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NIIT: The worst may be over - Views on News from Equitymaster

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NIIT: The worst may be over

Dec 6, 2002

The IT training and software services major NIIT has, on a standalone basis, reported a 49% fall in its topline, while its bottomline has declined by 91%. This due to disastrous performance in the first three quarters for the fiscal. Prima facie, the 4QFY03 also look disappointing, as the company has reported a loss at the pre-tax level and the bottomline is in the black due to a tax write back and extraordinary income. The company almost slipped into the red due to an increase in the provisioning for bad and doubtful debts, which has been included as part of the company's operating expenses. Excluding the write off of Rs 56 m, the net profits were Rs 69 m a YoY drop of 44% as compared to the steep 91% fall including the write-off.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Net Sales 1,641 981 -40.2% 6,875 3,521 -48.8%
Other Income 64 30 -53.8% 124 151 21.6%
Expenditure 1,463 897 -38.7% 5,773 3,095 -46.4%
Operating Profit (EBDIT) 178 84 -52.9% 1,102 426 -61.4%
Operating Profit Margin (%) 10.8% 8.5%   16.0% 12.1%  
Interest (14) 15 -203.5% (109) 69 -163.5%
Depreciation 102 138 34.6% 359 460 28.3%
Profit before Tax 153 -39 -125.5% 977 47 -95.2%
Extraordinary items (51) 14   74 0 0
Tax (23) (38) -264.9% 91 (44) -
Profit after Tax/(Loss) 125 13 -89.5% 960 91 -90.5%
Net profit margin (%) 7.6% 1.3%   14.0% 2.6%  
No. of Shares 38.7 38.7   38.7 38.7  
Diluted Earnings per share* 12.9 1.4   24.8 2.3  
P/E Ratio 13.0 123.9   6.8 71.5  
(* annualised)            

Global Performance

NIIT revenues * Q4FY02 Q1FY03 Q2FY03 Q3FY03 Q4FY03
Global revenues 1946 1750 1587 1575 1931
Stand alone revenues 1109 1087 890 857 981
* According to new revenue recognition method

The results table as declared by the company does not capture the company's quarterly as well as full year standalone performance in a correct manner. According to the new accounting policy adopted by the company there has been a change in the way the company recognizes revenues. If the new accounting policy is taken in to consideration then the 4QFY03 YoY stand-alone revenues have fallen by 12% and the FY03 stand-alone revenues have fallen by 28%. So in that sense the company's performance has been better than what is apparent from the results table.

Global revenues (Rs m) * Q4FY02 Q1FY03 Q2FY03 Q3FY03 Q4FY03 4Q YoY
change
4Q QoQ
change
Learning solutions 1,107 742 814 920 1,210 9% 32%
Software services 1,133 916 963 964 1,218 8% 26%
* According to old revenue recognition method

NIIT has reported a 31% decline in its global revenues (i.e. including overseas operations) in FY03 as compared to the 28% drop in revenues on a stand-alone basis. The fall in revenues can be attributed to a decline in revenues from all its revenues streams. The general slowdown in the IT industry has had an adverse effect on both its software services as well as learning divisions. While the global learning solution revenues have been the hardest hit with a 28% drop in revenues, the revenues from the software solutions division was lower by 18%.

Software services division

While the yearly figures have been poor, on a QoQ basis the trend is encouraging. In 4QFY03 then revenues from the major revenue stream software services and IT education were higher than the revenues for 4QFY02. This indicates an improvement in the performance of the company. The improvement in the performance has come from both the software solutions and the training divisions. The order intake for the software solutions division has been robust at US$ 33 m in 4QFY03. In 4QFY03 revenues from this division have been better than revenues in 4QFY02.

Operating margins Q4FY02 Q1FY03 Q2FY03 Q3FY03 Q4FY03
Learning solutions 3% 0% 5% 10% 12%
Software services 29% 13% 19% 21% 23%
SI and product distribution -6% -7% 9% 37% 14%

NIIT has been able to improve on its operating margins. From nearly no operating margins in 1QFY03 the learning division has improved operating margins to 12% by 4QFY03. Also the software services division has seen operating margins improve to 23% in 4QFY03 compared to 13% in 1QFY03. The operating margins have improved due to aggressive cost control measures as well as improving realisations. NIIT has reported an onsite realisation of US$ 74 in 4QFY03 compared to US$ 71 in 4QFY02. The offshore revenues on the other hand have not improved but have remained at the same levels indicating an easing of pressure in the same.

NIIT in the past has seen loss of business due to lack of skills in the legacy systems area. The company over the past year has been focused on this domain and has been able to increase its revenues from the legacy maintenance and migration business to 20% of the company's software revenues. The company in the recent past has benefited from the increased demand for offshore services. This is evident from the fact that revenues from software services have grown by 26% QoQ in 4QFY03. On a YoY basis, the revenues from software services have grown by 7%.

  Q4FY02 Q1FY03 Q2FY03 Q3FY03 Q4FY03
Learning solutions revenues (Rs m) 1,107 742 814 920 1,210
Enrollments 116,371 159,163 106,288 108,191 132,262
Realisations 9,513 4,662 7,658 8,503 9,149

IT learning division

The improvement in the education business is evident from better realisations (revenues per student) and higher registrations. The company has reported a 32% growth in its learning solutions business in 4QFY03 on a QoQ basis. On a YoY basis the growth stands at 9%. The realisations that had fallen to as low as Rs 4,662 per student have improved to Rs 9,149 per student. Also the number of registrations for 4QFY03 increased by 14% on a YoY basis. The company is aggressively targeting new areas of business like corporate learning solutions business, which is a fast growing segment of the industry. NIIT has also increased its focus on the student IT learning segment. K12 which is student learning division of NIIT has led NIIT's foray in to the fast growing school IT learning segment and now contributes nearly 20% of NIIT's learning revenues. NIIT currently operates 2,447 training centers, which is marginally down from 2,537 in 3QFY03.

Revenue mix Q4FY02 Q3FY03 Q4FY03 FY02 FY03
Futurz 78% 76% 85% 68% 80%
Cats 11% 8% 5% 14% 6%
Swift 11% 16% 11% 18% 14%

The company reported that enrollments for its long-term course 'Futurz' have gone up by 121% on a QoQ basis and 2% on a YoY basis in 4QFY03. The larger contribution of 'Futurz' courses to the total revenues indicates an improving scenario where students are enrolling for long-term courses as well indicating a changed demand scenario. Another benefit of this trend is that revenues are secured for a longer time period due to the length of these courses. A long-term association with the NIIT brand is likely to increase the brand recall of NIIT, which is likely to benefit the company in the long term. On a full year basis too this mix has changed favourably. 'Futurz' contributed 80% of FY03 revenues compared to 68% in FY02.

While the operating margins of the individual divisions have improved, on a standalone basis NIIT's consolidated operating margins have fallen. The fall in operating margins was mainly on account of provision for bad and doubtful debts. In 4QFY03 this provisioning stood at Rs 58 m compared to Rs 26 m in 4QFY02. For the full year this provisioning stood at Rs 286 m up from Rs 137 m in FY02.

While the topline shows improvement, receivables are major concern with the company. Due to the nature of the business NIIT has a higher level of receivables. NIIT works on an installments basis and some time delay in these installments leads to these receivables. For the full year the quantum of receivables stood at Rs 2,845 m representing nearly 130 days worth of receivables. Not considering the effect of the write offs the operating margins of the company have actually improved. While the company has been able to reduce its debt burden, higher depreciation has taken a toll on the bottomline. The company has stated that it has reduced debt worth Rs 152 m in FY03.

The company has undertaken initiatives to tap new segments in both the IT learning and software services markets. These initiatives are a mix of organic as well as inorganic measures. NIIT has started a new training program 'Planetworkz' to cater to the fast growing IT enables services (ITES) training segment. NIIT's BPO outfit NIIT Smartserve has also started operations in the fourth quarter. The subsidiary has already received an order worth US$ 10 m. NIIT has made three acquisitions during the year the latest one being AD Solutions AG. These acquisitions have also been made to obtain domain expertise in various fields as well as enter in to new markets. This new acquisition will give NIIT a foothold in the US$ 27 bn software solutions market in Germany, Switzerland and Austria. AD Solutions AG is a custom solution provider in the logistics and financial industry space.

The stock is currently trading at Rs 168, a P/E multiple of 71x its FY03 earnings. If the effect of the provisioning for doubtful debts were not considered then the resultant P/E works out to be 17x FY03 earnings. Though the full year picture looks poor, quarterly trends indicate that the worse may be over for the company. NIIT is seeing better realizations as well as higher enrollments in its learning business. The company has also managed to garner a higher market share of the domestic IT learning market. The software services division of the company has been able to book higher revenues on a QoQ basis with better realisations. Current valuations of the company look a bit steep but improved fundamentals are likely to keep investor interest alive in this counter.


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