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NIIT: Buying growth

Sep 18, 2002

NIITís troubleís started with the slowdown in the IT services industry in 4QFY01. With lesser jobs available, the optimism towards IT as a career subsided. Consequently, IT education companies witnessed a sharp decline in business. The decline was so steep that NIIT for four consecutive quarters of posted a 85% plus decline in net profits (YoY). However, companyís IT training business has shown signs of improvement since, 2QFY03 (quarter ended March 2002). Better realisations per student, improving operating margins and an increase in the number of students may indicate a nascent turnaround in the fortunes of the education business. But over all this division suffers due to a global slowdown in the software services sector at large.

Decline in net profits YoY Jun 01 Sep 01 Dec 01 Mar 02 Jun 02
NIIT -93.20 -86.20 -88.40 -95.80 -57.30

The software business did not fare any better. The revenues from software services have stagnated for sometime now and this has been a disappointment as the sector itself grew by 22% in FY02. Thus, a stagnant topline is currently the biggest concern for the company, which has prompted moves to grow inorganically. NIIT is on an aggressive acquisition spree and the companyís acquisitions are not only limited to the software sector but also in the IT learning sphere. The acquisitions will the help the company broaden it portfolio of offerings and get an existing customer base.

Company Date Realtionship Benefits
Data Executives International May-02 Acquisition

Entry in to the Finance and Insurance industry
IT consultancy business

Osprey Systems Mar-02 Acquisition

Entry in to SAP consulting, implementation,
integration, maintenance, training and full
life cycle solutions buisness.

Click2learn Jan-02 Strategic alliance

Joint development of e-learning and knowledge solutions.

CoKinetic Corporation Oct-01 Strategic alliance

Provides new business opportunities in
applications development and integration space

The reason for the companyís revenues from the software business stagnating was its focus on emerging technologies and the fact that it did not have expertise in the area like legacy systems. With clients choosing to focus on getting the most out of existing IT systems and deferring new development, NIITís revenues took a hit. The change in focus from areas will help the company gain a foothold in high growth potential verticals like BFSI (banking, financial services and insurance) and package implementation.

NIITís recent acquisitions in the software services sector include Osprey Systems and DEI (Data Executives International). While Osprey is a full life cycle SAP application provider, DEI is a provider of mission critical life insurance and underwriting, application solutions. The US based firm is also into strategic consulting services. With the Osprey acquisition the company intends to enter in to the high growth package implementation market where companies like Infosys and Satyam have shown strong growth in the recent past. The DEI acquisition will help the company focus its attention towards the BFSI, which are a major chunk of Indian software exports (22%).

The strategic alliance with Click2learn will help the company enter in to the highly lucrative corporate IT learning and knowledge management markets. The markets for knowledge management solutions (for corporates) are expected to grow to over Rs 180 bn by the year 2003. NIITís advantage is that is has been in the education business, which is very similar in nature for a long time and therefore, it can draw from its expertise for providing knowledge management solutions. As per, terms of the alliance with Click2Learn (a providers of enterprise learning platforms), the companies will jointly develop e-learning and knowledge solutions for the marketplace using. Click2learn's Aspen platform and NIIT's knowledge services. The deal is expected to earn US$ 15 m (Rs 720 m) over the next two years. The companyís alliance with CoKinetic Corporation will help it gain new business opportunities in applications development and integration space.

NIIT is the countryís largest IT training company with a significant global presence (2,537 centers including 216 international centers). The company is slowly changing the focus of its business and concentrating more on the software services sector though not losing focus of its core business of IT training. Currently, it is the seventh largest software exporter in the country. NIIT has been severely affected by the slowdown in the software services sector, but its certain advantages like size and being the strongest brand in the IT education industry. This suggests that it could be one of the biggest benefactors of a turnaround in the software industry. The companyís foray in to new business areas and regions like China and Latin America is expected to improve its topline, that apart improving business environment could ease the pressure on margins for both the divisions. These together may suggest better days ahead.

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