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Suresh Krishnamurthy

EXISTING investors in NIIT can reduce their exposures in the stock. After the recent rally, the stock appears over-priced relative to the potential for appreciation in future.

The bad news at NIIT almost seems to be over with the cleaning up of its debtors' portfolio in the fourth quarter of the financial year 2001-02 (NIIT's fiscal year ends in September). After suffering a sharp decline in the first half, there is perceptible growth in the ramp-up of business at the software solutions division. The education business is also showing signs of putting behind the recession that had engulfed the industry in 2001. The steady increase in order intake and pending order position for the software solutions business and the student enrolment position in the education business also reduces the uncertainty relating to growth in revenues.

However, these positives need to be juxtaposed against the valuation at which the stock trades now. Adjusted for non-recurring items such as provision for doubtful debts, the earnings per share of NIIT works out to nearly Rs 4. At the ruling price of Rs 168, the stock trades at a PE multiple of around 43 times. Given the expected growth of 20 per cent in revenues for the forthcoming financial year, only substantial expansion in margins and a consequent disproportionate increase in profits will justify such valuations. However, the scope for substantial expansion in margins appears limited given the trends in both the education and software services business. In this backdrop, investors can consider reducing their exposures.

Suitability: The sharp decline in the fortunes of its major businesses and uncertainty associated with the company's growth rates were reflected in the substantially larger volatility in the past year. Though the company is on a come back trail, earnings growth rates beyond the next two quarters is still subject to a lot of uncertainty.

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