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NIIT: Software services shine…

Oct 27, 2003

NIIT, India’s largest IT education and training company, has reported a 4.5% and 348% rise in its topline and profits, respectively, for 4QFY04. For FY04 (NIIT is a September ending company), while the rise in revenues has been almost similar to 4QFY04, profits have risen by 98%. The substantial gains in profitability were a result of improvement in operating margins as well as tax benefits (deferred tax assets).

The standalone picture...
(Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
Sales 985 1,029 4.5% 3,499 3,645 4.2%
Other Income 26 43 66.1% 173 170 -1.6%
Expenditure 897 898 0.1% 3,095 3,147 1.7%
Operating Profit (EBDIT) 87 131 49.3% 404 498 23.4%
Operating Profit Margin (%) 8.9% 12.7%   11.5% 13.7%  
Interest 15 19 30.1% 69 61 -11.4%
Depreciation 138 115 -16.7% 460 532 15.6%
Profit before Tax (39) 40   47 75 58.4%
Extraordinary items 14 -   - -  
Tax (38) (19)   (44) (106)  
Profit after Tax/(Loss) 13 59 347.3% 91 181 98.7%
Net profit margin (%) 1.3% 5.7%   2.6% 5.0%  
No. of Shares 38.7 38.7   38.7 38.7  
Diluted Earnings per share* (Rs) 1.4 6.1   2.3 4.7  
P/E Ratio (x)   26.3     34.1  

While that was the standalone picture, the consolidated performance brings out the improved performance of NIIT in a better light. As seen from the table below, better performance in the major segments of education and IT services have helped NIIT to post a 16% rise in its consolidated topline for FY04. However, the product distribution and systems integration (PD & SI) division of the company continues to fare dismally and, in FY04, witnessed a decline of 42% YoY. The operating margin of the consolidated entity however seems to have dipped on account of fall in margins of the education business.

The consolidated picture...
Rs m FY03 FY04 Change
Education 2,232 2,363 5.9%
IT services 3,971 4,998 25.9%
PD & SI 337 195 -42.1%
Total Revenues 6,540 7,556 15.5%
Operating profit 753 804 6.8%
OPM (%) 11.5% 10.6%  
Profit/(Loss) after Tax (193) 39  
Net profit margin (%) -3.0% 0.5%  

Education business

While this segment saw an improved performance on the topline front for FY04, NIIT’s continued investments in expanding its global reach (especially into China) resulted in operating margins for this segment to decline by about 300 basis points. The company ‘s international centres have increased from 241 at the end of FY03 to 277 at present, and the result can be seen in the 77% YoY growth of its international education business revenues. However, the rationalisation of training centers within the country has resulted into the total number of centers declining from 2,447 in FY03 to 2,151 in FY04.

On the students’ enrolement front, NIIT has been able to reduce the pressure that was witnessed in 2QFY04 and 3QFY04. However, due to increasing competition, average realizations have dipped further in 4QFY04. In FY04, the education segment has also witnessed an increase in contribution from short-term courses (like Futurz and Swift). NIIT, however, faces tremendous competition from local institutes that are able to offer similar short-term courses at comparatively lesser prices. Thus, the imperative for NIIT is to offer specialized courses (like CATS and DNIIT) that cater to the higher end of technology spectrum.

Software business

This segment, which now contributes to around 66% (61% in FY03) of NIIT’s consolidated revenues, has played an important role in the overall growth of the company in FY04. Reduced pressure on billing rates and increased order intakes has helped NIIT to post good performance for this segment. Also, the company has been able to maintain margins for this segment at the FY03 levels of 19%. The company can also take comfort from the fact that its pending order book at the end of FY04 stands at US$ 126 m (about 76% of FY04 revenues). Just in 4QFY04, this segment witnessed a fresh order intake of US$ 42 m that included US$ 20 m from the insurance vertical alone.

At the current price of Rs 159, the stock is trading at a P/E multiple of 34.1 its FY04 standalone earnings. Considering the fact that there still remains the uncertainty regarding the improvement in global IT education spending and also that the average P/E (18x-19x) for the Indian software sector is at much lower levels, NIIT’s stock price seems highly overstretched. However, the company, which has been one of the hardest hit in the slowdown, is trying to restructure its business. As a part of this strategy, NIIT is planning to de-merge its software solutions business into a separate company and reorganize the education business. What implications does this restructuring have on NIIT’s growth prospects are yet to be seen. Investors should, thus, practice caution.

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