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NIIT Ltd.: Global volatility dampens growth momentum - Views on News from Equitymaster
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  • Nov 8, 2011 - NIIT Ltd.: Global volatility dampens growth momentum

NIIT Ltd.: Global volatility dampens growth momentum
Nov 8, 2011

NIIT Ltd. has announced the second quarter results of financial year 2011-2012 (2QFY12). The company has reported an 11.0% YoY and 6.2% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Consolidated net sales grew by 11.0% year-on-year (YoY) during second quarter of financial year 2011-2012 (2QFY12). For the half year ended September 2011 (1HFY12), sales grew by 13.0% YoY (year-on-year).
  • Operating margins declined by 0.8% YoY during the quarter, largely due to expenses on cloud campus readiness and pre-operative expenses on new business segment 'skill building solutions'. For 1HFY12, margins declined by 0.8% YoY as compared to the same period last year.
  • Net profits grew by 6.2% YoY. This was largely on account of lower tax expenses during the quarter which offset the negative effect of lower operating margins. For 1HFY12, net income increased by 4.5% YoY.
  • Added 133 employees during the quarter taking the total headcount to 4,567.

Consolidated financial snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY12 1HFY12 Change
Sales 3,458 3,838 11.0% 6,238 7,050 13.0%
Expenditure 2,927 3,278 12.0% 5,420 6,182 14.1%
Operating profit (EBITDA) 531 560 5.4% 818 867 6.0%
Operating profit margin (%) 15.4% 14.6%   13.1% 12.3%  
Other income/(expense) (99) (92) (173) (156)  
Depreciation 216 250 15.8% 419 477 13.9%
Profit before tax 217 218 0.7% 227 234 3.4%
Tax 37 21   22 8  
Profit after tax/(loss) 180 197 9.7% 205 226 10.7%
Share of associates' net profit 105 105 0.0% 210 207 -1.4%
Net profit after tax/(loss) 285 302 6.2% 415 433 4.5%
Net profit margin (%) 8.2% 7.9%   6.6% 6.1%  
No. of shares (m)       165.1 165.1  
Diluted earnings per share (Rs)*         5.70  
P/E ratio (x)*         8.4  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in 2QFY12?
  • NIIT recorded an 11.0% YoY growth in net sales during the quarter. The 'Individual learning solutions (ILS)' business (47% of net sales) and the 'Corporate learning solutions (CLS)' business (42% of net sales) witnessed a growth of 11.9% YoY and 9.6% YoY respectively during the quarter. The 'school learning solutions (SLS)' business (11% of net sales) witnessed a growth of 12.5% YoY during the quarter.

  • NIIT's ILS business witnessed a growth of 11.9% YoY on the back of an 11% YoY growth in short term courses. Banking enrolments also witnessed a strong traction during the quarter. Overall global enrolments were up by 5% during the quarter. However, international business reported a decline of 1% YoY in this business segment during the quarter. Operating margins for this segment declined to 20.8% during the quarter as compared to 23.5% seen during the same period last year. This was due to expenses towards the development of the Cloud Campus product.

  • The SLS segment witnessed a growth of 12.5% YoY during the quarter. This was on account of a growth of 24% YoY in the business from non-government schools. Margins at operating levels were also higher which expanded to 11.6% as compared to 8.6% seen during the same period last year.

    The company has added 133 non-government schools during the quarter. The pending order book stood at Rs 4,718 m at the end of the quarter out of which 31% is executable within the next 12 months. The management reiterated that they would be concentrating on the private school business. With regards to the government schools, they stated that they are very selective. The company, however, still continues to derive nearly 54% of the segment's revenues from the government schools during the quarter.

    Segment wise performance
    (Rs m) 2QFY11 2QFY12 Change
    Individual learning business
    Net Revenue 1,611 1,802 11.9%
    Operating profit 379 375 -1.1%
    Operating profit margin 23.5% 20.8%  
    School learning solutions
    Net Revenue 360 405 12.5%
    Operating profit 31 47 51.6%
    Operating profit margin 8.6% 11.6%  
    Corporate learning solutions
    Net Revenue 1,487 1,630 9.6%
    Operating profit 122 151 23.8%
    Operating profit margin 8.2% 9.3%  
    Skill building solutions
    Net Revenue - 1 NA
    Operating profit - (13) NA
    Operating profit margin NA NA  

  • The CLS segment witnessed a 9.6% YoY growth in sales during the quarter. This was due to the 14% growth in volumes for the business. This in turn was driven by the growth in 'Managed Training Services' which witnessed a good growth of 62% YoY during the quarter. Adverse current movement during the quarter as compared to the same period last financial year impacted both revenues growth as well as margins at operating levels. Despite this, the margins at operating levels expanded by 1.1% YoY during the quarter. Pending order book stood at US$ 77.8 m, with around 62% executable in the next 12 months.

  • The operating margins declined by 0.8% YoY during the quarter. The decline was mainly due to the increase in business development expenses (largely due to Cloud Campus product). The adverse currency movement and pre-operative expenses towards new business segment 'Skill building solutions' also negatively impacted the margins.

  • Despite lower operating margins and higher depreciation charges, net profits grew by 6.2% YoY during the quarter. This was mainly on account of lower tax expenses during the quarter as effective tax rate was just 8% during the quarter. However, the management highlighted that tax rates would be in the range of 28-29% for the current financial year 2011-12.

What to expect?
At the current price of Rs 48, the stock is trading at a multiple of 7.6 times our estimated FY14 earnings. As per the management, the quarter saw a weak demand environment due to tight monetary policy and sticky inflation. The uncertainty in the global economic environment is also affecting the hiring outlook across the sectors in India. The management stated that the big software companies are maintaining their hiring plan. However, there are delays in joining in some cases.

The company has already implemented Cloud Campus on its 190 centers.This product is witnessing good enrolments. So far, the total enrolment in the Cloud Campus has crossed 11,000.

In a recent development, the company has divested its stake in Element K, a US based learning solutions provider, in a cash deal of US$ 110 m (total enterprise value). This unit had contributed US$ 86 m in the sales of the last financial year. After this divestment, the company is left with 1/3rd of its CLS business which is mainly managed training services. According to the management, Element K was not contributing much to the bottomline. They added that the proceeds from the divestment would be used in paying off debts.

The company has started a new business segment 'Skill Building Solutions'. This is a joint venture (JV) with National Skill Development Corporation (NSDC). It is a 90:10 JV where NIIT holds the majority stake. In this program, there is a plan to train 7 m students over a ten-year period. The company would be setting up 1,500 centers across the country. As per the management, this would help the company grow in the long run.

We maintain our 'Buy' view for the company from a 2-3 year perspective.

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