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NIIT Ltd: A muted start to FY15 - Views on News from Equitymaster
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NIIT Ltd: A muted start to FY15
Jul 24, 2014

NIIT Ltd has announced its first quarter results for 2014-2015. The company's net sales have increased by 1.4% YoY. While the net profit, has come in at Rs 6 m for the quarter.

Performance summary
  • Consolidated net sales increased marginally by 1.4% YoY. The continued pressure on the individual learning business was largely responsible for the rather flat topline performance.
  • Operating margins firmed up by 1% on a YoY basis during 1QFY15 to come in at 5.7%. The operating profit increased by 23.1% YoY.
  • At the bottomline, the company's pre-tax loss reduced significantly on a YoY basis. However, the company's reported bottomline numbers continue to depend a lot on the share of profits from the associate, NIIT Technologies. The net profit came in at Rs 6 m for the quarter.

Consolidated financial snapshot
(Rs m) 1QFY14 1QFY15 Change
Sales 2,222 2,253 1.4%
Expenditure 2,118 2,125 0.3%
Operating profit (EBITDA) 104 128 23.1%
Operating profit margin (%) 4.7% 5.7%  
Other income/(expense) (81) (35)  
Depreciation 210 171 -18.6%
Profit before tax  (187) (78)  
Tax  33  19 -42.4%
Profit after tax/(loss)  (220) (97)  
Share of associates' net profit  128 103 -19.5%
Net profit after tax/(loss) (92) 6  
Net profit margin (%) -4.1% 0.3%  
No. of shares (m)   165.1  
Diluted earnings per share (Rs)*    1.7  
P/E ratio (x)*   28.5  
* Trailing 12 months basis

What has driven performance in 1QFY15?
  • Sales were up by 1.4% YoY. The muted growth was largely due the company's core individual learning business which contracted by 23.4% YoY.

  • The School learning solutions (SLS) business was also under pressure in the quarter. Sales from this division fell 7.1% YoY. The contribution from non-government schools has increased from 50% in 1QFY14 to 62% in 1QFY15.

  • The corporate learning solutions (CLS) business continued its robust performance. This segment grew by 31.9% YoY while operating profit from this segment increased by 42.2% YoY.

  • The contribution from associate company NIIT Technologies was Rs 103 m for the quarter which helped the company post a marginal profit of Rs 6 m. Without this contribution the company's registered a loss at the bottom line of Rs 97 m.

    Segment wise performance
    (Rs m) 1QFY14 1QFY15 Change
    Individual learning business
    Net Revenue 948 726 -23.4%
    EBITDA 5 1 -80.0%
    EBITDA margin 0.5% 0.1%  
    School learning solutions
    Net Revenue 424 394 -7.1%
    EBITDA 32 22 -31.3%
    EBITDA margin 7.5% 5.6%  
    Corporate learning solutions
    Net Revenue 844 1,113 31.9%
    EBITDA 90 128 42.2%
    EBITDA margin 10.7% 11.5%  
    Skill Building solutions
    Net Revenue 6 19 216.7%
    EBITDA (23) (23)  
    EBITDA margin N.A  N.A  

  • At the operating level, the company's performance continued to improve. Operating expenditure increased by just 0.3% YoY, lower that the growth in sales. Thus the operating profit saw a jump of 23.1% YoY. The operating margin for 1QFY15 was 5.7%.

  • The bottom line continued to depend on the share of profit from associate NIIT technologies to remain in the green. However, this dependence is clearly reducing as the company's fundamentals continue to improve.
What to expect?
At the current price of Rs 47.3, the stock is trading at 28.5 times its trailing twelve months (TTM) earnings.

The company's fundamentals continue to improve. This is quite evident in the margin improvement. However, for topline growth to return, all of the company's business divisions will have to fire. Currently it is only the corporate training division that has sustained the company.

The management believes that the school learning division is finally picking up. The percentage of revenue from non-government schools (in this division) has reached 62%. The company had stopped taking on government school contracts last year. These contracts are long term (5 years) in nature and are plagued with payment issues. As these are wound down and the contribution of revenues from private schools increases, the company's margins will improve further.

The biggest concern remains the individual learning division. The NIIT Cloud Campus has already been rolled out but the benefits will be seen only over the coming years as enrollments pick up. In the short term, revenues from this division will continue to be under pressure.

In the month of June 2014 the stock had breached our target price of Rs 52. However, we had recommended investors hold on to the stock in the MCS special report keeping in mind the improving fundamentals of the company. We have revised our FY17 financial estimates for the company. Our revised target price for the stock stands at Rs 60. As we had mentioned in the performance review of the July MCS report we may revise our target price further if the company's profitability continues to improve. As of now, we re-iterate our 'hold' view on the stock.

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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