of lower growth. This could be due to pressure on the billing rates or the utilisation rates going down for the company. However, the company is optimistic on its outlook for Europe and Asia Pacific regions. As far as the education business was concerned the company claimed that it was unaffected.
The key point is how severely does this affect NIITs fundamentals. The impact should be marginal considering the fact that NIITs exposure to the US is significantly lower than others in the Industry. But what is appreciable is the fact that the company came clean on the difficulties it is facing.
This is a call that NIIT has to respond to very smartly. Leveraging on its strength like high offshore business and access to a huge pool of talent should help it show a strong performance. Will it be able to? Nothing that says it canít.