>NIIT (CITI)

Sell: Q1 Below Expectations

■ Results below expectations — NIIT reported revenues of Rs2.6b (flattish yoy) with EBITDA up ~52% yoy (CIRA: Rs2.8b and ~75% yoy respectively). Despite a tax write-back, profits were below our expectations due to lower other income and share of profits from NIIT Tech (NITT.BO; Rs98.05; Not Rated).

■ Individual business (ILS) slowing — ILS reported revenues of Rs856m (flattish yoy) and operating profits of Rs160m (+6% yoy), below our estimates. Despite seeing an uptick in June, management has scaled down the guidance given at the end of May, to ~10% yoy growth (from 10-15% earlier).

■ Corporate business challenged — Revenues were down ~4% yoy while margins were up more than 700bps yoy. Significant favorable forex movement would have helped, in our view. Corporate training budgets are largely discretionary in nature, and this business could continue to face challenges.

■ School business (SLS) growing; New businesses flat — SLS revenues were up ~43% yoy while operating profits were up ~89%. This business has a lower return on capital (compared with ILS), and growth here will pull down the overall return ratios, in our view. New businesses were flat in revenues while continuing to make operating losses.

■ Maintain Sell — The market cap of NIIT is ~Rs10.2b while that of NIIT Tech is ~Rs5.8b. Taking out the 25% stake in NIIT Tech, the market cap attributable to the core business is ~Rs8.7b (without considering any holding company discount). This values the core earnings at ~20x FY10E – ~20% premium to the Indian market – steep, in our view given the growth outlook.

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