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NIIT: Same Story

Apr 29, 2002

NIIT has once again reported a 96% decline (YoY) in net profits for 2QFY03. This is including an extra-ordinary expense of Rs 14 m. Excluding the extra-ordinary item, net profits have declined by 92%. The numbers are way below market expectations (85% decline in net profit). The company’s topline declined by 56% compared to 2QFY02. The continuing weakness in the software education business is the reason for the company’s disappointing numbers. So far in 1HFY03, the company’s revenues have fallen by 47% on a YoY basis, while the net profits have fallen steeply at 93%.

(Rs m) 2QFY02 2QFY03 Change 1HYF02 1HFY03 Change
Sales 2,170 890 -59.0% 3,728 1,978 -47.0%
Other Income 182 51 -71.8% 186 93 -50.3%
Expenditure 1,700 770 -54.7% 2,894 1,768 -38.9%
Operating Profit (EBDIT) 471 121 -74.4% 834 210 -74.9%
Operating Profit Margin (%) 21.7% 13.6%   22.4% 10.6%  
Interest - 17   (44) 38  
Depreciation 84 110 31.3% 169 214 26.7%
Profit before Tax 569 45 -92.0% 896 50 -94.5%
Extra-ordinary income/(expense) 0 (14)   - (14)  
Tax 86 11 -86.9% 114 (19) -116.8%
Profit after Tax/(Loss) 483 20 -95.8% 782 55 -93.0%
Net profit margin (%) 22.3% 2.3%   21.0% 2.8%  
Diluted number of shares 38.7 38.7   38.7 38.7  
Diluted Earnings per share* 50.0 2.1   40.4 2.8  
*(annualised)            
P/E (x)   132.7     97.5  

For the past four quarters the company has been reporting of significant declines in net profits. This is mainly due to sharp decline in realisations (revenues per student) in the education business. In the last quarter the company had embraced a volume based growth strategy. The company had introduced courses for as low as Rs 500, and was expecting a significant growth in student registrations. It seems that the strategy has not been very effective. However, segment specific details that will paint a clear picture are not available. We will update the article as soon as the numbers are available to us.

  3QFY02 4QFY02 1QFY03 2QFY03
Decline in net profits -93.2% -86.2% -88.4% -95.8%
Operating profit margin 6.0% 10.8% 8.2% 13.6%

In 2QFY03, NIIT Limited earned 43% of its revenues from the software business, while the remaining 54% came from the company’s learning business. This translates to a sequential growth of 9% in the software education business. While the topline growth in the software business is heartening, the EBIT (earnings before interest and taxes) at 10% are very low as compared to others in the software industry.

The company has simplified the operating arrangement with its business partners. Consequently, it booked lower revenues from the education business. The company has booked Rs 477 m in revenues from the software education business in 2QFY03. As per the practice followed earlier, the company would have booked Rs 782 m and would have deducted the additional Rs 305 m as course execution charges.

NIIT’s consolidated numbers.

On a consolidated basis NIIT reported a 46% decline in global revenues in 2QFY03. The company earned 57% of its revenues from the software business, while 43% of the revenues came from the education business. NIIT Limited contributed 47% to NIIT consolidated revenues, which stood at Rs 1,892 m (US$ 39 m).

The decline in revenues largely stemmed from the software education business. The revenues from this business have declined by 49%, on a YoY basis. Due to the company de-emphasizing on systems integration & product distribution business (SI & PD), the revenues have declined by 89% from this revenue stream and now contribute to 6% of the revenues. Revenues from software solutions business have fallen by 22% on a YoY basis. However, on a sequential basis the revenues from software services have increased by 5%. The growth in software services including SI & PD revenues is 10%.

The bright spot in the otherwise dismal performance is the fact that the company has managed to improve operating margins from almost all its business streams. However, the company still has a long way to go before the margins recover to the levels seen in the first half of FY02. The improvement in operating margins is due to the company cutting costs aggressively.

NIIT saw a sequential decline in the number of student registrations for 2QFY03. However, on a YoY basis the registrations have grown significantly. The improvement in realisations seen in 2QFY03 could be taken as initial signs of recovery in the sector. NIIT slowed down the addition of new centres. The company opened 13 new centres (30 in 1QFY03), taking the total number of centres to 2,510. While the revenues from the company’s long-term course (FUTURZ) and short term courses (SWIFT) grew at a sober pace compared to 1QFY03, the surprise saw the steep rise in revenues from the company’s CATS course offerings. The courses offered under the CATS brand are aimed at software professionals who wish to upgrade their skills. The initial signs of recovery in the US economy could have improved the prospects of this offering.

  Unit 2QFY02 1QFY03 2QFY03
Revenue from education business Rs m 1,595 742 814
Number of students Nos 68,298 159163 106,288
Realisation per student Rs 23,354 4,662 7,658

For the software business the company added 20 new clients. The list includes Fidelity, ING North America Insurance, Toyota Motors and Wells Fargo. NIIT also made two acquisitions during the quarter. These were Osprey Systems and Click2Learn. While the acquisition of Osprey Systems will give NIIT an entry into the SAP-implementation business, Click2Learn has been acquired with a view to strengthen its presence in the e-learning and knowledge solutions market.

At the current market price of Rs 276 the stock is trading at a P/E multiple of 98x its 1HFY02 annualised earnings. The stock is likely to witness a significant downside considering the steep fall in net profits. The results seem to point to the fact that worst might be over for the company.


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