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NIIT: Changing strategies

Jul 6, 2004

NIIT, India's largest IT education and training company, had recently announced its FY04 results. The company has changed its accounting year from October-September to April-March. This way, the results presented by the company for the period ending March 2004 include performance for 18 months. As such we have analyzed the performance of the company only for the three months ending March 2004. As indicated in the table below, the company's revenues in the three months ending March 2004 have dipped YoY by 22%, mainly due to the internal restructuring and transfer of software solutions business to NIIT Technologies Ltd. (NTL). While operating profits have declined by 34% YoY, a depreciation write-back has resulted in a whopping 410% rise in net profits. Operating margins have declined by 220 basis points.

Standalone financial performance: A snapshot...
(Rs m) Mar-03 Mar-04 Change
Sales 894 699 -21.8%
Other income 71 139 94.7%
Expenditure 771 618 -19.9%
Operating profit (EBDIT) 123 81 -34.1%
Operating profit margin (%) 13.8% 11.6%  
Interest 13 10 -21.9%
Depreciation 140 (135)  
Profit before tax 41 345  
Extraordinary items - -  
Tax (23) 21  
Profit after tax/(loss) 64 324 410.1%
Net profit margin (%) 7.1% 46.4%  
No. of shares 38.7 38.7  
Diluted earnings per share* (Rs) 6.6 33.6  
P/E ratio (x)   5.6  
*annualised      

This decline in standalone topline is largely a result of the demerger of NIIT's software business (indicated here as Global Solutions) into NTL. As a result of this, revenue contribution from this segment fell from 46% during the March quarter of 2003 to 16% during March 2004. In absolute terms, revenues from this segment have fallen YoY by 74%. This fall in revenues from the solutions segment negated the effect of a rise of 22% in the company's education business (indicated here as Global Learning).

Segment-wise picture...
(Rs m) Mar-03 Mar-04 Change
Global Learning Business      
Revenues 485 591 21.7%
PBIT 15 66 345.3%
PBIT margins 3.0% 11.2%  
Global Solutions Business      
Revenues 409 108 -73.5%
PBIT 86 149 74.0%
PBIT margins 20.9% 137.5%  
Total      
Revenues 894 699 -21.8%
PBIT 100 215 114.1%
PBIT margins 11.2% 30.7%  

Education business
Growth in this segment seems to have come on account of the company increasing its global presence over the last year. In the past one year, the company has increased its country presence for the education business to 33, which contributed to around 51% of its global education business. The remaining 49% came from the education and training business in India. The company seems to be moving fast in the corporate training space and revenue from the same were around 39% of the company's domestic training business. This move is likely to serve the company over a long-term, as corporate IT training segment is a more sustainable growth stream than the individual training segment. This is because of the unorganised sector competition, which has been giving NIIT a run for its money in the individual learning space, has a low presence in the corporate learning segment.

In the individual learning segment, however, the company has initiated new programs that have been co-designed with the IT and BPO industry and this is likely to bring out the company from the rough times that it has witnessed in this business over the past two years. The press release issued by the company does not contain any details of the number of learning centres, students and realisations and, as such, we are not in any position to comment on the same.

Software business (NTL)
The performance of the software business, which has been demerged into a separate company called NTL, is not comparable with the previous period. As such, we are not in apposition to give our view on the same. However, as the previous results show, this business has been a saviour for NIIT over the past few years. The company's press release also states that this business has a pending order book size of US$ 122 m and, we believe, is likely to be a key growth driver for the Group going forward.

At the current price of Rs 187, the stock is trading at a P/E multiple of 5.6x annualised 1QFY05 earnings. Despite such low valuations for the stock vis--vis its peers, investors need to practice caution. This is because there is still a high level of uncertainty as to how the Group will perform going forward, especially after the de-merger of the software business. Also, investors need to look into the fact that the Group's education business has been a poor performer in the past, and if it does not come out of the same, the company's growth prospects will present a bleak picture. Poor level of disclosures is another area of concern, and this should weigh heavy on the minds of investors. The Board has recommended a dividend of 50% for NIIT Ltd. and 50% for NTL.

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