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NIIT Limited: Retail push! - Views on News from Equitymaster
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NIIT Limited: Retail push!
Nov 22, 2005

Performance Summary
NIIT Limited (NIIT) had recently reported its results for the second quarter and half-year ended September 2005. The topline has registered a good performance during the quarter, driven mainly by the Individual (retail) business, which showed a strong performance due to the high growth seen in the IT services business. Margin expansion was also witnessed due to operating leverage in the Individual segment because of strong growth in enrolments of students, particularly in the Careers segment. It must be noted that 2QFY06 is traditionally a strong quarter. However, due to lower other income and lower profits from associates, net profit growth was slower, albeit still growing at a good pace. The half-year performance has also been enthusing.

Consolidated financial performance: A snapshot
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
System-wide revenues 1,860 2,085 12.1% 3,380 3,780 11.8%
Net revenues 1,109 1,241 11.9% 2,077 2,305 11.0%
Expenditure 969 1,066 10.0% 1,809 1,986 9.8%
Operating profit (EBDITA) 140 175 25.0% 268 319 19.0%
Operating profit margin (%) 12.6% 14.1%   12.9% 13.8%  
Other income 28 15 -45.8% 59 61 3.4%
Depreciation 84 90 7.3% 166 176 6.1%
Profit before tax 85 100 18.8% 162 204 26.6%
Tax 5 7 20.4% 8 14 60.7%
Extraordinary items - -   - -  
Share of profits from associates 39 38 -2.6% 73 73 0.0%
Profit after tax/(loss) 118 132 11.7% 226 264 16.7%
Net profit margin (%) 10.6% 10.6%   10.9% 11.4%  
No. of shares (m) 19.3 19.3   19.3 19.3  
Diluted earnings per share (Rs)* 24.4 27.3   23.4 27.3  
P/E ratio (x)         11.5  
(* annualised)            

What is the company’s business?
NIIT is India’s premier IT training company with a 31% market share of the IT education and training market and is thrice the size of its next-largest competitor, Aptech. The company has a major presence in the fast-growing retail segment, which, by and large, caters to the staffing requirements of the Indian IT and BPO sectors. The company derives a significant share of its revenues from the international retail segment as well. NIIT also operates in the institutional/government segment, where it executes projects relating to provision of IT education to schoolchildren throughout the country. Apart from the above segments, the company earns 40% of its revenues from the corporate segment, where it provides learning solutions, e-learning and content development solutions to technology and other companies mainly in the US. NIIT earned about 53% of its revenues from international operations in FY05.

What has driven performance in 2QFY06?
Individual business push: NIIT recorded a 12% YoY growth in gross (system-wide) as well as net revenues. Gross revenues minus the share of revenues given to the company’s franchisees give the net revenue figure. This was driven mainly by the Individual business segment of the company. This segment basically caters to the staffing requirements of the Indian IT and ITES-BPO sectors and has clearly been the main ‘push’ factor behind the revenue growth this quarter. This segment witnessed a 27% YoY growth in gross revenues and an even stronger 35% YoY growth in net revenues. The overall enrolments grew at 13% YoY, of which the enrolments for the ‘Career’ segment grew by 20% YoY. This has been the trend witnessed over the past few quarters for NIIT, with students increasingly opting for long-term career courses and working IT executives also opting for re-skilling courses, while the IT literacy course, SWIFT, is seeing slower growth due to basic IT education being provided in schools. As a result, there is a limited market for this course, restricted to housewives and elderly people. Revenues in China grew at 24% YoY.

Retail segment: Bias towards Careers
  2QFY05 2QFY06
Carees 93.0% 95.0%
Others 7.0% 5.0%

The Corporate segment’s gross revenues grew by 6% YoY and net revenues at a stronger 15% YoY. This was driven by the increasing adoption of training outsourcing by corporates and growing e-learning spends. NIIT won an order from the Indian government for smart governance and new multi-year contracts for hosted e-learning solutions that will give the company annuity revenues. The outstanding order book in this segment stands at US$ 22.6 m, with 67% executable over the next 12 months. The company recorded an order intake of US$ 9.7 m this quarter.

However, it was the Institutional segment that proved to be a laggard this quarter, thus restricting the overall revenue growth. This business saw revenues falling by 19% on a gross basis and 17% on a net basis. This was due to a lower order intake and also the completion of existing orders. The company did manage to win new contracts from the states of Tripura and Chattisgarh. The total order book was at Rs 1.8 bn, with 42% executable over the next 12 months.

Segment-wise performance…
(Rs m) 2QFY05 % of total 2QFY06 % of total Change
System-wide revenues 947 50.9% 1,204 57.7% 27.1%
Net revenues 374 33.7% 505 40.7% 35.0%
OP (2) -1.7% 67 38.4% -2891.7%
OPM -0.6%   13.3%   13.9%
System-wide revenues 352 18.9% 287 13.8% -18.5%
Net revenues 342 30.8% 285 23.0% -16.7%
OP 76 53.9% 29 16.4% -62.1%
OPM 22.1%   10.0%   -12.0%
System-wide revenues 561 30.2% 594 28.5% 5.9%
Net revenues 393 35.4% 451 36.3% 14.8%
OP 67 47.8% 79 45.2% 17.9%
OPM 17.0%   17.5%   0.5%
System-wide revenues 1,860   2,085   12.1%
Net revenues 1,109   1,241   11.9%
OP 140   175   24.6%
OPM 12.6%   14.1%   1.4%

Operating leverage aids margins: NIIT witnessed a strong 146 basis points margin expansion during the quarter. This was primarily on account of the operating leverage in the Individual segment. This segment has a high proportion of fixed costs and the higher the volumes (read students), the better will be the operational performance. The capacity utilisation this quarter has been 50% and steady state average is 65%, which NIIT expects to achieve within 24 months. Thus, from a loss at the operating level in 2QFY05, this segment has shown a strong improvement, thus driving the margin expansion.

It should also be noted that this is generally the strong quarter, since in this quarter, the new academic session starts and students take career decisions. The improvement in perceptions towards IT as a career has helped NIIT, it being the market leader. This marks the continuance of recovery in the IT training industry as was witnessed in FY05. This business tracks the IT industry with a lag and given the strong hiring carried out by the top IT companies this quarter, NIIT seems to have benefited to a great extent.

Lower other income restricts net profit: Due in part to the fall in other income and lower profits from associate companies (mainly NIIT Technologies), net profit growth at 12% YoY was not as strong as the operating profit growth of 25% YoY. It should be noted that due to the write-back of provisions in 2QFY05, the other income was higher to that extent in that quarter. Thus, there being no such write-back this quarter, other income was affected. The treasury income, however, has remained stable.

Performance in the recent past
  1QFY06 2QFY06
System-wide revenue growth (%, YoY) 12.0 12.1
Net revenue growth (%, YoY) 10.0 11.9
Operating margins (%) 13.4 14.1
Profits growth (%, YoY) 21.0 11.7
Employees (Nos.) 1,964 1,995
Retail centres (Nos.) 548 531
Of which, own centres (Nos.) 46 46

What to expect?
At the current price of Rs 313, NIIT’s stock is trading at a price to earnings multiple of 11.5 times annualised 1HFY06 earnings. Given the pick-up in the IT training industry in FY05 and its continuing recovery so far in FY06, NIIT’s market leadership position, improvement in sentiment for IT as a career, favourable trends in recruiting IT personnel and strong growth in the IT industry as a whole, we expect the company to be a major beneficiary.

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