NIIT Ltd.: Schools business hits margins - Views on News from Equitymaster

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NIIT Ltd.: Schools business hits margins

Oct 25, 2010

NIIT has announced its 2QFY11 results. The company has reported 4% YoY decline in sales and 11% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Sales decline by 3.9% YoY during the quarter mainly due to the absence of the one-time revenue from the schools business that was seen last year.
  • Operating margins improved by 1.6% YoY mainly on account of better margins from individual learnings solutions as well as the corporate learnings solutions businesses.
  • Net profits grew by 10.9% YoY due to higher operating margins as well as higher other income during the quarter.
  • Added 154 employees during the quarter taking the total headcount to 3,874.

Consolidated financial snapshot
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales 3,598 3,458 -3.9% 6,199 7,056 13.8%
Expenditure 3,102 2,926 -5.7% 5,426 6,028 11.1%
Operating profit (EBITDA) 496 532 7.3% 773 1,028 33.0%
Operating profit margin (%) 13.8% 15.4% 1.6% 12.5% 14.6%  
Other income/(expense) (78) (99)   (179) (177)  
Depreciation 203 216 6.4% 357 419 17.4%
Profit before tax 215 217 0.9% 237 432 82.3%
Tax 39 37   13 76 484.6%
Profit after tax/(loss) 176 180 2.3% 224 356 58.9%
Share of associates' net profit 81 105 29.6% 137 186 35.8%
Net profit after tax/(loss) 257 285 10.9% 361 542 50.1%
Net profit margin (%) 7.1% 8.2%   5.8% 7.7%  
No. of shares (m) 165.1 165.1   164.7 165.1  
Diluted earnings per share (Rs)*         5.3  
P/E ratio (x)*         12.8  
* Trailing 12 months basis

What has driven performance in 2QFY11?
  • NIIT recorded a 4% YoY decline in net sales during the quarter. This was mainly due to the absence of the one-time revenue in the ‘schools learning business’ seen last year. The ‘individual learning solutions’ business and the ‘corporate learning solutions’ business witnessed growth of 13% YoY and 43% YoY respectively during the quarter.

  • NIIT’s ‘individual learning solutions’ saw a 5% growth in global enrolments and a 9% growth in Indian IT enrolments. The pending order book executable over next 12 months for this segment stood at Rs 1.4 bn at the end of the quarter. Its margins improved slightly to 27.5% during the quarter as compared to 27% during 2QFY10. Going forward, the management is looking to focus on SAP, ERP training and infrastructure management. The ‘99 days’ diploma programme has driven the growth in enrollments during the quarter. This is expected to continue in the quarters to come.

  • NIIT’s ‘School Learning Solutions’ segment (SLS) , which accounted for 10% of total sales during the quarter, witnessed a significant decline of 59% YoY. This was mainly due to the absence of the one-time revenue received during the same period last year. Even if the one-off revenue is removed, sales were still weak during the quarter. This was due to slower decision making, delay in implementation of ICTES schools by the government and delay in releasing of money by state governments. These led to lower margins for the business which declined by 0.3% YoY during the quarter. Margins were also negatively impacted by the higher selling costs during the quarter which was due to the shift of focus towards the private schools. It added 132 non-Government schools during the quarter. This segment registered an increased pending order book of Rs 4.6 bn out of which 30% is executable within the next 12 months. NIIT’s private schools business has seen positive momentum and will remain a key focus area going forward. For government schools, the company is looking to adopt a diligent approach on how to work with the different state governments. However, due to the shift in focus, there would be a negative impact on the business in the short term.

  • NIIT’s 'Corporate Learning Solutions' (CLS) segment which contributed around 43% of its sales, witnessed a 11% YoY growth during 2QFY11. This was due to the growth in volumes in the business. The margins improved by 0.3% YoY despite the adverse currency movements during the quarter. Going forward, the management expects volume growth for the full year to be better than previously estimated. On constant currency terms, the management expects the full year margins from the business to improve by 1%. Pending order book stood at US$ 92 m, with around 57% executable in the next 12 months.

  • Revenue from the new businesses segment (4% of the total revenue) catering to long-duration courses in banking and financial services had a strong growth during the quarter. The FMT (finance & management training) enrolments grew, signaling an accelerated hiring in the banking sector. Although the business still makes losses, total losses as a percentage of total revenues came down during 2QFY11.

    Segment-wise revenue breakup
    (Rs m) 2QFY10 2QFY11 Change
    Individual learning business (IT)      
    Net Revenue 1,311 1,475 12.5%
    Operating profit 354 406 14.7%
    Operating profit margin 27.0% 27.5%  
    School learning solutions      
    Net Revenue 878 360 -59.0%
    Operating profit 78 31 -60.3%
    Operating profit margin 8.9% 8.6%  
    Corporate learning solutions      
    Net Revenue 1,345 1,487 10.6%
    Operating profit 106 122 15.1%
    Operating profit margin 7.9% 8.2%  
    Finance & Management training
    (ILS-New Businesses)
    Net Revenue 63 136 115.9%
    Operating profit (43) (27)  
    Operating profit margin -68.3% -19.9%  

  • NIIT’s operating margins improved 1.6% YoY during the quarter. This was due to lower operating expenses s percentage of sales.

  • NIIT’s net profits increased by 11% YoY during the quarter, due to higher operating income as well as higher share of profits from the associates.

What to expect?
At the current price of Rs 68, the stock is trading at a multiple of 11.2 times our estimated FY11 earnings. The management expects growth in all of its segments to pick up going forward. With growth in volumes and higher realizations per student, it expects margins to improve going forward. The management has maintained its full year guidance that was given during the last quarter. At the current levels, we have a cautious view on the stock.

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