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NIIT: Uncertainty looms large

Jul 30, 2003

NIIT, Indiaís largest IT training and education company has reported poor YoY performance for 3QFY04 (ending June, 2003). While the topline growth has been a dull 4%, bottomline has taken a big hit of 79% YoY. For 9MFY04, also, the performance has been dismal. While the topline has grown a meagre 2%, bottomline has shown a growth of 58%, mainly contributed by substantial tax benefits. But for the tax benefits the bottomline growth would have been marginal.

The standalone pictureÖ
(Rs m) 3QFY03 3QFY04 Change 9MFY03 9MFY04 Change
Sales 857 890 3.8% 2,540 2,591 2.0%
Other Income 29 51 74.7% 122 136 11.5%
Expenditure 725 774 6.8% 2,198 2,231 1.5%
Operating Profit (EBDIT) 133 116 -12.8% 342 360 5.3%
Operating Profit Margin (%) 15.5% 13.0% 13.5% 13.9%
Interest 16 16 -2.5% 54 43 -20.4%
Depreciation 109 145 34.0% 323 417 29.1%
Profit before Tax 37 5 -86.7% 87 36 -58.6%
Extraordinary items 0 0 -14 0
Tax 14 - (5) (87)
Profit after Tax/(Loss) 23 5 -78.8% 78 123 57.7%
Net profit margin (%) 2.7% 0.6% 3.1% 4.7%
No. of Shares 38.7 38.7 38.7 38.7
Diluted Earnings per share* (Rs) 2.4 0.5 2.7 4.2
P/E Ratio (x) 261 31

On a consolidated basis, however, the company is back in the black in 3QFY04, after a loss in the corresponding quarter last year. Revenues have risen by a healthy 22% (YoY), mainly due to a 33% growth in the software services segment. Also, while NIITís education business continued to grow, even if at a lower pace, its product distribution & systems integrations (PD & SI) business continued to decline, thus paring topline growth.

Öand the consolidated
(Rs m) 3QFY03 3QFY04 Change 9MFY03 9MFY04 Change
Education 565 611 8.1% 2,121 2,328 9.8%
Software 964 1,279 32.7% 2,843 3,585 26.1%
PD & SI 47 31 -34.0% 246 130 -47.2%
Total revenues 1,576 1,921 21.9% 5,210 6,043 16.0%
Operating profits 186 223 19.9% 360 483 34.2%
OPM (%) 11.8% 11.6% 6.9% 8.0%
Profit after Tax/(Loss) (13) 34 - 42 151 259.5%
Net profit margin (%) -0.8% 1.8% 0.8% 2.5%

The highlight of NIITís performance (consolidated) is that its operating margins have remained almost stable for 3QFY03 and have moved up by 110 basis points for 9MFY04, due to its cost management initiatives. The operating profits for the company have thus jumped by 20% for 3QFY04.

Education business
The education business of the company continued its slow yet steady growth. On YoY basis, it grew by 8% in 3QFY04 and by 10% in 9MFY04. However, operating margins have declined by 300 basis points for the quarter. This comes in the wake of the company expanding its reach by setting up learning centres globally (China, for example). NIITís international centres increased in number from 249 in 3QFY03 to 256 in 3QFY04. Due to a decline in the number of domestic centres (from 2,445 in 3QFY03 to 2,229 this quarter), the company has witnessed a 16% decline in its number of students. They numbered 90,516 in 3QFY04. However, sequentially, there was a substantial growth of 36% in the number of NIITís students.

Volatile realizationsÖ
Unit 4QFY03 1QFY04 2QFY04 3QFY04
Revenues (Rs m) 1,210 480 559 611
Enrolements (No. of students) 132,262 145,065 66,535 90,516
Realisations (Rs per students) 9,149 3,309 8,402 6,750

In the recent past, the success of the education business has been due to NIITís initiatives on short-term specialized courses. However, the company faces tremendous competition from local institutes that are able to offer similar courses at comparatively lesser prices. But, the downturn in the education business had adversely impacted the growth of the unrecognized players in the IT education business and NIIT, thus, has been able to garner a larger share of the software education market. Also, as technical spending improves worldwide and there is greater demand for highly specialized courses, this segment is likely to be the growth driver for the company.

Software business
The software business, which caters to verticals like finance, insurance & banking, transport and retail, has been one of the major drivers for NIITís growth in this quarter. With 33% growth in revenues, this segment now constitutes around 57% of NIITís global revenues. The sequential growth also has been at a reasonable 7%. In 3QFY04, NIIT added 13 new clients for this segment and this was included in the companyís fresh order intake of around Rs 1.7 bn (US$ 36.7 m).

For its revenues, NIIT has reduced its dependence on the US markets where the revenue contribution has dropped to 50% in 3QFY04 from 56% in 3QFY03. However, contribution of the European region to NIITís revenues has increased substantially from 21% in 3QFY03 to 36% this quarter.

At the current market price of Rs 132, the stock is trading at a P/E multiple of 31x its 9MFY04 annualized earnings. Considering the Indian software sectorís average P/E of 18x, NIITís poor performance in recent times and high levels of uncertainty regarding increase in IT education spending, the valuations are highly stretched and the stock price may take a hit going forward. Also, the performance of the company has been quite volatile lately and, therefore, NIITís future lacks visibility.

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