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NIIT Ltd: A big reset - Views on News from Equitymaster
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NIIT Ltd: A big reset
Jun 5, 2015

NIIT Ltd has announced its fourth quarter and full year results for 2014-2015. The company's net sales have fallen by 4% YoY. The company has reported a loss of Rs 1,513 m in 4QFY15.

Performance summary
  • Consolidated net sales fell by 4% YoY. For the full year FY15, the topline was flat.
  • The operating performance took a huge big hit in the quarter due a one-off impact caused by a restructuring of the business (explained below). The company recorded an operating loss of Rs 59 m in the quarter. For the full year FY15, the operating profit fell 50.3% YoY.
  • The one-off impact due to the business restructuring impacted the bottomline as well. The company has recorded a net loss of Rs 1,513 m in the quarter and Rs 1,386 m for the full year FY15.
  • Due to the restructuring, the company has decided to not declare a dividend for FY15.

Consolidated financial snapshot
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Sales 2,329 2,235 -4.0% 9,510 9,574 0.7%
Expenditure 2,198 2,294 4.4% 8,890 9,266 4.2%
Operating profit (EBITDA) 131 (59)   620 308 -50.3%
Operating profit margin (%) 5.6% -2.6%   6.5% 3.2%  
Other income/(expense) 98 (825)   (106) (895)  
Depreciation 207 602 190.8% 779 1,073 37.7%
Profit before tax 22 (1,486)   (265) (1,660)  
Tax 29 (12)   93 12 -87.1%
Profit after tax/(loss) (7) (1,474)   (358) (1,672)  
Share of associates' net profit  147 (39)   534 286 -46.4%
Net profit after tax/(loss) 140 (1,513)   176 (1,386) -887.5%
Net profit margin (%) 6.0% -67.7%   1.9% -14.5%  
No. of shares (m)         165.2  
Diluted earnings per share (Rs)*         (8.4)  
P/E ratio (x)*         N.A  
* Trailing 12 months basis

What has driven performance in 4QFY15?
  • The company has clubbed the skills division with the individual learning business as part of the restructuring. Revenues from this segment were down 17.2% YoY. The management stated that this pressure will continue throughout FY16. Revenues from the corporate training division were up 7.5% YoY. The school business contracted by 7.4% YoY. The payment issues in this segment from government schools will only come in over the next two years. Thus, the performance of this business will remain under pressure in the short term.

    Segment wise performance
    (Rs m) 4QFY14 4QFY15 Change
    Skills & careers learning group
    Net Revenue 836 692 -17.2%
    EBITDA (17) -79 364.7%
    EBITDA margin -2.0% -11.4%  
    School learning group
    Net Revenue 417 386 -7.4%
    EBITDA 23 19 -17.4%
    EBITDA margin 5.5% 4.9%  
    Corporate learning group
    Net Revenue 1076 1,157 7.5%
    EBITDA 125 135 8.0%
    EBITDA margin 11.6% 11.7%  

  • The operating margins were negative in the quarter due the restructuring. However, even excluding the impact of the restructuring, the operating margins were down to 3% in 4QFY15 largely due to the continued poor performance of the Individual learning business.

  • At the net level, the company posted a loss of Rs 1,513 m in the quarter due to the restructuring. Excluding the impact of the restructuring, the net loss was to the tune of Rs 149 m in 4QFY15.
What to expect?
We attended the investor meet of the company to assess the plans of the management. The company's new CEO Rahul Patwardhan who is a former senior employee and an industry veteran has been given a complete control of operations. The restructuring has been done keeping in mind the need of the new management team to have a free hand and to be unburdened by the company's past problems.

The restructuring has three parts to it. The first has been to bring in a new leadership team. This has been done with the new CEO having already appointed the key professionals who will work under him.

The second has been a significant re-organisation of subsidiaries. The company has merged three subsidiaries, Evolv, Scantech (which held NIIT Ltd's 23.8% stake in NIIT Technologies) and NOLL into itself. This will lead to reduction in operating expenses as well as improved management effectiveness. NIIT has also hived of the capex intensive school business into a separate subsidiary. This will enable the company bring in outside investors to help capitalise this business for future growth. The details of this fund raising has not yet been worked out.

Lastly, the company has undertaken a major re-assessment of its existing business. In the schools business the company has already stopped taking orders from government schools. The focus will be on private schools from now on. NIIT will be able to ramp up this business only after bringing in outside investors into the subsidiary. Revenues from private schools contribute almost two thirds of the topline of the schools business. The management stated that this business can grow at 10% annually with a 10% operating margin. The company will complete all pending government school contracts over the next two years.

The skills and the ILS divisions have been clubbed. The focus here will be on India and China as these two markets provide the maximum growth opportunities. The company will exit most other geographies. In India, the company has closed down many loss making centers (more will be closed in FY16). The total reduction in capacity will be a huge 33%. Also, the employee headcount has been reduced by 27% and the number of courses offered has been reduced by 39%. The focus will be on the profitable or potentially profitable centers as well as those courses which can offer decent margins and growth prospects. The management stated that all centers will be allowed to offer all courses and flexibility will be provided to individual centers to decide the product mix at the local level. This will help to improve efficiency as well as accountability.

The corporate learning business has been understandably left untouched. The revenue visibility from this division is US$ 179 m. The management has guided for 23% YoY growth in this business with around 15% operating margins for FY16.

The total cost of the restructuring is Rs 134 m. However, the management stated that the savings (in terms of people and premise costs) will be massive, around Rs 252 m per year.

Although this huge reset in the business has come as a surprise, we view it favourably. It is a much needed clean up. We don't see a significant pickup in growth or profitability in FY16 due to this but the company's long term prospects certainly looks brighter now.

We are currently updating our financial estimates for the company post the restructuring. For now we maintain our hold view on the stock.

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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