The Hindu Business Line : NIIT: Hold

Brand ambassador of NIIT, Mr Viswanathan Anand... As the training market is staging a recovery, the company is well-positioned to consolidate its market share.

SHAREHOLDERS can consider retaining their exposure in the NIIT stock at the current price levels. Since the stock has run-up by over 35 per cent in the past six months, fresh exposure can be avoided for now.

The recovery of the domestic training and education business, especially in the retail segment, and good growth in the corporate segment, are expected to be key drivers of revenues and margins over the next two years. At the current price, the stock trades at a price-earnings multiple of 10.5 times FY-06 earnings.

The risks to the recommendation will be the lower-than-expected growth in the domestic retail segment and institutional business and margin pressures in the corporate segment because of competition or other factors.

Financial highlights

For the quarter-ended June 30, NIIT's performance was a mixed one on the financial front:

The revenues on a sequential basis moved up by 2 per cent to Rs 106.4 crore, the growth being considerably lower on a sequential basis. On a year-on-year basis, however, the revenue growth was 9.9 per cent, in line with the growth in the previous quarter.

The lower contribution of the corporate segment appears to have moderated the rise in revenues on a yearly basis.

On a sequential basis, the margin growth, however, proved encouraging. The operating margins moved up by 1.2 percentage points to settle at 13.5 per cent. But on a year-on-year basis, it was relatively flat. This may be attributed primarily to a steep fall in the margins in the institutional segment.

Aided by a higher `other income' component at Rs 4.6 crore (Rs 3.1 crore last year), the post-tax earnings settled at Rs 13.2 crore in the latest quarter. This includes a share of profits from NIIT Technologies where NIIT holds a 25 per cent equity stake.

Contribution of key segments

Resurgence of the individual training segment: One of the key factors driving NIIT's growth is the resurgence of the domestic training market and strong growth in the Chinese geography.

Not only did this segment post a 26 per cent year-on-year net revenue growth, the operating margins turned around to 3.2 per cent from a negative 8.8 per cent over this period.

sThe two encouraging signs are the increasing contribution of the career courses to 88 per cent from 86 per cent a year ago, reflected in the healthy trend in enrolments.

The training momentum is expected to sustain as, according to the recent Dataquest survey, about 1.7 lakh IT professionals are expected to join the workforce in 2005-06 and 60 per cent of them will be fresh recruits.

This is a healthy sign that suggests that the market is firming up again, though there may be quarterly glitches in growth. Career-oriented courses such as Futurz offered by NIIT are aligned to the needs of Indian IT companies.

In the international retail education business, which spans several countries such as China, Vietnam, and West Asia, among others, the growth in China has been encouraging.

Mixed trend in institutional segment: In the institutional segment, while the revenues grew 13 per cent, the operating margins dipped 9 percentage points to 19 per cent on a year-on-year basis.

The revenue growth was aided by new orders bagged from Himachal Pradesh for 210 schools and Assam Government for 320 schools. However, the decline in margins was attributed to different milestones in different parts of the project.

But the management has indicated that, given the changing nature of the institutional business, the steady margins in this business will be 18 per cent and will reduce to 16 per cent as volumes increase.

The management has also indicated that institutional orders are getting delayed on account of political situation in different states in the next couple of quarters.

Stable margins in corporate segment: Though revenues dipped by 4.6 per cent, the operating margins have remained stable at 19 per cent in the corporate segment. Considering NIIT's customer base in the US geography in the technology segment and greater interest in the higher education segment among corporates, this business will continue to do well.

Amidst growing competition, NIIT's ability to keep margins under control will be the key to the growth of this segment. The fresh order intake in the latest quarter is quite encouraging.

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