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NIIT Ltd.: First half hit by a weak job market - Views on News from Equitymaster

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NIIT Ltd.: First half hit by a weak job market

Oct 26, 2009

Performance summary
  • Revenue grows by 38% QoQ during 2QFY10. This happened on account of recovery in school learning solutions business which grew by around 145% QoQ during 2QFY10.
  • Operating margins expand by 2.6% QoQ during the quarter.
  • Net profits rise by 165% QoQ during the quarter, on back of improved volumes and lower hedging losses coupled with better performance of the subsidiaries.
  • Performance during 1HFY10 remains muted (owing to a weak 1QFY10), as sales grow by a marginal 9% YoY while profits decline by 23% YoY.


(Rs m) 1QFY10 2QFY10 Change 1HFY09 1HFY10 Change
Sales 2,610 3,589 37.5% 5,690 6,199 8.9%
Expenditure 2,324 3,102 33.5% 5,097 5,426 6.5%
Operating profit (EBITDA) 286 487 70.3% 593 773 30.4%
Operating profit margin (%) 11.0% 13.6%   10.4% 12.5%  
Other income/(expense) (101) (78)   26 (179)  
Depreciation 168 189 12.5% 272 357 31.3%
Profit before tax 17 220 1194.1% 347 237 -31.7%
Tax (26) 39   58 13 -77.6%
Profit after tax/(loss) 43 181 320.9% 289 224 -22.5%
Share of associates' net profit 56 81 44.6% 177 137 -22.6%
Net profit after tax/(loss) 99 262 164.6% 466 361 -22.5%
Net profit margin (%) 3.8% 7.3%   8.2% 5.8%  
No. of shares (m) 164.7 164.7   164.7 164.7  
Diluted earnings per share (Rs)*   4.4   6.4 4.0  
P/E ratio (x)*   15.5     17.2  
* Trailing 12 months basis

What has driven performance in 2QFY10?
  • NIIT recorded a 38% QoQ growth in net sales during 2QFY10 on account of good performances in its school learning solutions and individual learning solutions (ILS-IT) businesses. These grew by 145% and 53% QoQ respectively during the quarter, on back of aggressive action in India and emerging economies.

  • NIIT’s ‘Individual Learning Solutions’ segment (ILS-IT which is 36% of the total sales) registered a robust growth of 53% QoQ on back of increased traction from Indian and Chinese markets. During the quarter, overall enrollments fir ILS segment grew by 8% QoQ, with 15% for ‘Edgineers’ and 43% for ‘IMS’. NIIT’s placements grew by 45% YoY.

  • NIIT’s ‘School Learning Solutions’ segment, which accounted for 24% of total sales during the quarter, witnessed a stellar growth of 145% QoQ. This was largely on account of timely and successful execution of a large government contract covering around 3,500 schools. This segment registered a pending order book of Rs 3,188 m out of which 32% is executable within the next 12 months. The interactive classroom product ‘E-Guru’ added 82 private schools in 2QFY10.

    Segment-wise revenue breakup
    (Rs m) 1QFY10 2QFY10 Change
    Individual learning business (IT)      
    Net Revenue 856 1,311 53.2%
    Operating profit 160 354 121.3%
    Operating profit margin 18.7% 27.0%  
    School learning solutions      
    Net Revenue 359 878 144.6%
    Operating profit 66 78 18.2%
    Operating profit margin 18.4% 8.9%  
    Corporate learning solutions      
    Net Revenue 1,345 1,345 0.0%
    Operating profit 102 106 3.9%
    Operating profit margin 7.6% 7.9%  
    Finance & Management training
    (ILS-New Businesses)
         
    Net Revenue 50 63 26.0%
    Operating profit - (43)  
    Operating profit margin 0.0% -68.3%  

  • NIIT’s ‘Corporate Learning Solutions’ (CLS) segment which contributes over 37% of its topline, remained flat during 1QFY10. This was due to continued weakness in corporate spending globally. Nevertheless, the company managed to efficiently rationalise costs for the segment, resulting in a 4% growth at the operating profit level. The order intake for the segment stood at US$ 31 m.

  • Revenue from the new businesses segment (2% of the total revenues) catering to long-duration courses in banking and financial services grew by 26% during 2QFY10. NIIT saw 24% and 60% QoQ increase in enrollments for banking and BPO training courses respectively.

  • NIIT’s operating margins expanded by 2.6% QoQ on account of better working capital management and reduction in discretionary spending. Wage moderation and higher utilisation further boosted the margins.

  • NIIT recorded a substantial 165% QoQ surge in net profits during 2QFY10. This can be attributed to improved volumes and lower hedging losses coupled with better performance of the subsidiaries.

What to expect?
At the current price of Rs 68, the stock is trading at a multiple of 17.2 times its trailing 12 months earnings, which makes it overvalued. The management has acknowledged that there are indications that the worst is over for the business, with global IT spending slated to increase by 3.3% in 2010 coupled with an improved employment outlook in India. However, it remains cautious about the short-term prospects of hiring in IT and BFSI, delays in government decision-making, weak consumer sentiment, and restricted IT spending on training by corporates.

Nevertheless, the management expects continuous improvement in traction for its ILS-IT offering particularly in training for ERP and IBM technologies. Similarly it remains confident for growth in school learning solutions on account of strong order book of government and private schools. It expects further margin improvement for its corporate learning solutions.

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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