>NIIT: Q1FY13

Lower enrolments impact Q1 performance


NIIT’s Q1FY13 performance was below our expectations. The Individual Learning Solution (ILS) segment witnessed a decline of 8.3% YoY which led to lower than expected performance in ILS and affected the overall performance of the company. Also, the high fixed cost model had a negative impact of 726bp in operating margin for the ILS segment. We downgrade our rating to Neutral (from Buy) on the stock considering the pressure on the ILS segment in FY13E and its impact on overall margin of the company. Accordingly, we revise our earnings assumption downward by ~30% at EBITDA levels.

Lower than expected performance in Q1: Though we were expecting a weak performance considering the seasonal impact and challenging macro environment, it was much below our expectation in ILS. On a like to like basis, the revenue grew by 3.9% YoY to Rs2.3bn. EBITDA margin contracted by 260bp on yoy basis to 5% (our expectation of 8%) mainly due to the fixed cost model in ILS segment.


ILS segment business under pressure: Decline of 13% enrolment in India IT training business led to a fall of 8.8% YoY in revenue to Rs1.1bn and accordingly due to higher fixed cost, the operating margin witnessed 726bp decline to 2.3% on YoY basis. Lower hiring from IT companies resulted in lower demand for its courses and it is going to be difficult for company to get enrollment in the 9M period.


Corporate Learning Solution (CLS) showed strong performance and helped the company deliver YoY revenue growth. CLS segment registered 20% YoY growth in revenue to Rs730mn. Better revenue mix in favour of managed training services helped expand EBITDA margin by 887bp to 10% (on like to like basis). We believe that the company’s decision of selling Element K business was very apt as it helped improve topline and margins.

Concall highlights: Challenging macro environment led to lower than expected performance in the IT training enrollment. Going forward, the company indicated it would double its efforts on NIIT Insights which is into the colleges segment, increase offerings on cloud, push for advanced high tech courses and non-IT training courses to improve enrollment growth. During Q1, the company made certain provisions with regard to the Element K transaction including vendor claims. This could see a reversal. Also, the company has seen tax write back this quarter on account of lower tax liability on Element K deal.


We downgrade the stock to Neutral rating (from Buy) considering the pressure on ILS segment in FY13E and its impact on overall margin of the company. Based on weak performance in the ILS segment, we revised our earnings assumption downward. We expect 30%/300bp fall in EBITDA/EBITDA margin in FY13E and FY14E on account of pressure on IT training business. The company would be able to make profit mainly due to the share of profits coming from NIIT Technologies investment. At the CMP, the stock is trading at 10.9x FY13E and 8.3x FY14E earnings estimates. Based on current financial estimates and business outlook, we revise our target price to Rs36 (from Rs54 earlier).

RISH TRADER