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NIIT has sold Element K, its US subsidiary, to SkillSoft Corporation (SkillSoft) for
US$110mn in an all-cash deal. The company also announced its entry into a
strategic long-term services and licensing agreement with SkillSoft. Element K was
part of NIIT’s corporate learning solution (CLS) business.
Deal rationale
A big deal
Element K was operating in the areas of online products for corporates and
e-learning libraries. NIIT had acquired Element K in August 2006 for a
consideration of US$35mn. In FY2006, Element K had reported net revenue of
US$66mn, with EBITDA margin of ~5%, and was loss making at the PAT level.
Element K contributed US$85mn to NIIT’s net revenue in FY2011 (~30% of NIIT’s
overall revenue) with EBITDA margin of ~8.1%, implying a revenue CAGR of
~5% over FY2006-11.
This deal has been finalized at a consideration of US$110mn, which is ~70% of
NIIT’s market capitalization; Element K contributes just ~30% to NIIT’s overall
revenue. Thus, the deal brings in applaud for NIIT’s superior value unlocking
capability. Also, with a muted ~5% CAGR and margin tad less than NIIT’s anchor
businesses such as individual learning solution (ILS) and school learning solution
(SLS), this clearly was a rational move by the company.
NIIT has entered into this deal to focus on one of its primary growth
drivers – managed training services (MTS). Management indicated that it would
further invest in growing NIIT’s four platforms – MTS, cloud campus, private
school venture and university program.
In conjunction with the deal, NIIT has also entered into a strategic agreement with
SkillSoft for content development of SkillSoft’s e-learning products and
collaboration in R&D initiatives.
Change in business mix to propel margins and improve profitability
Element K was part of NIIT’s CLS business, which reported EBITDA margin of
~8.1% and contributed ~47% to NIIT’s top line in FY2011. Margin of the CLS
business was much lower than other businesses – ILS (41% to revenue, 18.4%
OPM) and SLS (12% to revenue, 11.4% OPM). NIIT’s consolidated EBITDA margin
stood at ~13% for FY2011.
After this deal, revenue contribution from the low-margin CLS business is expected
to slide down to ~35% in FY2012 (impact is expected to flow in 2HFY2012 only)
and ~20% in FY2013. In fact, the remaining 20% of the business would primarily
be focusing on MTS, which has a scope to improve its margins (as the nature of
work is identical to IT services with OPM of 15-18%). This tectonic shift in business
mix to the high-margin ILS business, at 60% of revenue in FY2013, as well as the
high-margin MTS business in CLS would boost the company’s overall EBITDA
margin to 13.5% and 15.9% (previous estimates – 13.1% and 13.8%) for FY2012
and FY2013, respectively, from 12.8% in FY2011
NIIT’s revenue is expected to slip by 4.5% and 8.5% yoy in FY2012 and FY2013,
respectively, due to monetization of Element K (estimates do not include proceeds
possible because of the MTS contract won against the deal). Whereas EBITDA is
expected to remain almost flat yoy in FY2012 and grow by 7.4% yoy in FY2013.
Cash proceeds of US$110mn are expected to draw down debt of `365cr and the
remaining is expected to add to cash and equity. Hence, interest expense is
expected to be nullified effective from 2HFY2012 and income is expected on net
positive cash balance of ~`200cr. This would lead to the deal being EPS accretive.
RoCE set to improve
NIIT is expected to use the proceedings from this deal to retire its debt, which stood
at `365cr as of 1QFY2012. This would decrease the capital employed along with
improving the company’s EBIT margin. Thus, we expect this deal to augment NIIT’s
return on capital employed (RoCE) to ~10.6% for FY2012 and ~11.7% for
FY2013 from 8.0% in FY2011.
Outlook and valuation
Management’s move is in-line with its mission to improve its RoCE. Element K,
which is highly exposed to global macroeconomics, especially the US, proved to be
a growth and profitability laggard during the downturn and as traction for learning
products was relatively subdued vis-à-vis the MTS business. In summary, the deal
has proved to be OPM, EPS as well as RoCE accretive, thus clearly unlocking NIIT’s
value. Earlier, the company’s stake in NIIT Tech was the only rationale for an
upside in its valuation; but with Element K’s monetization, the company’s core
profitability would improve substantially. Hence, we maintain our Buy
recommendation on the stock with a target price of `62, based on SOTP
EV/EBITDA valuation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NIIT has sold Element K, its US subsidiary, to SkillSoft Corporation (SkillSoft) for
US$110mn in an all-cash deal. The company also announced its entry into a
strategic long-term services and licensing agreement with SkillSoft. Element K was
part of NIIT’s corporate learning solution (CLS) business.
Deal rationale
A big deal
Element K was operating in the areas of online products for corporates and
e-learning libraries. NIIT had acquired Element K in August 2006 for a
consideration of US$35mn. In FY2006, Element K had reported net revenue of
US$66mn, with EBITDA margin of ~5%, and was loss making at the PAT level.
Element K contributed US$85mn to NIIT’s net revenue in FY2011 (~30% of NIIT’s
overall revenue) with EBITDA margin of ~8.1%, implying a revenue CAGR of
~5% over FY2006-11.
This deal has been finalized at a consideration of US$110mn, which is ~70% of
NIIT’s market capitalization; Element K contributes just ~30% to NIIT’s overall
revenue. Thus, the deal brings in applaud for NIIT’s superior value unlocking
capability. Also, with a muted ~5% CAGR and margin tad less than NIIT’s anchor
businesses such as individual learning solution (ILS) and school learning solution
(SLS), this clearly was a rational move by the company.
NIIT has entered into this deal to focus on one of its primary growth
drivers – managed training services (MTS). Management indicated that it would
further invest in growing NIIT’s four platforms – MTS, cloud campus, private
school venture and university program.
In conjunction with the deal, NIIT has also entered into a strategic agreement with
SkillSoft for content development of SkillSoft’s e-learning products and
collaboration in R&D initiatives.
Change in business mix to propel margins and improve profitability
Element K was part of NIIT’s CLS business, which reported EBITDA margin of
~8.1% and contributed ~47% to NIIT’s top line in FY2011. Margin of the CLS
business was much lower than other businesses – ILS (41% to revenue, 18.4%
OPM) and SLS (12% to revenue, 11.4% OPM). NIIT’s consolidated EBITDA margin
stood at ~13% for FY2011.
After this deal, revenue contribution from the low-margin CLS business is expected
to slide down to ~35% in FY2012 (impact is expected to flow in 2HFY2012 only)
and ~20% in FY2013. In fact, the remaining 20% of the business would primarily
be focusing on MTS, which has a scope to improve its margins (as the nature of
work is identical to IT services with OPM of 15-18%). This tectonic shift in business
mix to the high-margin ILS business, at 60% of revenue in FY2013, as well as the
high-margin MTS business in CLS would boost the company’s overall EBITDA
margin to 13.5% and 15.9% (previous estimates – 13.1% and 13.8%) for FY2012
and FY2013, respectively, from 12.8% in FY2011
NIIT’s revenue is expected to slip by 4.5% and 8.5% yoy in FY2012 and FY2013,
respectively, due to monetization of Element K (estimates do not include proceeds
possible because of the MTS contract won against the deal). Whereas EBITDA is
expected to remain almost flat yoy in FY2012 and grow by 7.4% yoy in FY2013.
Cash proceeds of US$110mn are expected to draw down debt of `365cr and the
remaining is expected to add to cash and equity. Hence, interest expense is
expected to be nullified effective from 2HFY2012 and income is expected on net
positive cash balance of ~`200cr. This would lead to the deal being EPS accretive.
RoCE set to improve
NIIT is expected to use the proceedings from this deal to retire its debt, which stood
at `365cr as of 1QFY2012. This would decrease the capital employed along with
improving the company’s EBIT margin. Thus, we expect this deal to augment NIIT’s
return on capital employed (RoCE) to ~10.6% for FY2012 and ~11.7% for
FY2013 from 8.0% in FY2011.
Outlook and valuation
Management’s move is in-line with its mission to improve its RoCE. Element K,
which is highly exposed to global macroeconomics, especially the US, proved to be
a growth and profitability laggard during the downturn and as traction for learning
products was relatively subdued vis-à-vis the MTS business. In summary, the deal
has proved to be OPM, EPS as well as RoCE accretive, thus clearly unlocking NIIT’s
value. Earlier, the company’s stake in NIIT Tech was the only rationale for an
upside in its valuation; but with Element K’s monetization, the company’s core
profitability would improve substantially. Hence, we maintain our Buy
recommendation on the stock with a target price of `62, based on SOTP
EV/EBITDA valuation.
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