Buy NIIT Ltd – 3QFY2011 Result Update - Angel Broking

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NIIT Ltd – 3QFY2011 Result Update

Angel Broking recommends a Buy on NIIT Ltd with a Target Price of Rs. 70.

NIIT reported its 3QFY2011 results, which were marginally below our

expectations with revenues growing by 6.0% yoy. The ILS and CLS businesses

were the growth and profitability drivers, respectively. The company improved its

EBITDA margin by 70bp yoy YTD FY2011 on the back of improvement in business

mix in its anchor verticals of CLS and ILS, the highest margin businesses returning

to growth. We expect this trend to continue and expect EBITDA margin of 14.9%

by FY2012. We have valued NIIT at EV/EBITDA of 5.8x FY2012E EBITDA of

`208cr and added the company’s stake in NIIT Technologies (with holding

discount of 20%) arriving at a Target Price of `70 and recommend a Buy.

Muted revenue growth: Revenues came in at `300.7cr, up 6.0% yoy. The ILS

business revenues grew 11.7% yoy, CLS 8% and new business grew by 33% yoy.

However, SLS revenues declined by 17.9% yoy.

Margins enhance: Blended EBITDA margin improved by 134bp yoy to 12.3% (v/s

our expectation of 12.1%) on the back of strong growth in the high-margin ILS-IT

business as well as the improving business mix of its anchor CLS business.

Outlook and Valuation: We expect ILS to return to strong growth trajectory of

14% yoy in FY2012 with strengthening of the hiring environment by the Indian IT

players resulting in return in demand for the vocational courses. The SLS segment

is also expected to return to growth of 22% yoy with anticipation of increasing

adoption for ICT by government schools following increasing outlay related to

modernisation of teaching infrastructure. Also, with developed economies like the

US returning to growth, we expect the discretionary spend related to training

outsourcing and learning products to resurface and expect 5.5% yoy growth. At

the CMP, the stock is trading at 6.2x EV/EBITDA, but the stake in NIIT

Technologies provides for strong upside. Hence, we recommend a Buy on the

stock, with a Target Price of `70.

Muted revenue growth due to seasonality

NIIT reported its 3QFY2011 numbers, which were muted qoq due to seasonality

effect of 3Q. However, the numbers were modest on yoy basis. Overall revenues

came in at `300.7cr (v/s our expectation of `301.6cr), up 6.0% yoy. Revenues

from Individual Learning Solution (ILS-IT) and Corporate Learning Solutions (CLS)

businesses were up 11.7% and 8.0% yoy, respectively. However, revenues of the

School Learning Solution (SLS) business dipped by 17.9% yoy.

ILS: Revenues of the ILS-IT business grew 11.7% yoy with revenues coming at

`107.7cr (v/s our expectation of `107.9cr) with global enrollments growing by 8%

yoy to 1, 07,430. Enrolments growth in India came in higher at 12% yoy. Also, this

business posted robust placements growth of 30% yoy and enhanced its seat

capacity as well to 49%, registering 2% yoy growth. The pending order book of this

segment currently stands at `124.2cr with 69% of it being executable in the next

12 months. This segment is witnessing continued traction from the 99 days

Diploma course, which grew by 46% yoy signaling strong preference for short-term

job-oriented programs. SAP enrollments in this segment have also started picking

up. EBITDA margin of the segment expanded by 146bp yoy to 21.2%.

CLS: Revenues of the CLS business grew 8.0% yoy with revenues coming at

`144.6cr (v/s our expectation of `140.4cr) on the back of volume growth of 13.0%

yoy, driven by growth in training outsourcing and on-line learning products (up

21% yoy). Order intake for the quarter stood at US $33.1mn with the pending

order book standing at US $92.5mn, of which 58% is executable over the next 12

months. The company managed to expand EBITDA margin of this segment by

180bp yoy to 8.4% on the back of change in business mix, despite the steep

increase in people cost and adverse exchange rate impact.

SLS: Revenues of the SLS business de-grew by 17.9% yoy with revenues coming at

`36.3cr (v/s our expectation of `39.9cr). During the quarter, the company added

35 private schools with an order intake of `14.2cr from them. The pending order

book of this segment stands at `442.4cr, with 30% being executable in the next 12

months. NIIT added 385 private schools in 9MFY2011, surpassing the full year

number of FY2010, which was 330. The company is now focusing only on adding

private schools due to delays in disbursements and execution in the government

schools. EBITDA margin of the segment declined by 497bp yoy to 12.7% due to

lower execution.

New business: Revenues of the new business grew 33.0% yoy with revenues

coming at `12.1cr. The FMT enrollments grew by 57% yoy signaling strong hiring

in the banking sector. The company also added 10 more BFSI clients taking the

total to 35. Few segments within new business like the banking course (IFBI) and

management education are doing well and have already broken-even. However,

overall the segment is still at EBITDA negative level and is expected to breakeven

by 2HFY2012.

Blended EBITDA margins improved by 134bp to 12.3% (v/s our expectation of

12.1%) on the back of strong growth in the high-margin business of ILS. Net profit

came in at `12.9cr (v/s our expectation of 13.2cr), up 37.2% yoy.

Outlook and Valuation

The ILS and CLS businesses are emerging to be the growth and profitability drivers

for the company. In fact, the company managed to improve its EBITDA margin by

70bp yoy YTD FY2011 only on the back of improvement in the business mix of its

anchor verticals CLS and with ILS, the highest-margin business returning to growth.

We expect ILS to return to strong growth momentum of 14% yoy in FY2012 with

strengthening of the hiring environment by the Indian IT players resulting in return

in demand for the vocational courses. The SLS segment is also expected to return

to growth of 22% yoy with anticipation of increasing adoption for ICT by the

government schools with increasing outlay related to modernisation of the teaching

infrastructure. Also, with the developed economies like the US returning to growth,

we expect the discretionary spend related to training outsourcing and learning

products to resurface and expect 5.5% yoy growth. Hence, we expect the company

to post a CAGR of 8.3% over FY2010-12, whereas EBITDA growth is expected to

outpace the same clocking 15.3% CAGR due to improving business mix.

At CMP, the stock is trading at 6.2x EV/EBITDA, but the stake in NIIT Technologies

provides strong upside. Hence, we have valued the company at EV/EBITDA of 5.8x

on FY2012E consolidated EBITDA of `208cr and added the company’s stake in

NIIT Technologies (with holding discount of 20%) arriving at a Target Price of `70.

We recommend a Buy on the stock.