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NIIT: Taking a double hit

Apr 19, 2001

NIITís disappointing performance for the 2QFY02 is due to the fact that the company has not been able to show any increase in the net profit figure on a YoY basis. The Rs 483 m figure includes 125 m of extraordinary income on account of the sale of NIS Sparta and the companyís online education business. Excluding this, net figure would have clocked Rs 358 m a drop of 3% compared to 2QFY01.

(Rs m) 1QFY02 Contribution to
revenues
2QFY02 Contribution to
revenues
Change
Global software 1706 56% 1239 44% -27.4%
Global learning 1324 44% 1595 56% 20.4%

NIIT Ltd.ís contribution was 76% to the total revenues for NIIT global, which stood at Rs 2,834 m. The learning business of NIIT global grossed 56% of the revenues for 2QFY02 while software services businessís revenues accounted for 44%. While its learning solutions business showed a QoQ growth of 20%, the software services business has shown a sequential drop of 27%. This raises concerns about the quality of work the company does and the clientele it has. Considering the fact that NIITís exposure to the US is just 35% it is very surprising to see that NIIT has been hit so badly.

However, the company in March had given profit warning as it was facing longer sales cycle and it had an isolated case of two clients merging which would lead to a consolidation of business and eventually delaying of projects in future.

NIITís operating margins have shown improvement. But the highlight was rise in operating margins for systems integration business that now stands at 25% compared to 6% in 1QFY02. This could be due to the fact that the operating margins were combined for systems integration and product distribution in the first quarter. The company as a part of its portfolio reorganization has de-emphasized the low margin business of product distribution business. It had 12% of its global revenues from this business in 1QFY02. The dip in sales for the software business might be due to NIIT moving out of the products distributions business.

OPM 1QFY02 2QFY02
Learning solutions 11% 22%
Systems Integration 6% 25%
Software services 22% 34%

The company added 155 new education centres in the second quarter of FY02. Of this 108 centers were international in 26 countries outside India. According to the company the learning business may be in a pressure due to the grim employment scenario in the US and hype created in the media regarding H1B returnees. The company has seen inquiries for the CATS course dip in the first two week of April.

For the software business the company added 28 new clients, which include ING (Netherlands) and Channel 4 Television Corporation (UK). On a YoY basis the companyís business in the European, Asia Pacific and American region showed growth rates of 53%, 39% and 20% respectively.

One of the reasons why NIIT has taken such a hit is due to its focus on new technologies. All corporates have cut down their IT spend and the area to be hit the worst is spend on new technologies like e-commerce. The company does not have a presence in the legacy business and therefore was not able to offset the lost business. As a result it is expecting a drop of 30-40% in operating profits for the year ended September í01(from Rs 2, 611 m in September í00).

NIIT has been hit as its competencies lie in new technology areas and the demand for software professionals has shrunk globally. Therefore, the alternatives available to the company are to equip itself with skills that are more sellable or wait for the tide to turn. But for the immediate future it is at the mercy of the macro environment.

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