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NIIT: Turning around? - Views on News from Equitymaster
 
 
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  • Jun 1, 2002

    NIIT: Turning around?

    The NIITís 2QFY03 results were below expectations as the topline and bottomline fell sharply. The streetís disappointment was evident from selling seen in the stock subsequent to the results. Though at first glance the numbers look disappointing, a deeper look reveals what could be initial signs of a turnaround.

    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. The decline in revenues largely stemmed from the software education business. While the revenues from the education business declined by 49%, on a YoY basis, the decline in revenues from the software solutions milder at 22%.

    The first impression
    (Rs m) 2QFY02 2QFY03 Change
    Sales 3,511 1,892 -46.1%
    Other Income 14 17 21.4%
    Expenditure 3,042 1,741 -42.8%
    Operating Profit (EBDIT) 469 151 -67.8%
    Operating Profit Margin (%) 13.4% 8.0%
    Depreciation 110 169 53.6%
    Profit before Tax 373 -1 -100.3%

    The markets canít exactly be blamed for their impatience. This is the fourth consecutive quarter in which the company has posted a steep fall in bottomline. Infact, the last fiscal, FY02 (year ending September 2001), was probably on of the toughest in the companyís history. The company saw an 8% decline in revenues due to a slowdown in both its business streams education and software. While the revenues from software business grew by a marginal 3%, it was the education business that declined by 18%, which was largely responsible for fall in topline. The fall in bottomline for NIIT was steep at 57% on the back of significant decline in operating margins.

    In 2QFY03, while revenues have fallen on a YoY basis, a deeper look into the number presents a slightly brighter picture. The companyís revenues per centre and revenue per student have shown an improvement compared to the previous quarter. The increased revenue per student could point to the easing of pricing pressure on the courses offered by the company. With a lot of competitors dying out has improved the bargaining power of NIIT. The improvement in revenues per centre could point to volumes improving. The number could also point to the fact that the company is now controlling its costs by opening new centres cautiously. But the improvement has been observed for only one quarter and consistent improvement over a number of quarters will indicate a clear trend.

    The Ďsignsí of recovery
    NIIT Unit Jan - Mar 01 Sep - Dec 01 Jan - Mar 02
    Revenue from education business Rs m 1,595 742 814
    Number of students Nos 68,298 159,163 106,288
    Realisation per student Rs 23,354 4,662 7,658
    No of centres (Nos) Nos 2,228 2,497 2,510
    Revenue per centre (Rs) Rs 715,889 297,157 324,303
    Operating margins % 7.6% - 3.2%

    Also, the operating margins from the education business improved significantly. This too could point to the company managing to finally getting a grip of the situation.

    Meanwhile, the company has taken a number of steps to counter the slowdown in education business. Sometime back it launched CareerEdge a program with basic and technical inputs. It will cater to the non-IT professionals and college students preparing for a non-IT career like accountancy, finance, health, law, life sciences, management, or sales & marketing. NIIT also entered the Latin American markets seeking growth opportunities in the education business. The company has started a centre in Columbia.

    In the software business the company saw a strong 8% sequential growth this too is an improvement in performance. The operating margins also improved from the software business. However, the margins continue to be way below industry average of 30%.

    The company is looking at the inorganic route for growth in the software business. NIIT in 2QFY03 made two acquisitions in the USA. While the acquisition of Click2Learn will strengthen the companyís presence in the enterprise learning markets, acquisition of Osprey Systems will give NIIT an entry into the SAP implementation business. Software package implementation has been one of the strongest growth areas for the Indian software industry in FY02. NIIT hopes to cash in on this surge in demand.

    And of course, the company, like all others in the software industry has jumped on to the ITES (IT enabled services) bandwagon. NIITís board approved the launch of a new entity called NIIT Smartserve to look into the business possibilities in the ITES segment. However, it does not stop there the company is a step ahead of others. In April NIIT launched Planetworkz, courses for those looking at the ITES industry as a career option.

    A host of new initiatives and improving business prospects will help NIITís numbers look much better going forward. And as NIIT completes one year of slowdown 3QFY02 will not look as terrible, as number have looked for the past four quarters. Infact, the companyís net profit figure might show growth. This might cause the valuations to improve going forward and consequently, the stock price is likely to head north.

    However, before considering such stocks as investment options retail investors need to consider the fact that almost half of the business has very low entry barriers and NIIT brand though the largest in the country is not sticky enough. In one year, revenues from education business have declined from Rs 1,585 m to Rs 814 m, a drop of 48% in revenues while the bottomline has eroded further. Are you sure you want own a business with so much volatility in demand.

     

     

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