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NIIT: US slowdown hits hard

Jun 16, 2001

In September 2000, NIIT ended its fiscal year with consolidated revenues of Rs 12.3 bn (US$ 264 m), 55 percent of which came from its education business, making it the market leader in the computer training and education industry in the country. But, the company is definitely not taking it easy. It has set for itself a goal of achieving revenues from global operation of Rs 100 bn (US$ 2.1 bn) by 2005. This means that the company plans to grow at a CAGR (compounded annual growth rate) of 52 percent (including inorganic growth) over the next five years. The target seems to be an ambitious one considering the fact that the software industry is expected to grow at a CAGR of 39 percent in the future and the training and education is expected to grow at a CAGR of around 28 percent. Thus, NIIT expects to outperform both the training & education and the software industry.

To be agile enough and meet up to the challenges of the growth rates that NIIT has set for itself, the company is restructured into four independent business units (IBUs). They are education and training IBU, project K12 IBU, software solutions IBU and knowledge solutions IBU. The software solutions IBU will be further divided into five business units (US, Europe, APAC, Japan and India) and one financial services vertical. The K 12 IBU will look into IT education for school children.

OPM 1QFY02 2QFY02
Learning solutions 11% 22%
Systems Integration 6% 25%
Software services 22% 34%

The company plans to have a sharper focus on business development and is creating a structure in the central management processes that should give the company more than 30 percent of the revenues from initiatives started in the last three years. NIIT is also looking at inorganic growth to supplement its motivated growth plans. The target is that every year about 15 percent of business should come from strategic alliances and acquisitions.

In the education business the company primarily has three brands CATS, Futurz and Swift. NIITís Curriculum for Advanced Technology Studies (CATS) targeted at IT professionals provides in-depth training on advanced and latest technologies in areas that includes products and software from Microsoft and Oracle.

The Futurz brand is for the student community that wants to make a career in the software industry. The offering includes a series of programs including the 4-year comprehensive iGNIIT program. The Swift courses are designed to be more preliminary in nature and introduce computers to people who have no or little computer knowledge. For first quarter of the financial year 2001 (ended September 2000) the companyís revenue mix in the education business was 56 percent from Futurz, 29 percent from CATS and 15 percent from Swift.

(Rs m) 2QFY00 2QFY01 Change
Sales 2,100 2,170 3.4%
Other Income 41 182 340.1%
Expenditure 1,659 1,700 2.4%
Operating Profit (EBDIT) 441 471 6.9%
Operating Profit Margin ( percent) 21.0% 21.7%
Interest - -
Depreciation 79 84 5.6%
Profit before Tax 403 569 41.4%
Tax 35 86 146.0%
Profit after Tax/(Loss) 368 483 31.4%
Net profit margin ( percent) 17.5% 22.3%
Diluted number of shares 38.7 38.7
Diluted Earnings per share* 38.1 50.0
*(annualised)
P/E (x) 11

In the software business NIITís services range from professional services to customised software development. The companyís software business had been growing well and in 1QFY01 has contributed 56 percent to the companyís global revenues.

However, in March NIIT gave a profit warning as it was facing longer sales cycle in the software business and had been hit by an isolated case of two clients merging which would lead to a consolidation of business and eventually delaying of projects in future. The software revenues for the company showed a drop of 27 percent in a single quarter (2nd quarter of fiscal year 2001).

(Rs m) 1QFY02 Contribution to
revenues
2QFY02 Contribution to
revenues
Change
Global software 1,706 56% 1,239 44% -27.37%
Global learning 1,324 44% 1,595 56% 20.40%

One of the reasons why NIIT has taken such a hit is due to its focus on new technologies. All corporates have cut down their IT spend and the area to be hit the worst is spend on new technologies like e-commerce. The company does not have a presence in the legacy business and therefore was not able to offset the lost business. Also, the demand for software professionals has shrunk globally due to the slowdown in the US. This has taken a toll on the education and training business of the company. As a result it is expecting a drop of 30-40 percent in operating profits for the year ended September í01. The figure was Rs 2,611 m (US$ 56.1) in September 2000

Started in 1981, NIIT, then known as Pace Education Private Limited was promoted as a private limited company in 1981 by Shiv Nadar of the HCL group along with Vijay Thadani and R.S. Pawar. In 19 years the company has come to be of the size of Rs 12.3 bn (US$ 0.2 bn) a formidable task.

As the company faces one of the toughest times in its 20 years of existence the alternatives available to the company are to equip itself with skills that are more sellable or wait for the tide to turn. But for the immediate future it is at the mercy of the macro environment. But the question is will the company be able to achieve the formidable target it has set for itself? A look at past says that it has all that it takes.


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