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NIIT LTD
PRICE: RS.57 RECOMMENDATION: BUY
TARGET PRICE: RS.74 FY12E P/E: 8X
NIIT's 3QFY11 results were disappointing. We note that, 3Q is normally a
seasonally weak quarter for the company. This quarter, new businesses and
SLS results fell below expectations. Continued investments in new
businesses and lack of business from Government schools in SLS impacted
results. On the other hand, ILS EBIDTA improved 19% YoY and CLS was able
to sustain EBIDTA QoQ despite appreciation in rupee.
In fact, this is the third successive quarter of disappointment in overall
margins. While the company has been reporting growth, the extent of
growth has disappointed us and so has the improvement in margins. The
revenue growth in ILS, which is the largest profit earner, has been
moderate, considering the growth in recruitment by the IT industry. Also,
CLS business continues to remain impacted in parts due to the global
slowdown.
An improving macro scene and increased demand for learning should
support future growth of NIIT, we opine. After incorporating 3QFY11
earnings, our FY11 EPS estimate stands at Rs.5.1 (Rs.5.8) and our FY12 EPS
estimate at Rs.7. (Rs.7.7). The stock currently trades at 8x FY12E earnings.
We maintain BUY with a price target of Rs.74 (Rs.86), based only on
valuations. A slower-than-expected global recovery and a sharper-thanexpected
rupee appreciation may impact growth rates.
Revenues grew by 6% YoY
n Revenues grew by 6% YoY, which was below our estimates. All the businesses
except SLS reported growth on a YoY basis. The QoQ fall in CLS was partly due
to the currency fluctuations.
ILS - YoY growth of about 11.7%; however the velocity of enrolments
remained moderate
n The Individual learning solutions (ILS) business reported an 11.7% YoY growth in
revenues. 3Q is the weakest quarter for the ILS business in terms of revenues.
n The India business reported an 8% enrolment growth. In India, enrolments were
up by 12% YoY.
n The overall growth was impacted by the international business where enrolments
grew at a slower pace. The international business has been witnessing low
growth over the recent past.
n The 99 - day diploma courses saw the maximum improvement in enrolments
(46% YoY). We understand that, the sharp increase in demand enticed more
candidates to become job-ready fast.
n The company increased seat capacity by 5% YoY.
n The company did witness traction in the long term courses but the increase has
not kept pace with the overall improvement in the demand from IT industry.
n We are seeing the impact of a stabilizing global economy on the sentiments.
Positive comments being made by IT services companies about future recruitment
is also helping bring back confidence in retail segment.
n We expect this to get translated into higher enrolments in India over the next
few quarters.
n The management had maintained the FY11 growth guidance at 10% - 11%. We
have assumed an 11% YoY growth in FY11.
n We find this disappointing especially as it comes on the back of a rise in fees
also.
Corporate business - revenues down by 3% QoQ
n CLS revenues fell by 3% on a sequential basis, impacted by the appreciation in
rupee.
n On a CC basis, we believe the growth rate was at about 1%. On a YoY basis,
volumes were 13% higher.
n We understand that, revenues grew on the back of increased traction in the
training out-sourcing business and learning products businesses, which grew by
about 21% YoY.
n CLS has three streams of revenues - Learning products (further broken down into
on-line products and print / publishing), training outsourcing and custom content
development.
n On-line products contribute about 33% to revenues, Print/publishing accounts for
about 30%, training outsourcing 18% and custom development, the balance
19%.
n The custom content business has been witnessing softness due to the cuts in discretionary
spends by clients. The print and publishing business of Element K has
also been impacted.
n This softness set off the growth in training outsourcing and on-line learning products
business.
n We believe custom projects business has faced extended sales cycles and scaleup
issues in the past.
n The company has received two orders (including 1 in 2QFY11) in the training
outsourcing segment from European clients, which are expected to scale up in
the future quarters.
n We will need to see higher business growth before becoming more bullish on this
business.
n With the macro headwinds easing, the probability of better growth rates has increased.
Schools learning business
n Business continued to remain impacted and revenues fell on a sequential basis.
n The company was impacted by the slower decision-making process as far as
awarding of Government schools projects is concerned.
n The highlight of this year has been the strong growth in the non-Government
schools business which contributed 38% of revenues. The velocity though,
slowed down in 3Q.
n NIIT has added 385 non-Government schools in FY11, surpassing the 330 additions
in the whole of FY10. The eGuru program is gaining increased acceptance.
We believe that, NIIT now has more than 1900 private schools.
n The order booking during the quarter was about Rs.142mn.
n The total number of schools serviced by NIIT has risen to beyond 16000, we
believe.
New businesses
n Revenues rose during the quarter by 33% YoY as the company executed the
orders in the banking and management spaces.
n There has been a revival in demand form from various private sector banks.
n FMT business reported a 57% rise in enrolments, indicating the release of pentup
demand from customer segments.
n The company added 10 more BFSI clients taking the total to 35.
n The executive training program too has gained traction and the company has
completed second intake of students to IGNOU's program.
n The company has added significant non-Genpact customers during the quarter
and with corporate sentiment improving, management and BPO courses are expected
to see further momentum.
n While margins improved on a YoY basis, they fell on a sequential basis and
came in much below expectations.
n NIIT has been guiding at much better margins in this business for quite some
time but the continued additional investments have sustained the losses in this
business.
n The IFBI business has achieved break even, we understand. The remaining businesses
(Management, BPO, etc) were expected to reach that stage during FY11,
as per management guidance. However, we believe it will be a long time before
they achieve this stage.
n Finance and Management training contribute about 70 -75% of revenues.
n We expect the new businesses to report negative EBIDTA in FY11 and achieve
break even in latter past of FY12.
EBIDTA margins - disappointing
n Margins improved on a YoY basis on the back of better profitability in ex-SLS
businesses.
n We note that, WEF 1QFY11, results have contained the impact of salary hikes.
During FY10, a part of the salaries were made variable and were not paid because
of lower revenues. During 1QFY11, these were paid and also a raise was
given WEF 1QFY11, the impact of which has been reflected in the results.
n ILS margins improved by about 21bps, which was in line with estimates.
n CLS reported an improvement on the back of higher revenues.
n The management has indicated that, with costs having been re-aligned, these
margins are sustainable and may rise with increase in revenues. However, potential
rupee appreciation will be a head-wind for margin improvement.
n New businesses continued to invest in growth and consequently, reported a
negative EBIDTA during the quarter. SLS also reported lower margins because of
sluggish revenues, we believe.
n We have been bullish on NIIT's prospects because of an expected improvement
in profitability across businesses. However, we have further reduced our margin
expectations post the 3QFY11 results.
n We expect the growth in individual learning business to be at about 11% in FY11
and about 12% in FY12.
n CLS business is expected to grow by about 7% and 15% in FY11 and FY12, respectively.
Improving sentiment in developed economies is expected to help CLS
report better numbers.
n SLS is expected to maintain moderate growth (excluding the high hardware component
in 2QFY10) on the back of the Government's initiatives on education and
scale up in private schools business.
n New initiatives are expected to scale up on the back of higher banking and
management training revenues.
n We have assumed margins to improve (YoY basis) on the back of better capacity
utilization, higher volumes and better leverage on costs.
n However, salary increments and currency impact may set off a part of this impact.
n After accounting for its 25% share in NIIT Technologies' profits, we expect the
net profit to go up to Rs.849mnn in FY11E and Rs.1.16bn in FY12E. This will
translate into an EPS of Rs.5.1 in FY11E and Rs.7 in FY12E.
Valuations
n Our DCF based price target works out to Rs.74. We have assumed WACC of
13.6% and terminal growth rate of 3%.
n At our target price, FY12E earnings will be discounted by 10.5x.
Concerns
n A delayed recovery in the global economy could impact revenue growth of NIIT.
n Steep rupee appreciation v/s major global currencies may impact the financials
of NIIT.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
NIIT LTD
PRICE: RS.57 RECOMMENDATION: BUY
TARGET PRICE: RS.74 FY12E P/E: 8X
NIIT's 3QFY11 results were disappointing. We note that, 3Q is normally a
seasonally weak quarter for the company. This quarter, new businesses and
SLS results fell below expectations. Continued investments in new
businesses and lack of business from Government schools in SLS impacted
results. On the other hand, ILS EBIDTA improved 19% YoY and CLS was able
to sustain EBIDTA QoQ despite appreciation in rupee.
In fact, this is the third successive quarter of disappointment in overall
margins. While the company has been reporting growth, the extent of
growth has disappointed us and so has the improvement in margins. The
revenue growth in ILS, which is the largest profit earner, has been
moderate, considering the growth in recruitment by the IT industry. Also,
CLS business continues to remain impacted in parts due to the global
slowdown.
An improving macro scene and increased demand for learning should
support future growth of NIIT, we opine. After incorporating 3QFY11
earnings, our FY11 EPS estimate stands at Rs.5.1 (Rs.5.8) and our FY12 EPS
estimate at Rs.7. (Rs.7.7). The stock currently trades at 8x FY12E earnings.
We maintain BUY with a price target of Rs.74 (Rs.86), based only on
valuations. A slower-than-expected global recovery and a sharper-thanexpected
rupee appreciation may impact growth rates.
Revenues grew by 6% YoY
n Revenues grew by 6% YoY, which was below our estimates. All the businesses
except SLS reported growth on a YoY basis. The QoQ fall in CLS was partly due
to the currency fluctuations.
ILS - YoY growth of about 11.7%; however the velocity of enrolments
remained moderate
n The Individual learning solutions (ILS) business reported an 11.7% YoY growth in
revenues. 3Q is the weakest quarter for the ILS business in terms of revenues.
n The India business reported an 8% enrolment growth. In India, enrolments were
up by 12% YoY.
n The overall growth was impacted by the international business where enrolments
grew at a slower pace. The international business has been witnessing low
growth over the recent past.
n The 99 - day diploma courses saw the maximum improvement in enrolments
(46% YoY). We understand that, the sharp increase in demand enticed more
candidates to become job-ready fast.
n The company increased seat capacity by 5% YoY.
n The company did witness traction in the long term courses but the increase has
not kept pace with the overall improvement in the demand from IT industry.
n We are seeing the impact of a stabilizing global economy on the sentiments.
Positive comments being made by IT services companies about future recruitment
is also helping bring back confidence in retail segment.
n We expect this to get translated into higher enrolments in India over the next
few quarters.
n The management had maintained the FY11 growth guidance at 10% - 11%. We
have assumed an 11% YoY growth in FY11.
n We find this disappointing especially as it comes on the back of a rise in fees
also.
Corporate business - revenues down by 3% QoQ
n CLS revenues fell by 3% on a sequential basis, impacted by the appreciation in
rupee.
n On a CC basis, we believe the growth rate was at about 1%. On a YoY basis,
volumes were 13% higher.
n We understand that, revenues grew on the back of increased traction in the
training out-sourcing business and learning products businesses, which grew by
about 21% YoY.
n CLS has three streams of revenues - Learning products (further broken down into
on-line products and print / publishing), training outsourcing and custom content
development.
n On-line products contribute about 33% to revenues, Print/publishing accounts for
about 30%, training outsourcing 18% and custom development, the balance
19%.
n The custom content business has been witnessing softness due to the cuts in discretionary
spends by clients. The print and publishing business of Element K has
also been impacted.
n This softness set off the growth in training outsourcing and on-line learning products
business.
n We believe custom projects business has faced extended sales cycles and scaleup
issues in the past.
n The company has received two orders (including 1 in 2QFY11) in the training
outsourcing segment from European clients, which are expected to scale up in
the future quarters.
n We will need to see higher business growth before becoming more bullish on this
business.
n With the macro headwinds easing, the probability of better growth rates has increased.
Schools learning business
n Business continued to remain impacted and revenues fell on a sequential basis.
n The company was impacted by the slower decision-making process as far as
awarding of Government schools projects is concerned.
n The highlight of this year has been the strong growth in the non-Government
schools business which contributed 38% of revenues. The velocity though,
slowed down in 3Q.
n NIIT has added 385 non-Government schools in FY11, surpassing the 330 additions
in the whole of FY10. The eGuru program is gaining increased acceptance.
We believe that, NIIT now has more than 1900 private schools.
n The order booking during the quarter was about Rs.142mn.
n The total number of schools serviced by NIIT has risen to beyond 16000, we
believe.
New businesses
n Revenues rose during the quarter by 33% YoY as the company executed the
orders in the banking and management spaces.
n There has been a revival in demand form from various private sector banks.
n FMT business reported a 57% rise in enrolments, indicating the release of pentup
demand from customer segments.
n The company added 10 more BFSI clients taking the total to 35.
n The executive training program too has gained traction and the company has
completed second intake of students to IGNOU's program.
n The company has added significant non-Genpact customers during the quarter
and with corporate sentiment improving, management and BPO courses are expected
to see further momentum.
n While margins improved on a YoY basis, they fell on a sequential basis and
came in much below expectations.
n NIIT has been guiding at much better margins in this business for quite some
time but the continued additional investments have sustained the losses in this
business.
n The IFBI business has achieved break even, we understand. The remaining businesses
(Management, BPO, etc) were expected to reach that stage during FY11,
as per management guidance. However, we believe it will be a long time before
they achieve this stage.
n Finance and Management training contribute about 70 -75% of revenues.
n We expect the new businesses to report negative EBIDTA in FY11 and achieve
break even in latter past of FY12.
EBIDTA margins - disappointing
n Margins improved on a YoY basis on the back of better profitability in ex-SLS
businesses.
n We note that, WEF 1QFY11, results have contained the impact of salary hikes.
During FY10, a part of the salaries were made variable and were not paid because
of lower revenues. During 1QFY11, these were paid and also a raise was
given WEF 1QFY11, the impact of which has been reflected in the results.
n ILS margins improved by about 21bps, which was in line with estimates.
n CLS reported an improvement on the back of higher revenues.
n The management has indicated that, with costs having been re-aligned, these
margins are sustainable and may rise with increase in revenues. However, potential
rupee appreciation will be a head-wind for margin improvement.
n New businesses continued to invest in growth and consequently, reported a
negative EBIDTA during the quarter. SLS also reported lower margins because of
sluggish revenues, we believe.
n We have been bullish on NIIT's prospects because of an expected improvement
in profitability across businesses. However, we have further reduced our margin
expectations post the 3QFY11 results.
n We expect the growth in individual learning business to be at about 11% in FY11
and about 12% in FY12.
n CLS business is expected to grow by about 7% and 15% in FY11 and FY12, respectively.
Improving sentiment in developed economies is expected to help CLS
report better numbers.
n SLS is expected to maintain moderate growth (excluding the high hardware component
in 2QFY10) on the back of the Government's initiatives on education and
scale up in private schools business.
n New initiatives are expected to scale up on the back of higher banking and
management training revenues.
n We have assumed margins to improve (YoY basis) on the back of better capacity
utilization, higher volumes and better leverage on costs.
n However, salary increments and currency impact may set off a part of this impact.
n After accounting for its 25% share in NIIT Technologies' profits, we expect the
net profit to go up to Rs.849mnn in FY11E and Rs.1.16bn in FY12E. This will
translate into an EPS of Rs.5.1 in FY11E and Rs.7 in FY12E.
Valuations
n Our DCF based price target works out to Rs.74. We have assumed WACC of
13.6% and terminal growth rate of 3%.
n At our target price, FY12E earnings will be discounted by 10.5x.
Concerns
n A delayed recovery in the global economy could impact revenue growth of NIIT.
n Steep rupee appreciation v/s major global currencies may impact the financials
of NIIT.
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