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NIIT Ltd: Swings back into the green - Views on News from Equitymaster
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NIIT Ltd: Swings back into the green
Jul 20, 2015

NIIT Ltd has announced its first quarter results for 2015-2016. The company's net sales have grown by 3.5% YoY. The company has reported a net profit of Rs 150 m in 1QFY16.

Performance summary
  • Consolidated net sales increased by 3.5% YoY in 1QFY16.
  • The operating performance has spectacularly swung back in to the green on a sequential basis. The major restructuring of the business completed in the last quarter has certainly brought early success. The company recorded an operating profit of Rs 164 m in the quarter up 28.1% YoY.
  • The strong operating performance along with a 24% YoY fall in depreciation (due to the restructuring) helped the standalone bottomline get back into the green after 10 quarters. The PAT came in at Rs 14 m.
  • After adding the profit from associate NIIT Tech, the company recorded a very healthy net profit of Rs 150 m in 1QFY16.

Consolidated financial snapshot
(Rs m) 1QFY15 1QFY16 Change
Sales 2,253 2,332 3.5%
Expenditure 2,125 2,168 2.0%
Operating profit (EBITDA) 128 164 28.1%
Operating profit margin (%) 5.7% 7.0%  
Other income/(expense) (35) (14)  
Depreciation 171 130 -24.0%
Profit before tax (78) 20  
Tax 19 6 -68.4%
Profit after tax/(loss) (97) 14  
Share of associates' net profit  103 136 32.0%
Net profit after tax/(loss) 6 150 2400.0%
Net profit margin (%) 0.3% 6.4%  
No. of shares (m)   165.2  
Diluted earnings per share (Rs)*   (7.5)  
P/E ratio (x)*   N.A.   
* Trailing 12 months basis

What has driven performance in 1QFY16?
  • The restructuring exercise has begun to show results. The skills & careers division has almost cut all its losses in the quarter. The strong growth in the corporate training division helped to offset the winding down of the business from government schools.

    Segment wise performance
    (Rs m) 1QFY15 1QFY16 Change
    Skills & careers learning group
    Net Revenue 745 725 -2.7%
    EBITDA (25) (3)  
    EBITDA margin N.A N.A  
    School learning solutions
    Net Revenue 394 322 -18.3%
    EBITDA 22 18 -18.2%
    EBITDA margin 5.6% 5.6%  
    Corporate learning solutions
    Net Revenue 1,113 1,285 15.5%
    EBITDA 128 149 16.4%
    EBITDA margin 11.5% 11.6%  

  • The company's operating performance has made its way back into the green in the quarter due to the restructuring. However, it is still early days to pin point steady state operating margins for the school and skill divisions.

  • At the net level, the company has posted a profit of Rs 150 m in the quarter due to the restructuring. Net margins came in at a respectable 6.4%.
What to expect?
In our 4QFY15 quarterly result update we had expressed our favourable outlook on the company in light of the restructuring. The management re-iterated the benefits of the same in the conference call post the 1QFY16 results. Understandably, they have refrained from providing any guidance on the topline as well as margins. However, the future certainly looks bright.

The corporate business continues to grow strongly. The management reiterated that this business can continue to grow 15% YoY with around 12% operating margins. The revenue visibility here stands at US$ 200 m. NIIT added 4 new clients in this quarter, one of them being one of the world's largest pharma firms. The non-IT revenues now stand at 39% of the total.

The management clarified that school subsidiary has been set up. Plans are afoot to find partners and investors for this business. 11 new private schools were added in 1QFY16. The total number of schools being served now stands at 2,738.

The skills business has surprisingly come back almost into the green earlier than expected. This was largely due to the company's asset light model achieving break-even at 38% capacity utilisation in 1QFY16. The management has stated that 75% of courses and 58% of centers are now available on the cloud via Cloud Campus.

The management has stated that the government's Skill India Mission holds huge potential. The management has set an ambitious target of training 10 m people over the next 5 years across 16 sectors

Factoring in the significantly improved fundamentals, the stock price of NIIT Ltd has seen a stunning rise recently. At current levels, the stock trades at prohibitively high valuations. We believe that most of the potential upside from the future performance has been factored in at these levels. We thus recommend investors to Sell and exit the stock of NIIT Ltd. We have explained our rationale in the MCS special report which can be accessed here.

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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