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NIIT LTD (NIIT)
PRICE: RS.46 RECOMMENDATION: BUY
TARGET PRICE: RS.63 FY13E P/E: 8X
q NIIT's 2QFY12 results were below expectations. While the revenues were
below our assumed levels, EBIDTA margins also disappointed. Investments
towards cloud campus and 1-NIIT impacted profitability. In fact,
this is the fifth successive quarter of disappointment in margins. Over
the past few quarters, margins have been impacted by investments in
new delivery models (ILS), in transitioning new projects (CLS) and in restructuring
(SLS), we understand.
q Within businesses, ILS and CLS reported lower-than-expected numbers
for the quarter. India-based ILS revenues grew by 9% YoY as the company
transitioned to the new mode of delivery. The management expects
high growth in this business in the next half of the fiscal, though.
q In CLS, NIIT has sold off its Element K business for $110mn. The net realization
will be utilized for repaying part debt, which should improve the
balance sheet strength. NIIT has now identified four growth drivers in
Cloud Campus (ILS), Managed Training Services (MTS), N Guru (SLS) and
Skill Building Solutions. The company is also focused on improving the
return ratios, which have been unimpressive till date.
q An increased demand for learning should support future growth of NIIT,
we opine. NIIT's performance over the past few quarters has been below
expectations on the margin front and we will closely watch the margin
performance in FY12 and FY13. After incorporating 2QFY12 earnings, our
FY12 EPS estimate stands at Rs.5.2. We also introduce FY13 earnings estimates
and expect an EPS of Rs.5.7. The stock currently trades at 8x FY13E
earnings. We maintain BUY with a price target of Rs.63, which will discount
our FY13E EPS by 11x. A slower-than-expected global recovery and
a sharper-than-expected rupee appreciation may impact growth rates.
ILS
n ILS revenues grew by 12%. However, about 4% came through realignment of
revenues from CLS (One NIIT).
n Of the balance, India based revenues grew by 9% but international revenues
continued to remain impacted and de-grew by 1% QoQ.
n The 9% growth in India based revenues was below estimates. According to the
company, the adoption of the One NIIT model and cloud campus had impacted
revenue growth for the quarter.
n Global enrolments grew by just about 5%, helped largely by 150% higher enrolments
in Banking.
n NIIT is now focusing on the One NIIT model and sees Cloud Campus as the next
growth area for this business. The company has invested significantly in building
the Cloud infrastructure which also impacted margins during the quarter.
n The Cloud Campus program has been rolled out in 190 centres and already has
11000 enrollments already.
CLS
n CLS volumes grew by 14% on a YoY Basis.
n This was before considering the impact of the realignment of business to ILS,
which had an impact of about 4% of revenues. Post this realignment, volumes
grew by 10% YoY.
n The company faced an adverse forex impact of about Rs.60mn (4% of revenues),
which led to a flat growth QoQ.
n NIIT has transferred Element K business to SkillSoft, with which it already has
had business relationship. This is with a view to focus more on Managed Training
Services.
n NIIT will now cater to the outsourcing needs of SkillSoft, we understand.
n The subsidiary has been sold off at $110mn. It had revenues of $86mn in FY11
with a marginal PAT of about $2.86mn, we believe.
n About Rs.190mn worth of assets have also been transferred to SkillSoft.
n The company expects to get a net of about $70mn for the transaction.
n The company intends to repay part of its debt with this money and also use it for
expansion in its focus areas.
n We believe that, repayment of debt will impart strength to the balance sheet.
n After transferring the Element K business, the company will be left with about 1/
3rd of the overall revenues in CLS. Of this, more than 60% is contributed by
Managed Training Services (MTS), which is once again growing at a very fast
pace.
SLS
n SLS reported 12% growth on a YoY basis. The company has been focusing on
the private schools and added about 133 non-Government schools during the
quarter. YTD, the company has added 306 private schools. .
n The non-Government schools business contributed about 46% of the SLS business
during the quarter.
n The company witnessed continuing momentum in IP based orders. N Guru, the
company's offering in the private schools business is gaini9ngincreasing acceptance,
as is reflected in the additional schools bookings.
n The company now has pending order book of $77mn, of which 62% is executable
in the next 12 months. This pending order book should support business
growth in the future quarters, we believe.
Margins lower
n Margins for the quarter were lower by about 78bps on a YoY basis.
n This fall was largely due to the ILS business and also the adverse impact of currency
fluctuations in the CLS business, as mentioned above.
n Margins in ILS fell due to the additional investment made in Cloud Campus and
in the 1-NIIT program. The company is setting up the infrastructure for providing
Cloud Campus facilities across its centres, which will allow it to implement the
One NIIT program across centres.
n These investments are expected to keep margins subdued in the near term.
n Margins were also impacted by investments in the skills building initiative, which
the company has started with the joint venture - NIIT Yuva Jyoti Ltd - with National
Skills Development Council (NSDC). NSDC will hold 10% equity in NYJL,
which aims to train 7 million students in 1,500 centres across 1,000 cities over 10
years
n Margins in SLS and CLS improved YoY.
n CLS faced Rs.60mn impact on the revenue, which also impacted margins for CLS
as well as for the company.
n The improved mix of business in CLS should help improve margins over the next
few quarters.
Future prospects
n We have made changes to our FY12 earnings estimates.
n We expect the growth in individual learning business (including new businesses)
to be at about 16% in FY12.
n CLS business is expected to de-grow by about 25% in FY12, largely due to the
discontinuance of the EK business from 3Q.
n SLS is expected to report a 14% growth on the back of the scale up in private
schools business.
n We have assumed margins to improve (YoY basis) on the back of better capacity
utilization, higher volumes and better leverage on costs. Improved margins in the
CLS business post EK should also help improve margins.
n However, salary increments and currency impact may set off a part of this impact.
n After accounting for its 25.7% share in NIIT Technologies' profits, we expect the
net profit to be at Rs.853mn in FY12E. FY11 had a one time income of Rs.210mn
in 4QFY11. This will translate into an EPS of Rs.5.1 in FY12E.
n We introduce FY13 estimates, where we expect ILS revenues to grow by 15%
and SLS to report a 14% rise. CLS may report a de-growth in the absence of EK
revenues for the full fiscal as compared to only six months in FY12.
n However, margins are expected to improve as the benefits of the new delivery
model in ILS come in and the improved profitability in MTS also helps.
n Post considering the NIITT's share of profit, PAT is expected to rise by about 11%
to Rs.944mn, resulting in an EPS of Rs.5.7.
Valuations
n We maintain our BUY with a PT of Rs.63, which will discount our FY13E earnings
by 11x.
n We will accord higher valuations to the stock after we see signs of improved
growth rates in ILS and also the sustainability of the growth in MTS.
n Improvement in margins in FY13e will also be very important from our point of
view.
Concerns
n A slower-than-expected 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 (NIIT)
PRICE: RS.46 RECOMMENDATION: BUY
TARGET PRICE: RS.63 FY13E P/E: 8X
q NIIT's 2QFY12 results were below expectations. While the revenues were
below our assumed levels, EBIDTA margins also disappointed. Investments
towards cloud campus and 1-NIIT impacted profitability. In fact,
this is the fifth successive quarter of disappointment in margins. Over
the past few quarters, margins have been impacted by investments in
new delivery models (ILS), in transitioning new projects (CLS) and in restructuring
(SLS), we understand.
q Within businesses, ILS and CLS reported lower-than-expected numbers
for the quarter. India-based ILS revenues grew by 9% YoY as the company
transitioned to the new mode of delivery. The management expects
high growth in this business in the next half of the fiscal, though.
q In CLS, NIIT has sold off its Element K business for $110mn. The net realization
will be utilized for repaying part debt, which should improve the
balance sheet strength. NIIT has now identified four growth drivers in
Cloud Campus (ILS), Managed Training Services (MTS), N Guru (SLS) and
Skill Building Solutions. The company is also focused on improving the
return ratios, which have been unimpressive till date.
q An increased demand for learning should support future growth of NIIT,
we opine. NIIT's performance over the past few quarters has been below
expectations on the margin front and we will closely watch the margin
performance in FY12 and FY13. After incorporating 2QFY12 earnings, our
FY12 EPS estimate stands at Rs.5.2. We also introduce FY13 earnings estimates
and expect an EPS of Rs.5.7. The stock currently trades at 8x FY13E
earnings. We maintain BUY with a price target of Rs.63, which will discount
our FY13E EPS by 11x. A slower-than-expected global recovery and
a sharper-than-expected rupee appreciation may impact growth rates.
ILS
n ILS revenues grew by 12%. However, about 4% came through realignment of
revenues from CLS (One NIIT).
n Of the balance, India based revenues grew by 9% but international revenues
continued to remain impacted and de-grew by 1% QoQ.
n The 9% growth in India based revenues was below estimates. According to the
company, the adoption of the One NIIT model and cloud campus had impacted
revenue growth for the quarter.
n Global enrolments grew by just about 5%, helped largely by 150% higher enrolments
in Banking.
n NIIT is now focusing on the One NIIT model and sees Cloud Campus as the next
growth area for this business. The company has invested significantly in building
the Cloud infrastructure which also impacted margins during the quarter.
n The Cloud Campus program has been rolled out in 190 centres and already has
11000 enrollments already.
CLS
n CLS volumes grew by 14% on a YoY Basis.
n This was before considering the impact of the realignment of business to ILS,
which had an impact of about 4% of revenues. Post this realignment, volumes
grew by 10% YoY.
n The company faced an adverse forex impact of about Rs.60mn (4% of revenues),
which led to a flat growth QoQ.
n NIIT has transferred Element K business to SkillSoft, with which it already has
had business relationship. This is with a view to focus more on Managed Training
Services.
n NIIT will now cater to the outsourcing needs of SkillSoft, we understand.
n The subsidiary has been sold off at $110mn. It had revenues of $86mn in FY11
with a marginal PAT of about $2.86mn, we believe.
n About Rs.190mn worth of assets have also been transferred to SkillSoft.
n The company expects to get a net of about $70mn for the transaction.
n The company intends to repay part of its debt with this money and also use it for
expansion in its focus areas.
n We believe that, repayment of debt will impart strength to the balance sheet.
n After transferring the Element K business, the company will be left with about 1/
3rd of the overall revenues in CLS. Of this, more than 60% is contributed by
Managed Training Services (MTS), which is once again growing at a very fast
pace.
SLS
n SLS reported 12% growth on a YoY basis. The company has been focusing on
the private schools and added about 133 non-Government schools during the
quarter. YTD, the company has added 306 private schools. .
n The non-Government schools business contributed about 46% of the SLS business
during the quarter.
n The company witnessed continuing momentum in IP based orders. N Guru, the
company's offering in the private schools business is gaini9ngincreasing acceptance,
as is reflected in the additional schools bookings.
n The company now has pending order book of $77mn, of which 62% is executable
in the next 12 months. This pending order book should support business
growth in the future quarters, we believe.
Margins lower
n Margins for the quarter were lower by about 78bps on a YoY basis.
n This fall was largely due to the ILS business and also the adverse impact of currency
fluctuations in the CLS business, as mentioned above.
n Margins in ILS fell due to the additional investment made in Cloud Campus and
in the 1-NIIT program. The company is setting up the infrastructure for providing
Cloud Campus facilities across its centres, which will allow it to implement the
One NIIT program across centres.
n These investments are expected to keep margins subdued in the near term.
n Margins were also impacted by investments in the skills building initiative, which
the company has started with the joint venture - NIIT Yuva Jyoti Ltd - with National
Skills Development Council (NSDC). NSDC will hold 10% equity in NYJL,
which aims to train 7 million students in 1,500 centres across 1,000 cities over 10
years
n Margins in SLS and CLS improved YoY.
n CLS faced Rs.60mn impact on the revenue, which also impacted margins for CLS
as well as for the company.
n The improved mix of business in CLS should help improve margins over the next
few quarters.
Future prospects
n We have made changes to our FY12 earnings estimates.
n We expect the growth in individual learning business (including new businesses)
to be at about 16% in FY12.
n CLS business is expected to de-grow by about 25% in FY12, largely due to the
discontinuance of the EK business from 3Q.
n SLS is expected to report a 14% growth on the back of the scale up in private
schools business.
n We have assumed margins to improve (YoY basis) on the back of better capacity
utilization, higher volumes and better leverage on costs. Improved margins in the
CLS business post EK should also help improve margins.
n However, salary increments and currency impact may set off a part of this impact.
n After accounting for its 25.7% share in NIIT Technologies' profits, we expect the
net profit to be at Rs.853mn in FY12E. FY11 had a one time income of Rs.210mn
in 4QFY11. This will translate into an EPS of Rs.5.1 in FY12E.
n We introduce FY13 estimates, where we expect ILS revenues to grow by 15%
and SLS to report a 14% rise. CLS may report a de-growth in the absence of EK
revenues for the full fiscal as compared to only six months in FY12.
n However, margins are expected to improve as the benefits of the new delivery
model in ILS come in and the improved profitability in MTS also helps.
n Post considering the NIITT's share of profit, PAT is expected to rise by about 11%
to Rs.944mn, resulting in an EPS of Rs.5.7.
Valuations
n We maintain our BUY with a PT of Rs.63, which will discount our FY13E earnings
by 11x.
n We will accord higher valuations to the stock after we see signs of improved
growth rates in ILS and also the sustainability of the growth in MTS.
n Improvement in margins in FY13e will also be very important from our point of
view.
Concerns
n A slower-than-expected 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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