niit ru4 qfy2010-130510

1

4QFY2010 Result Update I IT

May 13, 2010

Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539

Investment Period 12 months

Stock Info

Sector IT

Market Cap (Rs cr) 1,110

Beta 1.2

52 WK High / Low 79/27

Avg. Daily Volume 1,894,551

Face Value (Rs) 2

BSE Sensex 17,266

Nifty 5,179

Reuters Code NIIT.BO

Bloomberg Code NIIT@IN

Shareholding Pattern (%)

Promoters 34.0

MF/Banks/Indian FLs 18.3

FII/NRIs/OCBs 26.3

Indian Public 21.4

Abs. (%) 3m 1yr 3yr

Sensex 6.9 43.6 25.1

NIIT (%) (0.3) 134.7 (40.1)

NIIT declared lower-than-expected results for 4QFY2010 registering a 1.9% decline in consolidated Net Revenues to Rs295cr. Bottom-line however, witnessed a spurt of 40.2% yoy for the quarter on a consolidated basis marking strong performance for the quarter. Excluding the share of profits from associates, Net Income grew 49% on account of the 400bp jump in EBIDTA Margins. Profitability improved on better product mix and improved scale in the ILS and CLS Segments exhibiting strong recovery in job prospects and strong demand revival across industries in Corporate Training. Thus, on the back of improving global economy indicators (ILS) and strong domestic foothold (SLS) aiding the company’s business plans, we expect it to seize the upcoming opportunities and register robust Operational performance in the near future. Hence, we recommend a Buy.

Top-line pressure mitigated by excellent Margin expansion: NIIT registered Top-line de-growth of 1.9% yoy in 4QFY2010 as the School Learning Services (SLS) and the Corporate Learning Services (CLS) businesses remained laggards during the quarter, witnessing 27.4% yoy and 5.9% yoy de-growth, respectively. The only outperformer was the Individual Learning Solutions (ILS) Business, which grew 13.9% yoy backed by 10.5% and 84% yoy growth in ILS-IT and ILS-FMT, respectively. The company added 101 Non-Government/Private Schools in the ICT Segment during the quarter taking the total schools serviced to 15,000 as on 4QFY2010 v/s 12,622 in 3QFY2010. NIIT recorded an impressive 400bp yoy expansion in EBITDA Margins backed by the 500bp, 370bp and 360bp yoy expansion in SLS, CLS and ILS business segments respectively, which boosted Bottom-line by 40% yoy during the quarter despite higher forex losses and tax costs incurred. Outlook and Valuation: We expect NIIT to clock CAGR of 10.3% and 16.6% in Top-line and Bottom-line respectively, over FY2010-12E. At current levels, the stock is trading at 11.6x FY2012E EPS. Based on the SOTP methodology, we have valued NIIT, excluding its stake in NIIT Tech, at 12x FY2012E EPS of Rs5.8, fetching Rs69.6/share. We have valued the company’s stake in NIIT Tech at Rs13/share (on market capitalisation) after providing 25% holding company discount, effectively resulting in an SOTP Target Price of Rs83. We recommend a Buy on the stock. Key Financials (Consolidated) Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E

Net Sales 1149 1199 1318 1459

% chg 14.1 4.4 9.9 10.7

Net Profit 70 70 83 95

% chg (7.8) 0.6 18.1 15.2

FDEPS (Rs) 4.2 4.3 5.0 5.8

EBITDA Margin (%) 10.3 13.1 13.7 14.1

P/E (x) 16.0 15.8 13.4 11.6

P/BV (x) 2.3 2.1 1.9 1.7

RoE (%) 15.9 14.1 15.1 15.8

RoCE (%) 9.1 11.1 11.5 12.1

EV/Sales (x) 1.1 1.1 1.0 0.9

EV/EBITDA (x) 10.8 8.6 7.4 6.4 Source: Company, Angel Research

NIIT Limited Performance Highlights

BUY CMP Rs67 Target Price Rs83

Rahul Jain Tel: 022 – 4040 3800 Ext: 345

E-mail: [email protected]

Vibha Salvi Tel: 022 – 4040 3800 Ext: 329

E-mail: [email protected]

May 13, 2010 2

NIIT Ltd. I 4QFY2010 Result Update

Source: Company, Angel Research Unfavourable currency movement restricted Top-line growth NIIT witnessed Top-line de-growth of 1.9% yoy in 4QFY2010 mainly on account of the negative exchange movement, with the Rupee appreciating against most currencies during the quarter. The adverse exchange impact was seen in NIIT’s US Dollar denominated Revenues, which stood at Rs10.6cr during the quarter. Geographically, India, RoW and China witnessed growth with public private partnership model being successfully implemented in China during the quarter, as it inaugurated its largest facility with a seating capacity of about 10,000 students. Segment-wise, the SLS and CLS businesses remained laggards during the quarter. The SLS de-grew by 27.4% yoy mainly on account of de-growth in Revenues from 662 government schools earlier implemented in Andhra Pradesh, which were taken back during 4QFY2010. However, the Non-Government/Private Schools clocked16% yoy growth on the back of encouraging acceptance of the e-Guru product and arrested further decline in SLS Revenues. The company added 101 Non-Government/Private Schools during the quarter taking the total number of schools serviced to 15,000 as on 4QFY2010 v/s 12,622 in 3QFY2010. The CLS Business continued to languish for the third consequent quarter and registered de-growth of 5.9% yoy despite registering volume growth of 15% in e-Learning Products mainly on account of the forex impact and introduction of low-priced short duration courses. The only outperformer during the quarter, the ILS Business, registered 13.9% yoy growth backed by the 10.5% and 84% yoy growth in ILS-IT and ILS-FMT (includes new businesses, viz. the Banking-IFBI, Management-Imperia and BPO-based NIIT Uniqua and other new initiatives. Growth in the former was driven by India enrolments that grew 21% yoy with 35% yoy growth in Edgeineers range of programs and 88% yoy in Infrastructure Management Services courses. Placements continued to be strong, crossing the 8,000 mark, up by 13% yoy. In the new businesses, fresh order intake stood at Rs9.3cr (Rs3.6cr) in 4QFY2010 v/s Rs9.4cr in 3QFY2010. ILS-FMT enrolments grew 58% for the quarter, signaling an improving trend with 14 more placement partners added by IFBI (totally 24 as on date), whereas three large BPOs were added for the New Hire Training business. The company’s total headcount stood at 3,485, down from 3,540 in 3QFY10.

Exhibit 1: 4QFY2010 Performance (Consolidated) Y/E March (Rs cr) 4QFY10 4QFY09 % chg FY2010 FY2009 % chg

Net Revenues 295 301 (1.9) 1,199 1,149 4.4 Operating Costs 247 264 (6.4) 1,043 1,030 1.2 EBITDA 48 36 30.6 157 119 32.2 Depreciation 20 19 1.6 75 65 16.1 Other Income / (Expense) (6) (4)

(33) (5)

Income before Income Taxes 22 14 64.0 49 49 (1.2) Income Taxes 8 4 100.0 11 10 3.8 Net Income 14 10 49.1 38 39 (2.6) Share of Profit in Associates 10 8 29.4 32 31 4.4 Net Income after Associate Profits 25 18 40.2 70 70 0.5 Diluted EPS (Rs) 1.5 1.1 41.7 4.3 4.2 2.2 EBITDA Margin (%) 16.1 12.1

13.1 10.3

Net Profit Margin (%) 8.4 5.9

5.9 6.1

Effective Tax Rate (%) 35.7 29.3 22.1 21.1

May 13, 2010 3


Exhibit 2: Segment-wise Revenue Break-up

Segment Revenues (Rs cr) chg Contribution (%) 4QFY10 4QFY09 (%) 4QFY10 4QFY09 ILS Business 123.6 108.5 13.9 41.9 36.1 ILS-IT 114.4 103.5 10.5 38.8 34.4 ILS-FMT 9.2 5.0 84.0 3.1 1.7 SLS Business 32.1 44.2 (27.4) 10.9 14.7 Government Schools 19 32.7 (42.6) 6.4 10.9 Private Schools 13 11.5 16.0 4.5 3.8 CLS Business 139.3 148.1 (5.9) 47.2 49.2 Total 295.0 300.8 (1.9) 100.0 100.0

Source: Company, Angel Research

Strong Profitability across businesses expand Margins NIIT recorded an impressive 400bp yoy expansion in EBITDA Margins in 4QFY2010 backed by expansion in EBITDA Margins by 500bp, 370bp and 360bp yoy in the SLS, CLS (with better product mix, cost management and consistent higher profitability in e-Learning Product business, viz. Element-K) and ILS business segments respectively. Though the company continued to report losses at the EBIDTA level in the new businesses, viz. ILS-FMT, it fell from Rs 4.8cr in 4QFY2009 to Rs2.2cr in 4QFY2010, as some of the new businesses have broken even, while for some the investment phase is almost complete thereby reducing losses. Exhibit 3: Segment-wise EBIDTA Margins

Segment EBIDTA (Rs cr) chg EBIDTA Margin (%) chg 4QFY10 4QFY09 (%) 4QFY10 4QFY09 bp ILS Business 26.0 18.9 37.6 21.0 17.4 3.6 ILS-IT 28.2 23.7 19.0 24.7 22.9 1.8 ILS-FMT (2.2) (4.8) (54.2) (23.9) (96.0) SLS Business 7.4 8.0 (7.5) 23.1 18.1 5.0 CLS Business 14.1 9.5 48.4 10.1 6.4 3.7 Total 47.5 36.4 30.5 16.1 12.1 4.0


Other Income stood at a negative Rs5.7cr v/s negative Rs3.6cr in 4QFY2009 largely due to the forex loss, which was to the tune of Rs1cr in 4QFY2010 v/s forex gains of Rs3.8cr in 4QFY2009. Depreciation was up 1.6% yoy, while the tax rate shot up by 643bp yoy at 35.7%. Thus, the excellent expansion in Gross Margins lifted overall Profitability performance and resulted in the 40.2% yoy spurt in Bottom-line during the quarter.

May 13, 2010 4


Outlook and Valuation NIIT aims to drive growth in the SLS Segment through its content-led strong initiatives in Private schools related offerings, viz. E-Guru portfolio and Math Labs solutions. In this Segment, the company is currently increasing spend on the marketing and sales fronts to tap future opportunities in Tier II and III cities. The company incurred capex of around Rs95cr in FY2010 and plans to incur around Rs 90cr for FY2011E mainly on school projects. The company also sees strong assured annuity revenues from product roll outs for private schools. The IP-led revenues for FY2010 witnessed 12.3% yoy growth. Thus, non-linear revenues, viz. the strong annuity and IP-led revenues are expected to contribute to the company’s operational performance going ahead. In CLS the company aims to deliver strong volume backed growth in FY2011 through improved products mix and focusing on high margin Learning Products businesses, which has subscription based modules New Businesses are expected to recover going ahead on the back of strong hiring plans by Banks and Insurance companies and executive management education, which is expected to gain momentum would drive Imperia business. Apart from new businesses the growth in ILS is expected to be driven by strong IMS enrollments, better product mix and leverage on the recent tie-up with SAP and IBM. The company is targeting strong volume backed growth both in Revenues and Profits for FY2011E. We expect Margins to improve going ahead, as losses at the EBIDTA level in the new businesses would reduce with the new initiatives achieving break-even, while Margins in all other businesses are expected to be maintained. Going ahead, we expect NIIT to clock CAGR of 10.3% and 16.6% in Top-line and Bottom-line respectively, over FY2010-12E. At current levels, the stock is trading at 11.6x FY2012E EPS. Based on the SOTP methodology, we have valued NIIT excluding its stake in NIIT Tech at 12x FY2012E EPS of Rs5.8 fetching Rs69.6/share. We have valued the company’s stake in NIIT Tech at Rs13/share (on market capitalisation) after providing 25% holding company discount, effectively resulting in an SOTP Target Price of Rs83. Hence, we recommend a Buy on the stock.

Exhibit 4: One year forward P/E Band


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May 13, 2010 5


Profit & Loss Statement (Consolidated) (Rs cr) Y/E March FY2008 FY2009 FY2010E FY2011E FY2012E

Gross sales 1,007 1,149 1,199 1,318 1,459

Less: Excise duty - - - - -

Net Sales 1,007 1,149 1,199 1,318 1,459

Other operating income - - - - -

Total operating income 1,007 1,149 1,199 1,318 1,459

% chg 26.6 14.1 4.4 9.9 10.7

Total Expenditure 904 1,030 1,043 1,137 1,253

Cost of Services 362 428 444 487 540

SGA 237 268 251 268 290

Personnel 305 334 348 382 423

Other - - - - -

EBITDA 103 119 157 180 206

% chg 31.3 14.9 32.3 14.9 14.2

(% of Net Sales) 10.2 10.3 13.1 13.7 14.1

Depreciation& Amortisation 53 65 75 87 101

EBIT 50 54 82 93 105

% chg 60.3 7.2 51.7 14.0 12.7

(% of Net Sales) 5.0 4.7 6.8 7.1 7.2

Interest & other Charges 18 25 45 45 45

Other Income 8 20 12 13 15

(% of PBT) 19.1 41.2 24.6 21.4 19.6

Share in profit of Associates - - - - -

Recurring PBT 40 49 49 62 74

% chg 63.2 22.9 (1.1) 26.3 20.6

Extraordinary Expense/(Inc.) - - - - -

PBT (reported) 40 49 49 62 74

Tax (2) 10 11 14 18

(% of PBT) (5.1) 21.0 22.1 23.0 24.0

PAT (reported) 42 39 38 47 57

Add: Share of earnings of associate 33.4 28.3 32.2 35.4 39.0

Less: Minority interest (MI) (0.1) (2.5) - - -

Prior period items - - - - -

PAT after MI (reported) 76 70 70 83 95

ADJ. PAT 76 70 70 83 95

% chg 32.0 (7.8) 0.6 18.1 15.2

(% of Net Sales) 7.5 6.1 5.9 6.3 6.5

Basic EPS (Rs) 4.6 4.2 4.3 5.0 5.8

Fully Diluted EPS (Rs) 4.5 4.2 4.3 5.0 5.8

% chg 32.0 (7.8) 1.4 18.1 15.2

May 13, 2010 6


Balance Sheet (Consolidated) (Rs cr) Y/E March FY2008 FY2009 FY2010E FY2011E FY2012E

SOURCES OF FUNDS

Equity Share Capital 33 33 33 33 33

Preference Capital - - - - -

Reserves& Surplus 369 445 488 541 603

Shareholders Funds 402 478 521 574 636

Minority Interest 1 1 1 1 1

Total Loans 205 348 405 406 411

Deferred Tax Liability (25) (34) (34) (34) (34)

Total Liabilities 584 792 892 947 1,014

APPLICATION OF FUNDS

Gross Block 362 507 601 741 901

Less: Acc. Depreciation 231 273 348 435 536

Net Block 131 234 253 306 366

Capital Work-in-Progress 48 62 62 62 62

Goodwill 219 278 278 278 278

Investments 89 107 109 109 109

Current Assets 457 569 606 646 700

Cash 80 75 62 79 93

Loans & Advances 130 150 150 150 150

Other 247 344 394 418 458

Current liabilities 361 457 417 455 501

Net Current Assets 96 112 189 192 199

Mis. Exp. not written off 0 0 0 0 0

Total Assets 584 792 892 947 1,014

Cash Flow Statement (Consolidated) (Rs cr)

Y/E March FY2008 FY2009 FY2010E FY2011E FY2012E

Profit before tax 40.1 49.3 48.8 61.7 74.4

Depreciation 52.9 64.7 75.1 87.1 100.7

Change in Working Capital 36.6 (23.8) (10.3) 14.2 6.2

Less: Other income 15.8 20.3 12.0 13.2 14.6

Direct taxes paid (19.9) (22.5) (10.8) (14.2) (17.8)

Cash Flow from Operations 125.5 88.0 90.8 135.6 148.9

(Inc)./ Dec in Fixed Assets (84.8) (186.2) (94.9) (140.0) (160.0)

(Inc)./ Dec. in Investments (2.8) (17.4) (2.7) - -

(Inc)./ Dec. in loans and advances - - - - -

Other income 7.1 43.0 32.2 - -

Cash Flow from Investing (80.4) (160.7) (129.8) (140.0) (160.0)

Issue of Equity 0.5 2.3 (43.1) - -

Inc./(Dec.) in loans (22.0) 141.8 56.5 1.4 5.0

Dividend Paid (Incl. Tax) (16.8) (25.1) 27.0 29.1 33.5

Others (0.4) (51.3) (14.1) (9.6) (13.5)

Cash Flow from Financing (38.8) 67.8 26.4 20.9 25.0

Inc./(Dec.) in Cash 6.3 (4.9) (12.6) 16.5 13.9

Opening Cash balances 73.6 79.6 74.7 62.2 78.7

Closing Cash balances 79.6 74.7 62.2 78.7 92.6

May 13, 2010 7


Key Ratios Y/E March FY2008 FY2009 FY2010E FY2011E FY2012E

Valuation Ratio (x)

P/E (on FDEPS) 14.8 16.0 15.8 13.4 11.6

P/CEPS 8.6 8.3 7.6 6.5 5.7

P/BV 2.8 2.3 2.1 1.9 1.7

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

EV/Sales 1.1 1.1 1.1 1.0 0.9

EV/EBITDA 11.1 10.8 8.6 7.4 6.4

EV / Total Assets 1.2 1.0 1.0 0.9 0.9

Per Share Data (Rs)

EPS (Basic) 4.6 4.2 4.3 5.0 5.8

EPS (fully diluted) 4.5 4.2 4.3 5.0 5.8

Cash EPS 7.8 8.1 8.8 10.3 11.9

DPS 1.3 1.3 1.4 1.5 1.7

Book Value 24.4 28.9 31.5 34.8 38.5

Dupont Analysis

EBIT margin 5.8 6.5 7.8 8.1 8.2

Tax retention ratio 105.1 79.0 77.9 77.0 76.0

Asset turnover (x) 1.3 1.1 1.1 1.1 1.1

ROIC (Post-tax) 7.9 5.6 6.5 6.8 7.0

Cost of Debt (Post Tax) 7.9 7.1 9.3 8.5 8.4

Leverage (x) 0.9 0.9 1.2 1.2 1.1

Operating ROE 7.9 4.2 3.0 4.8 5.5

Returns (%)

ROCE (Pre-tax) 10.0 9.1 11.1 11.5 12.1

Angel ROIC (Pre-tax) 47.9 39.9 33.9 27.0 22.0

ROE 21.1 15.9 14.1 15.1 15.8

Turnover ratios (x)

Asset Turnover (Gross Block) 2.8 2.3 2.0 1.8 1.6

Inventory / Sales (days) 4.7 3.5 3.5 3.5 3.5

Receivables (days) 77.1 78.7 103.0 100.0 100.0

Payables (days) 40.8 41.5 43.0 41.4 39.5

Working capital cycle (ex-cash) (days) 13.3 8.5 24.8 32.9 27.2

Solvency ratios (x)

Net debt to equity 0.1 0.3 0.4 0.4 0.3

Net debt to EBITDA 0.4 1.4 1.5 1.2 1.0

Interest Coverage (EBIT / Interest) 2.8 2.2 1.8 2.1 2.3

May 13, 2010 8


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