>NIIT: Reasonable Valuations; Leveraged to Recovery

■ Upgrade to Buy — We are upgrading NIIT to Buy/Medium Risk (1M) from Sell/High Risk (3H). Our target price is Rs85 based on 15x Sep 11E EPS (10x Sep10E earlier) – below the last three-year trading average (~17x). We believe that this increase is fair given: (1) pick-up in hiring by the IT industry – benefits ILS, (2) improvement in US corporate sentiment – benefits CLS. Our estimates are largely unchanged with EPS CAGR of ~16% over FY10-13E.

■ Operating metrics improving — NIIT is a midcap with a presence in the growing education segment. Though FY10 was sluggish in terms of revenue growth, some of the key operating metrics showed improvement with: (1) EBITDA margins up by ~240bps, (2) ROCE increased by ~150bps, and (3) FCF positive after being negative in FY09. We expect the improvements to continue over FY10-13E.

■ Recovery in Individual Learning Solutions (ILS) — ILS recovered in FY10 with YoY growth rates improving from ~0% in Q1 to ~11% in Q4 (with margin improvement of ~130bps YoY). With a perceptible pick-up in hiring across the IT sector, we factor in ~11% YoY revenue growth and ~30bps margin improvement in FY11.

■ Corporate Learning Solutions (CLS) back to growth — CLS came back to growth with ~3% YoY in Q4 after registering negative growth rates from Q1 to Q3. With US revenues at ~90%, CLS stands to benefit from the pick-up in online training and training outsourcing. In FY11, we build in ~5% YoY revenue growth ($-terms) and ~90bps improvement in margins. INR appreciation remains a risk in CLS.

■ School Learning Solutions (SLS) – prudent choice a key for profitability — SLS was the growth driver in FY10 with revenues up ~45% YoY. The government schools business is working-capital intensive, making a prudent choice of contracts a necessity. We expect SLS to see ~9% YoY revenue growth and ~20bps margin improvement. New businesses, still small, could provide revenue upside though profitability is still sometime away.

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