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NIIT Ltd.: Margins, profits take a hit - Views on News from Equitymaster
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NIIT Ltd.: Margins, profits take a hit
Jul 21, 2010

NIIT has announced its 1QFY11 results. The company has reported 5% QoQ decline in sales and a 47% QoQ decline in net profits. Here is our analysis of the results.

Performance summary
  • Sales decline by 5% QoQ during the quarter mainly due to a 21% QoQ decline in sales from 'individual learning solutions' business. However, the pending order book in this segment increased by 21% QoQ.
  • Operating margins decline by 6% QoQ mainly on account of increase in headcount and rental costs during the quarter. This was compounded by adverse currency movements.
  • Net profits decline by 47%% QoQ due to lower sales and weaker margins. NIIT had a tax gain during the quarter that helped in offsetting the steep decline in net income.
  • Added 235 employees during the quarter taking the total headcount to 3,720.

Consolidated financial snapshot
(Rs m) 4QFY10 1QFY11 Change
Sales 2,950 2,780 -5.8%
Expenditure 2,474 2,493 0.8%
Operating profit (EBITDA) 476 287 -39.7%
Operating profit margin (%) 16.1% 10.3%  
Other income/(expense) (57) (74) 29.8%
Depreciation 195 203 4.1%
Profit before tax 224 10 -95.5%
Tax 80 (15) -118.8%
Profit after tax/(loss) 144 25 -82.6%
Share of associates' net profit 104 105 1.0%
Net profit after tax/(loss) 248 130 -47.6%
Net profit margin (%) 8.4% 4.7%  
No. of shares (m)   165.1  
Diluted earnings per share (Rs)*   4.4  
P/E ratio (x)*   15.9  
* Trailing 12 months basis

What has driven performance in 1QFY11?
  • NIIT recorded a 6% QoQ decline in net sales during the quarter. This was mainly due to a decline in sales from the 'individual learning solutions' business and the 'corporate learning solutions' business. These declined by 21% QoQ and 1% QoQ respectively. The 'school learning solutions' business reported a strong growth of 20% QoQ during the quarter.

  • NIIT's 'individual learning solutions' saw an 8% growth in global enrolments and a 14% growth in Indian IT enrolments. The pending order book executable over next 12 months for this segment stands at Rs 1,185 m. The increase in headcount and rental costs as well as adverse currency movements impacted the margins of this business which declined by 8% QoQ.Going forward the management will focus on SAP, ERP training and infrastructure management. It expects a margin expansion due to improved leverage as well as fee increase that NIIT made during the quarter.

  • NIIT's 'School Learning Solutions' segment (SLS) , which accounted for 14% of total sales during the quarter, witnessed a significant growth of 20% QoQ during the quarter. During the quarter, it received a new order from the Government of Maharashtra for 1,013 schools. It added 218 non-Government schools during the quarter. This segment registered an increased pending order book of Rs 4,518 m out of which 30% is executable within the next 12 months.

  • NIIT's 'Corporate Learning Solutions' (CLS) segment which contributed around 50% of its sales, remained subdued on account of continued weakness in corporate spending on training globally. Sales fell by 1% QoQ. Sales decline would have been worse had it not been for a surge in the growth of volumes from the US, which grew by 11%. The growth was mitigated by adverse exchange rate movements. NIIT will focus on training development. During this quarter, they added a new contract from Europe for training outsourcing. The benefit of this will be visible in the quarters to come. Pending order book stood at US$ 93 m, with around 56% executable in the next 12 months.

  • Revenue from the new businesses segment (4% of the total revenue) catering to long-duration courses in banking and financial services grew by 20% QoQ during 1QFY11. The FMT (finance & management training) enrolments grew signaling an accelerated hiring in the banking sector. Around 4 more placement clients were added during the quarter including United Bank of India, Barclays, CAMS, and Central Bank of India. During the quarter, the company also tied up with IGNOU for offering Executive MBA through the 'Imperia' platform. Total number of placement partners reached 28.

    Segment-wise revenue breakup
    (Rs m) 4QFY10 1QFY11 Change
    Individual learning business (IT)      
    Net Revenue 1,144 908 -20.6%
    Operating profit 282 151 -46.5%
    Operating profit margin 24.7% 16.6%  
    School learning solutions      
    Net Revenue 321 384 19.6%
    Operating profit 74 64 -13.5%
    Operating profit margin 23.1% 16.7%  
    Corporate learning solutions      
    Net Revenue 1,393 1,377 -1.1%
    Operating profit 141 109 -22.7%
    Operating profit margin 10.1% 7.9%  
    Finance & Management training (ILS-New Businesses)      
    Net Revenue 92 110 19.6%
    Operating profit (22) (36)  
    Operating profit margin -23.9% -32.7%  

  • NIIT's operating margins declined by 6% QoQ due to higher employee related and rental costs. This was compounded by adverse currency movements during the quarter.

  • NIIT's net profits declined by 47% mainly due to lower operating margins and higher other expenses. The decline would have been worse had it not been for the tax gain of Rs 15 m during the quarter.

What to expect?
At the current price of Rs 71, the stock is trading at a multiple of 11.6 times our estimated FY11 earnings. The management expects growth in all of its segments going forward. With growth in volumes and higher realizations per student, it expects margins to improve as well. For the ILS segment, the management expects revenues to grow by 10-12% for the whole year FY11. This is however dependant on the number of students added on GNIIT. The realization per student is expected to increase as NIIT has raised its fee for GNIIT by 14% which will help to improve the overall margins by 1-1.5% for FY11.

For the CLS business, the management expects the volume growth to continue from the US. The company has received two big orders on training outsourcing from Europe as well. The management expects margins to increase by 1-1.5% for FY11. This is subject to currency remaining at current levels.

We had recommended a 'Buy' on the stock in December 2008 and the target price has already been breached. At the current levels, we have a cautious view on the stock

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