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NIIT: Chugging along - Views on News from Equitymaster

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NIIT: Chugging along

Apr 21, 2003

NIIT has posted a 14% growth (YoY) in consolidated revenues for 2QFY04. This is on the back of a 10% growth in revenues from the education business and a heartening 24% growth in the company’s software business. On a sequential basis, revenues from the software business grew by 8%. This performance indicates stability in the company’s revenue streams and therefore, points to the fact the worst seems to be over for the company. However, highlight of the performance for 2QFY04 is the swift improvement in operating margins. On the back of this improvement the net profit figure is back in the black for 2QFY03. A strong growth in other income and a tax inflow has also helped the company post net profits of Rs 54 m in 2QFY04. Improvement in operating margins could be due to the software services having a larger share of the revenues. Infact the contribution of revenues from software has moved up from 61% in 2QFY03 to 66% in 2QFY04. Contribution from the software education business has remained steady at 31%. It is revenues from SI&PD (systems integration and product development) that have declined swiftly. This is an area that the company has been consciously de-emphasizing. For 1HFY03, the revenues have grown by 13%. The net profit figure is up 113%. Revenues from the education business segment have grown 10%, while growth in the software business has been 23%.

Consolidated revenus 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Education 814 901 10.7% 1,556 1,717 10.3%
Software 963 1,198 24.4% 1,879 2,306 22.7%
PD&SI 115 64 -44.3% 199 99 -50.3%
Total revenues 1,892 2,163 14.3% 3,634 4,122 13.4%
OPM 151 218 44.4% 174 260 49.4%
Operating Profit Margin (%) 8.0% 10.1%   4.8% 6.3%  
Profit after Tax/(Loss) 20 64 220.0% 55 117 112.7%
Net profit margin (%) 1.1% 3.0%   1.5% 2.8%  

IT services business
The company added 14 new customers in the IT services space including two Fortune 500 customers. It is unlikely that the company has bagged very big orders from these clients. However, when large corporates start working with new vendors initially not so mission critical work is outsourced to them. Then gradually as the vendors prove their capability there is a possibility that quantum of work outsourced is ramped up.

To improve and broaden its delivery capability and service offerings, NIIT has been steadily making acquisitions. In 2QFY04 the company announced the acquisition of CognitiveArts, US. With organisations increasingly becoming knowledge based, corporates are looking for solutions in the knowledge management space. This acquisition will help NIIT tap the knowledge solutions market.

Education business
The company continues to gain market share despite the downturn in the industry that has caused many players to go out of business. Further the software education industry is also witnessing consolidation. Recently, Aptech’s promoter sold his stake in the education business to SSI. For 2QFY04, growth came from increased demand for career courses and short-term courses.

Downturn in the IT industry and therefore, the slack in demand for IT education and intense competition have forced NIIT to look at other alternatives. Consequently, the company is expanding its portfolio of offerings from IT education to IT-assisted education. To develop competencies is this domain NIIT has chosen the inorganic route and has acquired eGurucool.com.

eGurucool.com provides online courses for the school segment. Thus, NIIT will now offer online courses for those students who wish to take up courses additional to the inputs provided in the school. Traditionally, the ‘tuition’ teachers and coaching classes have dominated this segment. Though there have been some efforts to towards branding, it has usually been localized to a particular city. Also, there have been very few coaching classes that have had a national brand. And these classes have provided coaching through correspondence. The idea of providing online coaching for schools is relatively new and e-gurucool.com has been one of its pioneers.

However, considering the fact that NIIT has a significant presence (2,245 centres), the advantage it has is that already its logistics are in place. NIIT centers can be used as coaching classes for these courses. Considering this move, the acquisition makes a lot of sense. Thus, NIIT will have two advantages: first a strong brand that is recognized nationally and secondly, a strong logistic support in place. On the back of these advantages the company expects revenues from this new line of business to touch Rs 1 bn within the next three years. eGurucool products will be launched at NIIT centres in 3QFY04.

Standalone numbers for NIIT indicate a muted performance in 2QFY04. Growth in revenues is largely due to the growth in revenues from the education business. Revenues from the education business grew by 2% YoY during the quarter, while the revenues from software solutions business declined.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Sales 890 894 0.4% 1,683 1,701 1.1%
Other Income 51 71 38.7% 93 85 -8.0%
Expenditure 770 771 0.2% 1,473 1,457 -1.1%
Operating Profit (EBDIT) 121 123 1.9% 210 244 16.3%
Operating Profit Margin (%) 13.6% 13.8%   12.5% 14.3%  
Interest 17 13   38 27  
Depreciation 110 140 27.9% 214 272 27.0%
Profit before Tax 45 41 -9.7% 50 30 -38.7%
Extra-ordinary income/(expense) (14) -   (14) -  
Tax 11 (23) -299.1% (19) (87) 351.6%
Profit after Tax/(Loss) 20 64 216.4% 55 117 114.1%
Net profit margin (%) 2.3% 7.1%   3.3% 6.9%  
Diluted number of shares 38.7 38.7   38.7 38.7  
Diluted Earnings per share* 2.1 6.6   2.8 6.1  
*(annualised)            
P/E (x)   14.8     16.1  

Higher other income and deferred taxes helped the company post a strong improvement in net profits. However, at an operational level the improvement was marginal. For 1HFY04, operating profits have grown 16% on the back of a significant improvement in 1QFY04. This was the quarter in which the education business had shown a strong 21% YoY growth.

At the current market price of Rs 97, the stock trades at a P/E multiple of 16x its 1HFY04 estimated earnings. While the valuations seem on the higher side, the company might be able to post significant improvement in net profits due to consolidation in the education industry, which will give it a larger market share. Further, company’s performance in the software business has been steadily improving. However, considering the high element of risk involved retail investors could look for better investment opportunities.


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