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Prospects improving
We believe NIIT is likely to witness structural changes in
its financials in coming years. With improvement in
operations, the company is likely to register better
operating margins, free cash flow and return ratios.
Also, we expect net profit (ex-NIIT Tech share of profit)
to grow faster than EBITDA on better financial
management. We re-iterate Buy rating on the stock
considering financial improvement and attractive
valuation of 8.6x FY12E earnings estimate with 2.4%
dividend yield.
Better revenue mix to help expand margins: We
expect the improvement in sales mix within each
segment to help expand margins on y-o-y basis. We
expect the improvement in margin to be 217bp over
FY11E-13E mainly due to better sales mix within
Corporate Learning Solution (CLS) and School Learning
Solution (SLS).
Net profit growth to be faster: We anticipate net
profit would grow at a higher rate than sales. This
would be mainly driven by 1) improvement in
operating margin and 2) rationalization of cost of debt
and the possibility of lower depreciation rate as
management would be cautious on addition of
government school contracts. Also, some assets would
get transferred to government schools upon contracts
getting over. Topline growth coupled with margin
expansion and low capex would result in free cash flow
generation and improvement in return ratios.
Attractive valuation; reiterate Buy: We believe that
the current valuation of 8.6x FY12E earnings estimates
is attractive considering improvement in business
prospects which would result in better return ratios,
generation of free cash flow and dividend yield of 2.4%
(FY10) . This also indicates the possibility of re-rating.
'Fundamentals to improve
We expect structural changes in company to lead to better sales mix resulting in improvement in
operating margins, generation of free cash flow and better return ratios. Each segment is likely to
contribute to this improvement. Going forward, we anticipate each potential segment to become
free cash flow and witness improvement in return ratios.
Key drivers for the above mentioned improvements are:
Individual Learning Solution segment: The course mix is moving in favour of long-term
courses which would improve the order book position going forward. The revenue growth
would be driven by volume growth as well as pricing which would flow from an increase in the
share of long term courses. The strategy of the company would be to grow its franchisee as well
as owned centers. While in India, both franchisee and owned centers would grow, in China
(~17% of ILS revenue) higher growth would be in owned centers thereby resulting in higher
revenue share for NIIT. Operationally, the company is working on setting up VSAT based
delivery channels for courses across centers to help build scale and address shortage in quality
faculty. We believe this would help the company expand margins.
Corporate Learning Solution segment: This segment witnessed a pick-up in revenue growth
in the last two to three quarters on the back of growth in volumes. Online learning products and
training outsourcing were the two key sub-segments responsible for a bounce back in growth
which together contribute half to CLS. Also, growth in online and training outsourcing
enhances the overall profile of revenue as clients in these two segments come with longer term
perspective. The company has already bagged two large deals in these segments during
9MFY11 and expects greater traction with the possibility of higher ticket size deals in these two
segments. Since these segments enjoy higher margins, the overall margin of CLC segment
would expand.
School Learning Solution: The management has changed its focus towards non-government
school business which we believe is more remunerative. Though the company was a late
entrant in multimedia to school market, penetration is low in this segment. The company has
the requisite sales force now to grow this business and accelerate the additions in schools per
quarter to 80-100+. While this approach would dent growth in FY11E, it is beneficial for the
company in the long run from the return on investment perspective.
New businesses: NIIT Imperia, IFBI and Uniqua are gaining strong traction with regard to
enrollment growth. Strong hiring by both public and private sector banks are key drivers for
strong growth in this segment. In terms of profitability, this segment is likely to break-even at
EBITDA level in 1HFY12E.
Balance sheet to get strengthened
With room for margin expansion and limited capex, we believe there is ample scope for ROE
expansion, going forward. With the decision of going slow on government school contracts, the
company is expected to become free cash flow, which would help expand ROE and ROCE.
In the absence of any inorganic growth strategy, we see two possible use of the excess so generated
– payment of loans or higher dividend payout. We see higher probability of payout of loan going
forward which would help increase EPS.
Valuations attractive; re-iterate Buy
With volumes in the Individual learning Solution (ILS) and Corporate Learning Solution (CLS)
segments improving, along with margin expansion, we expect the company to register 8.4%, 17.6%
and 22.7% revenue, EBITDA and net profit CAGR, respectively, FY10-13E. At the CMP, the stock is
trading at an attractive valuation of 8.6x FY12E EPS. This, along with improvement in financials
makes a strong case for re-rating of multiples. We re-iterate Buy rating on the stock. At the target
price of Rs74, the P/E is 10.8x FY12E and 9.4x FY13E earnings estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Prospects improving
We believe NIIT is likely to witness structural changes in
its financials in coming years. With improvement in
operations, the company is likely to register better
operating margins, free cash flow and return ratios.
Also, we expect net profit (ex-NIIT Tech share of profit)
to grow faster than EBITDA on better financial
management. We re-iterate Buy rating on the stock
considering financial improvement and attractive
valuation of 8.6x FY12E earnings estimate with 2.4%
dividend yield.
Better revenue mix to help expand margins: We
expect the improvement in sales mix within each
segment to help expand margins on y-o-y basis. We
expect the improvement in margin to be 217bp over
FY11E-13E mainly due to better sales mix within
Corporate Learning Solution (CLS) and School Learning
Solution (SLS).
Net profit growth to be faster: We anticipate net
profit would grow at a higher rate than sales. This
would be mainly driven by 1) improvement in
operating margin and 2) rationalization of cost of debt
and the possibility of lower depreciation rate as
management would be cautious on addition of
government school contracts. Also, some assets would
get transferred to government schools upon contracts
getting over. Topline growth coupled with margin
expansion and low capex would result in free cash flow
generation and improvement in return ratios.
Attractive valuation; reiterate Buy: We believe that
the current valuation of 8.6x FY12E earnings estimates
is attractive considering improvement in business
prospects which would result in better return ratios,
generation of free cash flow and dividend yield of 2.4%
(FY10) . This also indicates the possibility of re-rating.
'Fundamentals to improve
We expect structural changes in company to lead to better sales mix resulting in improvement in
operating margins, generation of free cash flow and better return ratios. Each segment is likely to
contribute to this improvement. Going forward, we anticipate each potential segment to become
free cash flow and witness improvement in return ratios.
Key drivers for the above mentioned improvements are:
Individual Learning Solution segment: The course mix is moving in favour of long-term
courses which would improve the order book position going forward. The revenue growth
would be driven by volume growth as well as pricing which would flow from an increase in the
share of long term courses. The strategy of the company would be to grow its franchisee as well
as owned centers. While in India, both franchisee and owned centers would grow, in China
(~17% of ILS revenue) higher growth would be in owned centers thereby resulting in higher
revenue share for NIIT. Operationally, the company is working on setting up VSAT based
delivery channels for courses across centers to help build scale and address shortage in quality
faculty. We believe this would help the company expand margins.
Corporate Learning Solution segment: This segment witnessed a pick-up in revenue growth
in the last two to three quarters on the back of growth in volumes. Online learning products and
training outsourcing were the two key sub-segments responsible for a bounce back in growth
which together contribute half to CLS. Also, growth in online and training outsourcing
enhances the overall profile of revenue as clients in these two segments come with longer term
perspective. The company has already bagged two large deals in these segments during
9MFY11 and expects greater traction with the possibility of higher ticket size deals in these two
segments. Since these segments enjoy higher margins, the overall margin of CLC segment
would expand.
School Learning Solution: The management has changed its focus towards non-government
school business which we believe is more remunerative. Though the company was a late
entrant in multimedia to school market, penetration is low in this segment. The company has
the requisite sales force now to grow this business and accelerate the additions in schools per
quarter to 80-100+. While this approach would dent growth in FY11E, it is beneficial for the
company in the long run from the return on investment perspective.
New businesses: NIIT Imperia, IFBI and Uniqua are gaining strong traction with regard to
enrollment growth. Strong hiring by both public and private sector banks are key drivers for
strong growth in this segment. In terms of profitability, this segment is likely to break-even at
EBITDA level in 1HFY12E.
Balance sheet to get strengthened
With room for margin expansion and limited capex, we believe there is ample scope for ROE
expansion, going forward. With the decision of going slow on government school contracts, the
company is expected to become free cash flow, which would help expand ROE and ROCE.
In the absence of any inorganic growth strategy, we see two possible use of the excess so generated
– payment of loans or higher dividend payout. We see higher probability of payout of loan going
forward which would help increase EPS.
Valuations attractive; re-iterate Buy
With volumes in the Individual learning Solution (ILS) and Corporate Learning Solution (CLS)
segments improving, along with margin expansion, we expect the company to register 8.4%, 17.6%
and 22.7% revenue, EBITDA and net profit CAGR, respectively, FY10-13E. At the CMP, the stock is
trading at an attractive valuation of 8.6x FY12E EPS. This, along with improvement in financials
makes a strong case for re-rating of multiples. We re-iterate Buy rating on the stock. At the target
price of Rs74, the P/E is 10.8x FY12E and 9.4x FY13E earnings estimates.
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