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NIIT Limited: Back in the reckoning! - Views on News from Equitymaster

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NIIT Limited: Back in the reckoning!

Aug 29, 2005

NIIT in FY04, re-structured its two businesses of software services and education and training. The company de-merged these two businesses into separate companies with effect from April 1, 2003. All the global subsidiaries of the company were re-aligned to the respective businesses. Therefore, the subsidiaries involved primarily in the software services business (global solutions business – GSB) were aligned with NIIT Technologies Ltd (NTL), the company formed that focusses on software services, and the subsidiaries having operations primarily in the education and training business (global learning business – GLB) were aligned with NIIT Ltd. This was done in order to enable the group to focus separately on its two businesses. In this write-up, we give a perspective about NIIT Limited (NIIT), the IT education and training major, the industry and future prospects.

India’s leading IT training company

NIIT is India’s premier IT training company, with a 31% share in the Indian IT education and training market and is thrice the size of its next-largest competitor, as per IT magazine DataQuest. The company has a major presence in the fast-growing retail segment, which, by and large, caters to the staffing requirements of the Indian IT and BPO sectors. The company derives a significant share of its revenues from the international retail segment as well, being present in over 30 countries, such as Bangladesh, China, the Middle East, Turkey, Vietnam and the US. The company also operates in the institutional/government segment, where it executes projects relating to provision of IT education to schoolchildren throughout the country. Apart from the above segments, the company earns 40% of its revenues from the corporate segment, where it provides learning solutions, e-learning and content development solutions to technology and other companies mainly in the US. NIIT earned about 53% of its revenues from international operations in FY05. It is the only Indian IT training company to be ranked among the top 20 in the segment globally by IDC.

Beneficiary of recovery in the IT training market

In 2001, until the tech bubble lasted, the Indian IT training industry grew at a scorching pace. In fact, during the period FY96 to FY01, the industry grew at a CAGR of 41%. Clearly, this could not be sustained and after the bubble burst, the industry witnessed a big slump. From FY01 to FY04, industry revenues declined at a CAGR of 24%. The result was that, at the end of FY04, the IT training market had a size of Rs 11.6 bn, less than half its size of Rs 25.9 bn in FY01.

During this period, the industry witnessed a period of consolidation. The fringe players or ‘fly-by-night’ operators either went bust or were acquired by larger players. Thus, the major companies, which were in this business for the long term, such as NIIT and its arch-rival Aptech, survived the downturn and got back into the reckoning. In FY05, the IT training industry grew for the first time since FY01. The industry grew at 10% to Rs 12.7 bn. This is now expected to be more sustainable as the industry has now matured and is oligopolistic in nature, with the top players commanding over half the market share.

NIIT, being the market leader, has benefited from this upturn in the industry. In fact, in FY05, the company grew revenues at a slightly faster pace than the industry growth at 11%. Going forward, given strong hiring plans of software majors, increasing hiring of non-engineers and diploma holders by IT companies for services like testing, the government’s commitment to IT literacy and strong growth of the corporate business, NIIT, being the market leader, seems poised to reap the benefits of the upturn in the industry.

Major segments

Individual segment - Strong retail presence

NIIT has a strong presence in the fast-growing retail segment of the industry. This segment, by and large, caters to the staffing requirements of IT and BPO industries. Thus, NIIT serves in an upstream industry to the IT and BPO sectors in the country, providing them with crucial human resources. This segment is expected to be the major growth driver for NIIT, going forward. The ‘Careers’ segment, which includes the company’s flagship GNIIT course (FUTURZ) as well as training on advanced technologies (CATS) is expected to lead the growth in the retail segment. In 1QFY06, this segment grew revenues at a rate of 26% YoY.

NIIT also earns around 25% of its revenues from the international retail segment. The company is present in geographies such as Bangladesh, China, the Middle East, Turkey and Vietnam. However, in this segment, China is expected to be the major growth driver for the company. In fact, in 1QFY06, China grew by 40% YoY and contributed 8% to total system-wide revenues.

Institutional segment

NIIT also executes IT literacy projects for the government. With its focus on IT literacy for schoolchildren through the ‘Sarva Shiksha Abhiyan’, the government invites bids for the provision of IT education in schools in various states. The budget for this initiative is Rs 47.5 bn in FY06. This will thus prove to be the main driver for business for this segment for NIIT. However, this segment is highly competitive, with players like Aptech, SSI and Tata Infotech also in the fray. Therefore, the bargaining power of the institutional business is low for NIIT and as a result, margins tend to be on the lower side. Another point about this business is that the government tends to take long to make decisions, as numerous approvals and grants need to be made before anything concrete is finalised. Thus, order books in this business could tend to be a little lumpy in nature. These contracts are generally awarded for a period of four to five years and hence, when such contracts are won by NIIT, they tend to add a little bit of stability to revenues.

Corporate segment

NIIT provides corporate training, e-learning and content development solutions to technology and other corporates through this segment. This business is similar to the software services business. It also has a lot of offshore capability, as content development solutions can be serviced in India for corporates abroad. This business is almost entirely based in the US. Margins are generally higher in this business. Repeat business also tends to be good, as corporates give NIIT smaller orders initially and if they are satisfied with their services, give a greater amount of business. This is largely an order book-driven business.

What about the competition?

NIIT is the market leader in India, with a 31% share, as per DataQuest magazine. Aptech is the next-largest player, with just an 11% share. Therefore, NIIT is well ahead of its major competitor. The company has a presence throughout the country, with over 750 retail centres. It is particularly strong in the highly profitable metro/urban areas, where realisations tend to be higher. Even NIIT’s institutional business is more than double the size of Aptech. Therefore, as can be seen, NIIT clearly comes out on top vis-à-vis the competition.

So, how does the future look?

NIIT is a market leader in a mature industry. The large number of centres in the country, coupled with its strong brand name and reach serve as potential entry barriers to competitors. Given the high employment potential in the Indian IT and BPO sectors and NIIT’s dominance in the retail segment, prospects appear strong. The corporate segment is also showing good traction and NIIT plans to diversify out of the US into the UK in FY06. This is a good sign. We believe that NIIT will be the foremost beneficiary of the upturn in the IT training industry and that this upturn will be more sustainable than the previous one.

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