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NIIT
OW(V): 1Q Revenues in-line; current investments likely to
improve margins in the long term.
Revenues broadly in-line with consensus in a seasonally
weak quarter
Margins declined owing to wage hikes and investments in
new learning platforms
We lower our valuation and estimates. Cut TP from INR85
to INR80
NIIT Limited reported 1Q12 revenues of INR 3,211m, up 15.5% y-o-y. Currency (INR
appreciation to USD) had a negative impact on the top-line (-100-150bp y-o-y). The first
quarter (1Q12) y-o-y growth was higher compared to 1QFY11/10/09 of +6.5%/0.5%
/15.2%, respectively. EBITDA margins declined 70bp y-o-y and 300bp sequentially due to
increased investments (in Cloud Campus and NIIT One World learning platforms), increase
in wages, and increased hiring for management training services and ILS.
Near-term investments to be margin accretive in the long-term: NIIT has invested in Cloud
campus (in over 50 centers already) to provide remote IT education, including online labs
for students. These centers are likely to significantly improve the margins of ILS, as they
enable better capacity utilisation on a long term and improve top-line growth due to better
penetration in urban and semi-urban areas. Additionally, in its CLS division, the company
witnessed a ramp-up in its managed services deals signed in the last few quarters, with a
total contract value of USD110m. The order book for CLS has also improved and margins
are likely to improve going forward as deals ramp-up further operating leverage.
The management continued to reiterate its focus on releasing capital employed from non-profit
divisions. In that regard, in its SLS division, the focus remains on the non-government (private
schools) market. Consequently, the non-government school segment grew +24% corresponding
to the previous year while the government school segment declined 4% y-o-y. We expect the
return on average capital employed to improve in FY12/13 by near 4pp every year. The
management reduced its gross debt from INR4,256m in 1QFY11 to INR 3,517m in the current
quarter thus reducing the net debt to INR2,959m (INR3,133m in 4QFY11).
Valuation: The stock is currently trading at c10x times our FY12 earnings estimate.
Historically, the stock traded at a one year forward PE average of 12x in the last five years
and 11x in the last two years. We cut our valuation multiple from 12x to 10x due to nearterm
margins/earnings risk as investments remain high and high share of profits (48% in
FY11) from associates than the core business. We remain OW(V) with a TP of INR80,
valuing it at 10x FY13 earnings.
ILS grew +15.7% y-o-y on back of near 16% y-o-y volume growth, with net revenues of INR 1,178m.
Margins in ILS declined from 11.2% in 1Q11 to 9.2% due to close to INR480m extra cost incurred in
implementing Cloud Campus and NIIT one world platforms. The net enrolment increased +11%
sequentially to 140,455. IT careers enrolment was up16% y-o-y, while ILS placements increased by
+28% y-o-y. Cloud Campus was implemented in 50 centers in this quarter. Close to 60% of the pending
order book at INR1,384m is executable in the next twelve months. Overall, eight new centers were added
this quarter and there was a 6% y-o-y increase in seat capacity. The management guided for an 18%
growth in revenues and a flat margins for FY12.
The CLS division posted the best growth in revenues at INR1,630m, +18.4% y-o-y driven by a strong
growth in management training services (MTS) up +56%, and Learning products up +22%. CLS recently
bagged six orders worth USD110m to be executed over a period of nearly five years. Execution was
ramped up this quarter to achieve 80% of the target quarterly run-rate. The EBITDA margin improved
102bp y-o-y to 8.9%. The management guided for a volume growth of 18% in FY12 and a margin
improvement of 150-200bp.
The SLS division posted net revenues of INR403m, +4.9% y-o-y and an EBITDA margin of 12.2%
(-470bps y-o-y). A total of 173 private schools were added this quarter overall contributing to 41% of the
revenues, up +24% y-o-y, while the non-performing government school segment declined 4% y-o-y. The
order book grew to INR4,975m up +10%. The management guided for a 25% revenue growth in FY12
and a margin improvement of 100-200bp.
Valuation
We factor in a revenue growth +17.3% for FY12, compared to an implied revenue growth of near 19%
guided by the management and factor in a margin improvement of c80bp for FY12 compared to near
100bp guided by the management.
The stock is currently trading at c10x times our FY12 earning. Historically, the stock traded at a one year
forward PE average of 12x in the last five years and 11x in the last two years. We cut our valuation
multiple from 12x to 10x due to near-term margins/earnings risk as investments remain high and high
share of profits (48% in FY11) from associates than the core business. We remain OW(V) with a TP of
INR80, valuing it at 10x FY13 earnings.
Under our research model, for stocks with a volatility indicator, the Neutral band is ten percentage points
above and below the hurdle rate for India stocks of 11%. This translates into a Neutral band of 1% to 21%
around the current share price. Our target price of INR80 suggests a potential return (including a dividend
yield) of 39.2%, which is above the Neutral band; therefore, we maintain our Overweight rating.
Risks
Increasing competition in the private school teaching aid solutions market could slow down the expected
growth rate in the SLS business. Macro-weakness could result in slower spend in the online training
investment by corporates in the US and Europe. Currency fluctuation (INR appreciation) can also impact
earnings from the CLS business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NIIT
OW(V): 1Q Revenues in-line; current investments likely to
improve margins in the long term.
Revenues broadly in-line with consensus in a seasonally
weak quarter
Margins declined owing to wage hikes and investments in
new learning platforms
We lower our valuation and estimates. Cut TP from INR85
to INR80
NIIT Limited reported 1Q12 revenues of INR 3,211m, up 15.5% y-o-y. Currency (INR
appreciation to USD) had a negative impact on the top-line (-100-150bp y-o-y). The first
quarter (1Q12) y-o-y growth was higher compared to 1QFY11/10/09 of +6.5%/0.5%
/15.2%, respectively. EBITDA margins declined 70bp y-o-y and 300bp sequentially due to
increased investments (in Cloud Campus and NIIT One World learning platforms), increase
in wages, and increased hiring for management training services and ILS.
Near-term investments to be margin accretive in the long-term: NIIT has invested in Cloud
campus (in over 50 centers already) to provide remote IT education, including online labs
for students. These centers are likely to significantly improve the margins of ILS, as they
enable better capacity utilisation on a long term and improve top-line growth due to better
penetration in urban and semi-urban areas. Additionally, in its CLS division, the company
witnessed a ramp-up in its managed services deals signed in the last few quarters, with a
total contract value of USD110m. The order book for CLS has also improved and margins
are likely to improve going forward as deals ramp-up further operating leverage.
The management continued to reiterate its focus on releasing capital employed from non-profit
divisions. In that regard, in its SLS division, the focus remains on the non-government (private
schools) market. Consequently, the non-government school segment grew +24% corresponding
to the previous year while the government school segment declined 4% y-o-y. We expect the
return on average capital employed to improve in FY12/13 by near 4pp every year. The
management reduced its gross debt from INR4,256m in 1QFY11 to INR 3,517m in the current
quarter thus reducing the net debt to INR2,959m (INR3,133m in 4QFY11).
Valuation: The stock is currently trading at c10x times our FY12 earnings estimate.
Historically, the stock traded at a one year forward PE average of 12x in the last five years
and 11x in the last two years. We cut our valuation multiple from 12x to 10x due to nearterm
margins/earnings risk as investments remain high and high share of profits (48% in
FY11) from associates than the core business. We remain OW(V) with a TP of INR80,
valuing it at 10x FY13 earnings.
ILS grew +15.7% y-o-y on back of near 16% y-o-y volume growth, with net revenues of INR 1,178m.
Margins in ILS declined from 11.2% in 1Q11 to 9.2% due to close to INR480m extra cost incurred in
implementing Cloud Campus and NIIT one world platforms. The net enrolment increased +11%
sequentially to 140,455. IT careers enrolment was up16% y-o-y, while ILS placements increased by
+28% y-o-y. Cloud Campus was implemented in 50 centers in this quarter. Close to 60% of the pending
order book at INR1,384m is executable in the next twelve months. Overall, eight new centers were added
this quarter and there was a 6% y-o-y increase in seat capacity. The management guided for an 18%
growth in revenues and a flat margins for FY12.
The CLS division posted the best growth in revenues at INR1,630m, +18.4% y-o-y driven by a strong
growth in management training services (MTS) up +56%, and Learning products up +22%. CLS recently
bagged six orders worth USD110m to be executed over a period of nearly five years. Execution was
ramped up this quarter to achieve 80% of the target quarterly run-rate. The EBITDA margin improved
102bp y-o-y to 8.9%. The management guided for a volume growth of 18% in FY12 and a margin
improvement of 150-200bp.
The SLS division posted net revenues of INR403m, +4.9% y-o-y and an EBITDA margin of 12.2%
(-470bps y-o-y). A total of 173 private schools were added this quarter overall contributing to 41% of the
revenues, up +24% y-o-y, while the non-performing government school segment declined 4% y-o-y. The
order book grew to INR4,975m up +10%. The management guided for a 25% revenue growth in FY12
and a margin improvement of 100-200bp.
Valuation
We factor in a revenue growth +17.3% for FY12, compared to an implied revenue growth of near 19%
guided by the management and factor in a margin improvement of c80bp for FY12 compared to near
100bp guided by the management.
The stock is currently trading at c10x times our FY12 earning. Historically, the stock traded at a one year
forward PE average of 12x in the last five years and 11x in the last two years. We cut our valuation
multiple from 12x to 10x due to near-term margins/earnings risk as investments remain high and high
share of profits (48% in FY11) from associates than the core business. We remain OW(V) with a TP of
INR80, valuing it at 10x FY13 earnings.
Under our research model, for stocks with a volatility indicator, the Neutral band is ten percentage points
above and below the hurdle rate for India stocks of 11%. This translates into a Neutral band of 1% to 21%
around the current share price. Our target price of INR80 suggests a potential return (including a dividend
yield) of 39.2%, which is above the Neutral band; therefore, we maintain our Overweight rating.
Risks
Increasing competition in the private school teaching aid solutions market could slow down the expected
growth rate in the SLS business. Macro-weakness could result in slower spend in the online training
investment by corporates in the US and Europe. Currency fluctuation (INR appreciation) can also impact
earnings from the CLS business.
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