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NIIT Ltd.: Better margins aid bottomline
May 7, 2010

NIIT has announced its FY10 results. The company has reported 4% YoY growth in sales and a 0.4% growth in net profits. Here is our analysis of the results.

Performance summary
  • Sales grow by 4% YoY during FY10, primarily on the back of higher enrolment for individual learning solutions. Topline falls by 2% YoY during 4QFY10 on account of seasonality factor in school learning solutions.
  • Operating margins expand by 3% YoY and 4% YoY during FY10 and 4QFy10 respectively. Improvement on the back of efficient cost containment measures and decrease in headcount.
  • Net profits surge by 41%% YoY during the quarter on back of better operating performance as well as higher share of profits from associates. Bottomline remains flat for FY10 largely impacted by forex losses.
  • The board recommends a final dividend of Rs 1.4 per share for FY10 (dividend yield of 2%).

(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Sales        3,008       2,950 -1.9%           11,486         11,993 4.4%
Expenditure         2,644       2,474 -6.4%          10,300         10,425 1.2%
Operating profit (EBITDA)             364           476 30.9%              1,186            1,568 32.2%
Operating profit margin (%) 12.1% 16.1%   10.3% 13.1%  
Other income/(expense)             (36)           (57)                   (45)             (329)  
Depreciation             192           195 1.6%                 647               751 16.1%
Profit before tax             136           224 65.3%                 494               488 -1.2%
Tax               40             80 100.0%                 104               108 3.8%
Profit after tax/(loss)                96           144 50.8%                 390               380 -2.6%
Share of associates' net profit                80           104 30.0%                 309               322 4.2%
Net profit after tax/(loss)             176           248 41.3%                 699               702 0.4%
Net profit margin (%) 5.8% 8.4%   6.1% 5.9%  
No. of shares (m)                   163.6            165.1  
Diluted earnings per share (Rs)*                         4.3  
P/E ratio (x)*                      15.8  

What has driven performance in FY10?
  • NIIT recorded a 4% YoY growth in net sales during FY10 indicating a revival in the IT training market as compared to last year. Increase in sales was mainly due to growth in various business segments and increased enrollments.

  • NIIT's 'Individual Learning Solutions' segment (ILS, 36% of the total sales) registered a growth of 7% YoY partially on account of increase in volumes. This segment saw a 12% growth in overall enrollments - 24% for 'Edgineers', 64% for ‘IMS’ (Infrastructure Management Services). NIIT’s placements grew by 25% YoY in FY10. During the year, the company launched SAP, IBM, Tally, and IMS programs to offer training in the respective technologies. The strategy of focusing on shorter duration courses like '99-days diploma’ showed encouraging results during the slowdown. The pending order book executable over next 12 months for this segment stands at Rs 982 m. 4QFY10 saw NIIT entering into a strategic partnership with IGNOU, the world's largest Open University, to provide education and skill building aimed at creating a talent pool for business & technology industries globally.

  • NIIT's 'School Learning Solutions' segment (SLS) , which accounted for 17% of total sales during the quarter, witnessed a significant growth of 45% YoY during FY10. It added 2,812 schools from states like Gujarat, Assam, and Andhra Pradesh. This segment registered an increased pending order book of Rs 3,316 m out of which 31% is executable within the next 12 months. The non-government revenue saw a decent growth of 24% YoY during FY10 while government revenue grew by 52%. Total number of schools serviced has reached 15,000.

    Segment-wise revenue breakup
    (Rs m) FY09 FY10 Change
    Individual learning business (IT)      
    Net Revenue 3,982 4,275 7.4%
    Operating profit 865 987 14.1%
    Operating profit margin 21.7% 23.1%  
    School learning solutions      
    Net Revenue 1,383 2,000 44.6%
    Operating profit 214 296 38.3%
    Operating profit margin 15.5% 14.8%  
    Corporate learning solutions      
    Net Revenue 5,786 5,422 -6.3%
    Operating profit 183 437 138.8%
    Operating profit margin 3.2% 8.1%  
    Finance & Management training
    (ILS-New Businesses)
         
    Net Revenue 334 296 -11.4%
    Operating profit (75) (152)  
    Operating profit margin -22.5% -51.4%  

  • NIIT’s ‘Corporate Learning Solutions’ (CLS) segment which contributed around 45% of its FY10 sales, remained subdued on account of continued weakness in corporate spending on training globally. Sales fell by 6% as the situation remained particularly weak in the developed economies which are the major target markets for the segment. The order intake for the segment stood at US$ 31 m. Pending order book stood at US$ 90 m, with around 58% executable in the next 12 months.

  • Revenue from the new businesses segment (2% of the total revenue) catering to long-duration courses in banking and financial services grew by 84% YoY in 4QFY10 but fell by 11% YoY during FY10. New customer segments were added for training programs including Dhanalakshmi Bank, TATA AIG Life Insurance, and Religare Enterprises. Fresh order intake stood at Rs 310 m, while the pending order book was Rs 62 m. Total number of placement partners reached 24 and overall enrolments for these courses reached 4,000.

  • NIIT improved its operating margins by 2.7% YoY during FY10. High-margin IP-led business aided the operational performance. IP-led revenues contributed 43% to NIIT's consolidated sales during the year. Cost containment measures taken by the company helped improve profitability.

  • NIIT’s net profits remained flat, growing by only 0.4% YoY during FY10, largely on the back of higher depreciation outlays and hedging losses due to dollar appreciation. Better cost management however helped sustain profits. Excluding other income, company’s bottomline increased by 39% YoY for FY10.

What to expect?
At the current price of Rs 67, the stock is trading at a multiple of 11 times our estimated FY11 earnings. During FY10, NIIT signed partnerships with new product partners such SAP, IBM and SAS. It hopes to leverage its tie up with IGNOU which will give it access to 2-2.5 lakh students every year. In the ILS segment, it has also ventured into newer offerings like English Plus (which will provide English language training and life skills development) and Training.Com (which will provide online learning products).

The management is upbeat about its business from the high margin intellectual property business. Revenues from the same increased from 37% in 2008 to 43% in 2010. It also hopes to achieve a greater portion of annuity based revenue in its order book. This will provide the company with a constant revenue stream over a 3-5 year horizon. The proportion of these revenues (greater than one year) has increased by 8% from last fiscal to 52% by 2010.

The ILS segment had a slightly weaker order book at the end of the fiscal but measures are being taken by the company to increase the same. In the SLS segment the company expects the government school segment to remain strong with the recent Maharashtra order which will service more than 1200 schools. In terms of the outlook for the CLS segment, the number one player SkillSoft is in disarray due to privatization and has been losing some customers to NIIT’s Element-K in the US market. The company has bagged a couple of multi-million dollar deals for this segment with more in the pipeline. The new businesses involving BFSI training are also expected to reach critical mass and become profitable due to recovery in this sector backed by strong hiring plans.

Increase in volumes and a favorable product mix is expected to aid margins. However wage inflation and increase in sales and marketing expenses will impact the margins in the short term.

In terms of raising capital through a QIP, the company has an enabling resolution valid for one year. However due to volatility in the market it does not plan to exercise this option but may do so in the future to raise funds for an attractive prospect for inorganic growth.

We had recommended a 'Buy' on the stock in December 2008 and the target price has already been breached. At the current levels, we have a cautious view on the stock.

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