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NIIT Limited: The story’s playing out! - Views on News from Equitymaster
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NIIT Limited: The story’s playing out!
Jun 30, 2006

Performance summary
NIIT Limited (NIIT) yesterday announced its consolidated financial results for FY06. The company recorded a decent growth in its topline, which was primarily driven by the company’s ‘Individual’ business. A decent margin expansion was also witnessed, mainly due to the improved operating performance of the Individual (retail) segment, which recorded a decent operating profit this fiscal, as against a loss in FY05. The improved margins led to an almost similar growth at the PBT level, but due to higher taxes, the bottomline growth, while storng, trailed the growth in operating profits.

Consolidated financial performance: A snapshot
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
System-wide revenues 1,656 1,838 11.0% 6,363 7,112 11.8%
Net revenues 1,045 1,149 10.0% 3,984 4,507 13.1%
Expenditure 916 984 7.4% 3,495 3,907 11.8%
Operating profit (EBDITA) 129 165 27.9% 489 601 22.8%
Operating profit margin (%) 12.3% 14.4%   12.3% 13.3%  
Other income 6 (21)   96 85 -11.9%
Depreciation 95 102 7.4% 345 374 8.2%
Interest - -   23 46 100.0%
Profit before tax 41 43 6.2% 217 266 22.4%
Tax 2 7 225.0% 10 29 192.0%
Extraordinary items - -   (8) 13  
Share of profits from associates 43 46 7.0% 149 164 10.0%
Profit after tax/(loss) 82 83 1.2% 348 414 18.8%
Net profit margin (%) 7.8% 7.2%   8.7% 9.2%  
No. of shares (m) 19.3 19.3   19.3 19.3  
Diluted earnings per share (Rs)       18.0 21.4  
P/E ratio (x)         17.2  

What is the company’s business?
NIIT is India’s premier IT training company and is thrice the size of its next-largest competitor, Aptech. The company has a major presence in the fast-growing retail segment, which, by and large, caters to the staffing requirements of the Indian IT and BPO sectors. The company derives a significant share of its revenues from the international retail segment as well. NIIT also operates in the institutional/government segment, where it executes projects relating to provision of IT education to schoolchildren throughout the country. Apart from the above segments, the company earns 37% of its revenues from the corporate segment, where it provides learning solutions, e-learning and content development solutions to technology and other companies mainly in the US and the UK.

What has driven performance in FY06?
Retail’s the story: In FY06, NIIT recorded a near-12% YoY growth in gross revenues, while net revenues saw an over-13% YoY growth. The primary driver for this performance was the retail (Individual) segment, which grew at over 22% YoY. The India business grew at an impressive 36% YoY, driven by the strong performance of the Indian IT and ITES industries, which continue to show good traction due to increased offshoring orders, primarily from the US and Europe, amidst increased acceptance of the offshoring concept. The China business grew at 19% YoY as well, and is expected to be a key growth driver for NIIT going forward. The overall enrolments grew at 13% YoY to hit 274,873. A clear trend that has been observed, and one that we have always maintained will happen, is that there is an ever-increasing proportion of revenues coming from the ‘Careers’ segment in India. Revenues from this segment grew at a strong 27% YoY. We believe, that with the secular long-term offshoring story remaining intact, there will be an increasing demand for long-term careers in IT from non-engineers, apart from demand from engineers and technical personnel for training in advanced technologies for their career advancement.

The Corporate segment, on the other hand, saw its gross revenues increase by just under 3% YoY. However, net revenues saw an impressive 13% YoY growth. NIIT won new business from the Indian Government, as well as new clients in the technology vertical. During FY06, NIIT’s European subsidiary, based in the UK, commenced operations. The company won its first training outsourcing order from a European electronics major. The business model in this segment has changed slightly in favour of a greater amount of corporate training as opposed to training through higher education universities. The outstanding order book in this segment stands at US$ 29.2 m, with 66% executable over the next 12 months. The company recorded an order intake of US$ 45.7 m this fiscal, and seems on course to grow this business at a decent pace in the medium-term.

The Institutional (government business) segment, on the other hand, proved to be the laggard this fiscal for NIIT. Gross revenues saw de-growth of around 2% YoY, while net revenues fell by over 1% YoY. The company won new contracts from Assam, Himachal Pradesh, Chattisgarh and Tripura during FY06, and recorded a total order intake of Rs 1,319 m. At the end of FY06, NIIT had an outstanding order book of Rs 1,645 m in the institutional segment, with 44% being executable over the next 12 months. The company has said in the past that it does not expect this business to grow at a similar rate to overall revenues, given the lumpy nature and significant volatility that characterise it. The competition in the segment is also strong, with players such as Aptech, SSI and Tata Infotech (now merged into TCS) also in the fray. Given that generally, price competition is high, with the government giving the contract to the lowest bidder, margins are also weaker.

Segment-wise performance…
(Rs m) FY05 % of total FY06 % of total Change
Individual
System-wide revenues 3,200 50.3% 3,912 55.0% 22.3%
Net revenues 1,322 33.2% 1,670 37.1% 26.3%
OP (3)   128 21.3%  
OPM -0.2%   7.7%   7.9%
Institutional
System-wide revenues 1,228 19.3% 1,209 17.0% -1.5%
Net revenues 1,192 29.9% 1,175 26.1% -1.4%
OP 256 52.3% 213 35.4% -16.8%
OPM 21.5%   18.1%   -3.3%
Corporate
System-wide revenues 1,935 30.4% 1,991 28.0% 2.9%
Net revenues 1,470 36.9% 1,662 36.9% 13.1%
OP 236 48.3% 260 43.3% 10.0%
OPM 16.1%   15.6%   -0.4%
Total          
System-wide revenues 6,363   7,112   11.8%
Net revenues 3,984   4,507   13.1%
OP 489   601   22.8%
OPM 12.3%   13.3%   1.1%

Retail provides the margin booster: In FY06, NIIT saw on over-100 basis points expansion in its operating margins. This was mainly due to the much-improved performance of the Individual business. This segment recorded Rs 128 m operating profit this fiscal, against Rs 3 m loss in FY05. This was achieved mainly due to increased capacity utilisation of 46% (38% in FY05). The company has, in the past, mentioned that steady-state margins in this segment would be between 20% and 25%, at 65% capacity utilisation. Therefore, going forward, there is still further scope for improving margins in this segment. Given the strong performance of the Indian IT-BPO industries and expectations of continuing strong performances in future, and NIIT’s leadership position in the industry, this appears to be well within the company’s grasp. Margins in the Institutional business were weak, falling by 334 basis points, while those in the Corporate business were relatively flat year-on-year.

It boils down to the bottomline: Buoyed by the higher operating margins, NIIT’s bottomline in FY06 grew at just under 19% YoY. This, was, however, slower than the operating profit growth, mainly due to lower other income and considerably higher taxes paid.

Performance in the recent past…
  1QFY06 2QFY06 3QFY06 4QFY06
System-wide revenue growth (%, YoY) 12.0 12.1 12.6 11.0
Net revenue growth (%, YoY) 10.0 11.9 22.2 10.0
Operating margins (%) 13.4 14.1 11.3 14.4
Profits growth (%, YoY) 21.0 11.7 14.1 1.2
Employees (Nos.) 1,964 1,995 2,103 2,259

What to expect?
At the current price of Rs 369, NIIT’s stock is trading at a price to earnings multiple of 17.2 times its FY06 earnings per share (EPS). The board has recommended a dividend of Rs 6 per share (dividend yield of 1.6%). Going forward, given that the IT industry is expected to show strong growth between 25% and 30% annually over the medium-term, the improvement in sentiment for IT as a career and favourable trends in recruiting IT personnel, we believe that NIIT, with its market leadership position, could be a major beneficiary. The increase in corporate spends on training in the US, new product launches by technology majors like Microsoft and greater interest in training outsourcing from European corporates also provide NIIT with a good opportunity to grow at a faster rate in the medium-to-long term. Long-term initiatives, such as partnering with technology giants like Microsoft and Intel, and expanding its global footprint into newer regions like Europe, are expected to give newer revenue-enhancing areas to NIIT. However, risks, such as the volatile nature of the Institutional business and its lower margins, could play spoilsport. Overall, we maintain our positive stance on the company.

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