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NIIT Ltd: A year of change - Views on News from Equitymaster
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NIIT Ltd: A year of change
May 27, 2014

NIIT Ltd. has announced its fourth quarter and full year results for 2013-2014. The company's net sales have declined by 0.3% QoQ. While the net profit increased by nearly 12 times QoQ.

Performance summary
  • Consolidated net sales declined marginally by 0.3% QoQ. The poor performance of the individual learning business was largely responsible for the flat topline performance. For the full year, sales were up 0.8% YoY.
  • Operating margins continued the declining trend witnessed in the previous quarter and dropped by 0.5% QoQ during the quarter. For the full year however, the operating margin has improved to 6.5% compared to 5.5% for FY13.
  • At the bottomline level, the company saw a big jump in financial performance the net profit increased by nearly 12 times sequentially. However too much should not be read into this. It must be pointed out that the company's reported bottomline numbers depend a lot on the share of profits from the associate, NIIT Technologies.

Consolidated financial snapshot
(Rs m) 3QFY14 4QFY14 Change FY13 FY14 Change
Sales 2,336 2,329 -0.3% 9,433 9,510 0.8%
Expenditure 2,193 2,198 0.2% 8,910 8,890 -0.2%
Operating profit (EBITDA) 143 131 -8.4% 523 620 18.5%
Operating profit margin (%) 6.1% 5.6%   5.5% 6.5%  
Other income/(expense) (46) 98   (339) (106)  
Depreciation 184 207 12.5% 864 779 -9.8%
Profit before tax (87) 22   (680) (265)  
Tax 14 29 107.1% (433) 93  
Profit after tax/(loss) (101) (7)   (247) (358)  
Share of associates' net profit 113 147 30.1% 509 534 4.9%
Net profit after tax/(loss) 12 140 1,066.7% 262 176 -32.8%
Net profit margin (%) 0.5% 6.0%   2.8% 1.9%  
No. of shares (m)         165.1  
Diluted earnings per share (Rs)*         1.1  
P/E ratio (x)*         42.0  
* Trailing 12 months basis

What has driven performance in 4QFY14?
  • Sales were down sequentially by 0.3%. This was largely due the company's core individual learning business which contracted by 20.3% QoQ.

  • The School learning solutions (SLS) business saw sales improve significantly by 15.8% QoQ. The contribution from non-government schools has increased from 47% in FY13 to 57% in FY14.

  • The corporate learning solutions (CLS) business delivered a flat sequential performance. This segment grew by just 1.6% QoQ but operating profit from this segment declined by 6% QoQ.

  • The contribution from associate company NIIT Technologies was Rs 147 m for the quarter which helped the company post a substantial profit of Rs 147 m. Without this contribution the company's registered a small loss at the bottom line of Rs 7 m.

    Segment wise performance
    (Rs m) 3QFY14 4QFY14 Change
    Individual learning business
    Net Revenue 1,034 824 -20.3%
    EBITDA (34) 4  
    EBITDA margin N.A 0.5%  
    School learning solutions
    Net Revenue 355 411 15.8%
    EBITDA 20 23 15.0%
    EBITDA margin 5.6% 5.6%  
    Corporate learning solutions
    Net Revenue 1,059 1,076 1.6%
    EBITDA 133 125 -6.0%
    EBITDA margin 12.6% 11.6%  
    Skill Building solutions
    Net Revenue 5 12 140.0%
    EBITDA (25) (21)  
    EBITDA margin N.A N.A  

  • The company had a dull quarter, on a sequential basis, as far as the operating performance was concerned. The operating margin declined by 0.5% QoQ while the operating profit has fallen by 8.4 QoQ. However as the company receives the pending payments from its completed government school contracts, the operating profit can be expected to improve.

  • The company reported a minor loss at the bottom line (without considering the profit from associate. NIIT Tech). With this contribution, the net profit has seen a rise of nearly 12 times QoQ.
What to expect?
At the current price of Rs 44.5, the stock is trading at 42 times its trailing twelve months (TTM) earnings.

The company's core business of Individual Learning Solutions (ILS) continued to struggle. Revenues from this segment were down 20.3% QoQ but the operating margin in this segment has broken into the black in 4QFY14. This has happened due to the NIIT Cloud Campus now having attained a critical mass with about 60,000 students, 96 courses offered and 211 centers. This segment has significant operating leverage but it remains to be seen if the company can scale it up fast.

The School Learning Solutions (SLS) business delivered a good performance in the quarter as the company began receiving some long pending payments from government school contracts. The share of revenue from non-government schools in this segment has crossed 60% in 4QFY14. However it must be pointed out that the company will need at least a few more quarters to recover all the pending dues in this segment.

The Corporate Learning Solutions (CLS) business had a flat quarter on a sequential basis but for the full year FY14 this has been the saving grace for NIIT Ltd. The improvement in full year margins can be almost entirely attributed to this segment as the company does enjoy some pricing power in its Managed Training Solutions (MTS). MTS now contributes nearly 80% of the CTS revenue.

While the performance of NIIT Ltd. On a sequential basis may appear to be disappointing, it is now becoming increasingly clear that the company's revenue as well as margin profile is improving in a steady manner. The yearly financial numbers clearly reflect this. The company's stock price has responded positively to this improvement. Considering the valuations as well as the near term risks that the company faces, we recommend that investors do not buy the stock at current levels. We have updated our view on the stock of NIIT Ltd. from 'Buy' to 'Hold'.

We would like to gently remind our subscribers that their allocation to equities should be decided upon after keeping aside some safe cash. Also within their overall exposure to equities they should kindly ensure that our suggested asset allocation is broadly followed and that no single mid cap stock comprises more than 4-5% of their portfolio.

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