NIIT Ltd - Target price revision - Valuation compellingly attractive without ILS turnaround :: Centrum

Rating: Buy; Target Price: Rs67; CMP: Rs41.9; Upside: 59.9%



Valuation compellingly attractive without ILS turnaround



We reiterate Buy on NIIT Ltd with a new TP of Rs67 based on a
Sum-of-parts valuation with Sep-16E estimates. We think valuations
have again become compellingly attractive with the recent decline in
stock price (after 1QFY15 results did not meet the high expectations
despite EBITDA being up 29.9% YoY). Even without factoring in a sharp
recovery in ILS, we find significant upside is possible for the
valuation of the core business. With over 70% of current EV being
accounted for by the holding in NIIT Technologies, we think that NIIT
Ltd’s high-growth business in Corporate Learning Services is
undervalued while its ILS recovery can add further upside to our
target price.

$ Not baking in an ILS turnaround, new estimates conservative: ILS
revenues lagged our earlier estimates in 1QFY14 and we think we were
over-optimistic on average price realization improvements from new
courses like Analytics. While we are cautiously optimistic about the
growth in Beyond-IT enrolments for the flagship GNIIT program (20% of
GNIIT enrolments over 1QFY15 were for Beyond-IT programs), we wait for
sustained improvement in overall enrolments before calling a
turnaround in ILS. We note that if a dramatic turnaround happens, that
will lend additional upside. We remain optimistic about medium-term
prospects given high fixed costs in the ILS segment and the fact that
margins were as high as 16% in FY12.

$ CLS segment margin improvement not factored in even as scale grows:
While we expect CLS segment margins to improve with scale (we expect a
200-300bps improvement given SG&A leverage possible), we have not
factored that into our estimates as 1) Continued sales investments
ahead of revenue can be expected in this high-growth segment (CAGR of
19.1% in USD terms over FY14-17E) and 2) We have modeled costs at the
company level due to the limited availability of data at the
individual segment level. Given that margins are still not at the
steady state level, we think that an EV/Sales multiple would value
this segment more fairly and we value this segment at 0.8x Sep-16E
Sales in our sum-of-parts valuation.

$ School Learning Services and Skill Building Services’ margin
improvement to be gradual: With the exit of government school
contracts, we anticipated immediate improvement in margins of School
Learning Services (SLS). But while working capital improvement has
been significant with the end of government school contracts, margin
improvement is not yet visible and management attributed this to
overheads related to government contracts that persist even as the
revenue base reduces. Breakeven in Skill Building Services (SBS/ Yuva
Jyoti) still seems some time away despite encouraging improvement in
traction (enrolments at 8,000 in 1QFY15 Vs 6,500 in 4QFY14) as center
expansion continued.

$ Estimates now conservative, but believe in structural re-rating:
While we wait for a turnaround in ILS, we think that to unlock value
from the CLS segment, a different approach is needed compared to our
earlier EV/EBITDA approach that clubbed all four segments. We still
value the ILS, SLS and SBS segments together and believe their margins
have bottomed out. We do not factor in aggressive margin expansion for
any of these segments and value them at 3x Sep-16E EBITDA and value
the CLS segment at 0.8x Sep-16E Sales. We arrive at a new TP of Rs67
based on sum-of-parts valuation using Sep-16E Sales and EBITDA
estimates (see Exhibits 3, 4 & 5) and maintain Buy rating.  Key
downside risks are continued slow conversion of CLS book to revenue
and decreases in ILS enrolments beyond what we have factored.



Thanks & Regards

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