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NIIT Ltd.: Weak job market hits business - Views on News from Equitymaster
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NIIT Ltd.: Weak job market hits business
Jul 30, 2009

Performance summary
  • Revenue declines by 13% QoQ during 1QFY10. This is largely on account of weak sentiment in the IT job market, thereby resulting in lower volumes. On a YoY basis, revenue has grown by 1%.
  • Operating margins contract by 1.1% QoQ during the quarter. However on a YoY basis, margins expand by 4% mainly due to better management of costs, and change in overall service mix.
  • Net profits decline by 44% QoQ during the quarter, impacted by hedging losses to the tune of Rs 108 m, together at the standalone and share of associate profits level. Excluding the hedging losses, net profits would have grown by 16% QoQ.


Consolidated financial snapshot
(Rs m) 4QFY09 1QFY10 Change
Sales 3,008 2,610 -13.2%
Expenditure 2,644 2,324 -12.1%
Operating profit (EBITDA) 364 286 -21.4%
Operating profit margin (%) 12.1% 11.0% 1.1%
Other income/(expense) (35) (101)  
Depreciation 191 168 -12.0%
Profit before tax 138 17 -87.7%
Tax 40 (26)  
Profit after tax/(loss) 98 43 -56.1%
Share of associates' net profit 80 56 -30.0%
Net profit after tax/(loss) 178 99 -44.4%
Net profit margin (%) 5.9% 3.8%  
No. of shares (m)   164.7  
Diluted earnings per share (Rs)*   4.2  
P/E ratio (x)*   14.7  
* Trailing 12 months basis

What has driven performance in 1QFY10?
  • NIIT recorded a 13% QoQ decline in net sales during 1QFY10 on account of weak sentiment in the job market, particularly due the hiring freeze in the IT sector. The company’s ‘Individual learning solutions’ business, which contributes around 33% of the revenue, saw a decline of 17% QoQ due to weak traction during April and May. During the quarter, overall enrollments grew by 6% QoQ, largely due to a strong performance in the month of June.

  • NIIT’s ‘School learning solutions’ segment, which accounted for 14% of total revenue, witnessed a decline of 19% QoQ during 1QFY10. However on the YoY basis, this segment registered a robust growth of 43% led by fresh order intake of Rs 1,075 m from government and non-government schools. The interactive classroom product “E-Guru” gained further traction.

    Segment wise performance
    (Rs m) 4QFY09 1QFY10 Change
    Individual learning business (IT)      
    Net Revenue 1,035 856 -17.3%
    Operating profit 237 160 -32.5%
    Operating profit margin 22.9% 18.7%  
    School learning solutions      
    Net Revenue 442 359 -18.8%
    Operating profit 80 66 -17.5%
    Operating profit margin 18.1% 18.4%  
    Corporate learning solutions      
    Net Revenue 1,481 1,345 -9.2%
    Operating profit 95 102 7.4%
    Operating profit margin 6.4% 7.6%  
    Finance & Management training (ILS-New Businesses)      
    Net Revenue 50 50 0.0%
    Operating profit (48) -  
    Operating profit margin -96.0% 0.0%  

  • NIIT’s ‘Corporate learning solutions’ (CLS) segment which is a major business area (52% of the revenue) saw its sales decline 9% QoQ during the quarter. This was due to decrease in corporate orders globally. However, leveraging the non-linear aspect of the business, the company efficiently rationalised cost for the segment, which resulted in a 7.4% growth in operating profits. Addition of 17 new customers and better than expected performance from IT organisations, indicates a pickup in traction, going forward.

  • Revenue from the new businesses segment catering to long-duration courses in banking and financial services remained flat during 1QFY10. By efficiently managing the cost, the company managed to break-even in this segment, which is still in the nascent stage.

  • NIIT’s operating margins contracted by 1.1% QoQ but improved by 4% YoY. Operating profits grew 53% YoY on account of focused cost containment measures across all business segments.

  • NIIT recorded a 44% QoQ decline in net profits during 1QFY10. This can be attributed to contraction in topline, and huge amount of hedging losses due to currency volatility. Excluding the forex losses, the bottomline grew decently by 16%.

What to expect?
At the current price of Rs 60, the stock is trading at a multiple of 14.7 times its trailing 12 months earnings, which makes it overvalued. The performance during the quarter remained muted, plagued by the weak sentiments in the job market with continued freeze on hiring by major IT companies. The company’s management sounded caution about the ongoing sluggish environment and continued to prune cost to the level of operations. However, going forward, revival can be seen on account of increased governmental focus on education and skill development. The company continues to bet on India, on account of stable government and 20% higher allocation to education in the latest budget. The company also sees a lot of traction building up in the Chinese market. With the early signs of revival in the IT sector, and expected recovery in the global job markets by the end of this fiscal year, the management continues to follow an aggressive strategy towards gaining market share in select products and driving growth through Intellectual Property (IP) based products which now account for 41% of the company’s revenue.

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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