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NIIT Ltd.: Betting big on educating India - Views on News from Equitymaster
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NIIT Ltd.: Betting big on educating India
Sep 11, 2009

We recently met the management of NIIT Ltd to discuss the current business environment and various developments taking place within the company and their views on education and specifically IT-training sector. Here are the key takeaways from the same. Company background
NIIT is a leading provider of training solutions in IT, BPO, Banking, Finance and Insurance, Executive Management Education, and Communication and Professional Life Skills domains. The four major lines of business are Individual Learning Solutions for IT (ILS-IT) for IT skill development for individuals, Corporate Learning Solutions (CLS) for training corporate professionals, School Learning Solutions (SLS) and Financial and Management training (ILS-New businesses). The company is a leader in best-in-class IT-content development and has a major focus on ‘instructor-independent, quality content deployment'.

Key takeaways from the research meeting
Business environment: There's no opposing the impact of global economic crisis on businesses, big and small, around the world. NIIT's management acknowledged that the crisis impacted all businesses resulting in a weak recruitment scenario during FY09. As the job market and corporate IT budgets were beaten out of shape, the company's business was also impacted. However, the skill-development sector remained by far less impacted by the crisis, and business kept coming from schools and other educational institutes segment.

On competition: The management appeared quite confident of NIIT's unique value proposition and its leadership in the IT training domain. It believes its competitors lost a lot of market share to NIIT during the dotcom burst and never regained the strength thereafter. Domestic training firms like Aptech and Educomp, though good in some niche domains, are nowhere close to NIIT's overall dominance. The management attributed a large part of this to NIIT's strategy of investing in advertising and brand building during downturns. Also, a very high standard of selecting and dealing with its franchisees strengthened the NIIT brand.

On FY09 performance: Companies, particularly in the IT industry, slashed their bench strength as well as training budgets during FY09, which impacted NIIT's ILS-IT as well as CLS businesses. Positive fallout of the crisis for NIIT was that corporates looked for ‘job-ready' professionals, which resulted in increase in NIIT's placements as firms recruited directly from the company's centres. There was also a surge in the enrollment for short-term courses on this account. By the very nature of the business, the SLS segment remained immune to the economic vagaries. What is more, the Indian government's emphasis on newer models like public-private partnership to revamp Indian education system has helped NIIT in reaching out to more public and private schools. NIIT's ILS-New Businesses segment pertaining to financial and management training was dented by a soft-job market in the banking and financial services sector. All these factors resulted in muted performance for the company during FY09.NIIT's sales growth for FY09 was 14% YoY, while its margins remained flat, with net profits declining.

Expansion plans: NIIT aims to focus on an IP-led growth, which will entail focus on e-learning solutions for corporate and schools. In due course of time, it plans to venture into non-IT training like healthcare and retail. However, the company has no inorganic plans at present.

Management's guidance for FY10: Though the management remains cautious about the slow pace of recovery in the US and Europe, it sees a lot of traction coming from India, Japan and Africa. It expects a growth of 10% YoY in sales during FY10, which coupled with strict cost-containment measures, should result in a margin expansion of around 1%.

What to expect?
At the current price of Rs 70, the stock is trading at a multiple of 11.5 times our estimated FY11 earnings. NIIT's performance during FY09 as well as 1QFY10 has been muted, plagued by the weak sentiment in the job market with continued freeze on hiring by major IT companies. However, going forward, revival can be seen on account of increased government focus on education and skill development. The company continues to bet on India's education sector on account of a stable government and 20% higher allocation to education in the latest budget.

NIIT also sees a lot of traction building up in the Chinese and African markets for IT training. 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. We shall soon update our view on the stock.

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