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NIIT: Improvement continues

Jul 30, 2002

Though NIITís numbers look disappointing at first glance, a deeper analysis reveals that the companyís prospects are improving. The company has posted a 20% decline revenues for 1QFY03 and the drop in net profits has been steeper at 56%.

(Rs m) 3QFY02 3QFY03 Change
Sales 1,506 1,212 -19.5%
Other Income 50 29 -41.8%
Expenditure 1,415 1,080 -23.7%
Operating Profit (EBDIT) 91 132 45.7%
Operating Profit Margin (%) 6.0% 10.9%
Interest - 16
Depreciation 88 109 24.0%
Profit before Tax 53 36 -31.4%
Tax - 14 -
Profit after Tax/(Loss) 53 23 -57.3%
Net profit margin (%) 3.5% 1.9%
Diluted number of shares 38.7 38.7
Diluted Earnings per share* 5.5 2.3
*(annualised)
P/E (x) 57.3

Also, the company has changed the way it recognizes income. If the change in accounting is eliminated as revenues are recognized as the same way they were done a year ago, the revenues for 3QFY03 works out to be Rs 1,212 m.

This could point to improving business prospects for NIIT as in previous four quarters the company has seen a much steeper decline in revenues. Infact on a QoQ basis, the revenues in 3QFY02 (based on new accounting method) have declined by a marginal 4%. The drop in revenues also resulted in four consecutive quarters of 90% plus decline in net profits in the past. While the drop in 3QFY03 is lower at 56%, all of it is not due a bad performance. The decline in net profits is due to a significant drop in other income. Also, interest and taxes that were absent in 1QFY02 have taken a toll on the companyís bottomline.

The highlight of the performance is the fact that the companyís operating margins have moved up sharply. The company has managed to control almost all its cost heads. The operating profits for NIIT have jumped by 46%, pointing to an improvement in the business prospects of the company. In 1QFY03 the company earned 56% of the revenues from the software education business, while the remaining 44% of the revenues were from the software services.

NIITís consolidated numbers
On a consolidated basis the company recorded an 18% YoY decline in revenues. This was due to a 14% decline in the revenues from the education business and 17% decline in revenues from software services.

On a QoQ, basis the software services revenues did not show any growth. However, a 13% growth in revenues from education business caused the companyís revenues to grow by 2%. Of the total consolidated revenues 48% of the revenues came from the education business. Of the remaining 50% came from software services and 2% from systems integration and product distribution. The operating margins for all the revenue streams improved compared to 2QFY03.

Operating margins 2QFY03 3QFY03
Learning solutions 4.6% 9.7%
Software solutions 18.7% 19.3%
SI and product distribution 8.9% 23.7%
Blended operating margin 8.0% 9.6%

Education business
NIIT added 27 new international centres in 3QFY03. The total number of centres moved up to 2,537 (2,510 in 2QFY03) and the number of international centres stood at 216. The decline in registrations was for the education business was 3%. This is much lower than the decline seen in the past. The company saw a steep growth in registrations for its short-term courses that are offered under the CATS brand. Due to the slowdown in the IT industry the demand for CATS courses were the worst hit. With initial signs of revival the demand for these courses also seems to have picked up.

Though the downturn in the education business had adversely impacted NIITís numbers it has also helped NIIT consolidate garner a larger share of the software education market. With a lot of smaller brands unable to survive competition NIIT stands to gain.

Unit 2QFY02 3QFY02 1QFY03 2QFY03 3QFY03
Revenue from education business Rs m 1,595 1,066 742 814 920
Number of students Nos 68,298 111,254 159,163 106,288 108,191
Realisation per student Rs 23,354 9,582 4,662 7,658 8,503

During the quarter company bagged an Rs 1.5 bn (U$ 30 m) for providing training in 663 government schools in Andhra Pradesh. The contract translates to the fact NIIT will train 300,000 students annually. The biggest advantages is the prospective consumers in the future will be introduced the NIIT brand at a very early stage. Post the contract NIIT is now offering computer education services in about 2,000 schools and reaching out to 750,000 students.

Software business
Apart from a new brand, NIIT Technologies, the software business saw the highest order intake for the past 5 quarters. The new orders intake for the quarter was Rs 1,617 m (US$ 33 m). The company added 25 new clients during the quarter. However, the revenues for 3QFY03 were the same as that for the 2QFY03. On this count performance of the software business was disappointing. The top-rung software companies like Wipro and Infosys have shown a strong growth in revenues from the software business during the quarter.

Thus, the performance indicates the fact the prospects of the software education business seem to be improving. This is vindicated by the rise in operating margins and the realisation per student. However, the no growth from the software business is a cause for concern. Also, at the current market price of Rs 134 the stock is trading at a P/E multiple of Rs 54x its 3QFY02 annualised earnings. Considering the steep valuations, the stock price could continue heading south going forward.


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