NIIT LTD (NIIT)
PRICE: RS.63 RECOMMENDATION: BUY
TARGET PRICE: RS.88 FY11E P/E: 8.3X
In our recent interaction, company indicated further improvement on the
macro side; increased business traction is yet to flow through to the
company, though. Enquiries have increased in ILS, significant activity is
seen on recruitment drives of private banks (new businesses) and pipeline
for Government schools contracts (SLS) in filling up fast. We expect steady
improvement in revenues growth rates through the next fiscal. Sustained
cost control and higher revenues should lead to margin improvement in
most businesses, leading to higher bottom-line growth. At about 8x FY11E
earnings, we believe valuations are attractive. NIIT remains a leader by far,
in India with a growing international presence. Re-iterate BUY with
unchanged FY11 EPS estimates of Rs.7.6 and unchanged PT of Rs.88.
The main takeaways from our management interaction are as under:
Individual learning business - macro improving
n The ILS business had reported a 7% YoY growth in revenues in 2QFY10, which
was a reversal from the earlier low growth rates clocked by the business.
Growth rates in ILS had been coming down over the past four quarters on the
back of slack demand and reduced growth in enrolments.
n The company has indicated that, the sentiments have continued to improve
over the past one quarter.
n More enquiries have started now coming in for enrolments and turnaround
time in decision making has also shortened. We see these as the initial signals
which can lead to actual enrolments in the future.
Growth in ILS revenues
1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10
Revenues (Rs mns) 854.00 1224.00 870.36 1035.00 856.00 1311.00
YoY growth (%) 33.65 25.54 19.55 15.00 0.23 7.11
Source : Company, Kotak Securities - Private Client research
n Within verticals, the IMS stream continues to witness significant interest. The
international business is also scaling up with the African geography witnessing
higher growth.
n During the quarter, NIIT has further fortified its relationship with SAP and this
should start gaining traction over the next few quarters.
n NIIT has not affected any fee increases in this business during the current quarter.
n NIIT had a capacity utilization of about 62% in 1HFY10 and we expect this to
improve over the next fiscal (adjusted for seasonality).
n This should, in turn, result in margin improvement in FY11 over FY10.
n Thus, the macro factors are pointing to an improvement and we expect these to
translate into higher enrolments and revenues in due course.
n We understand that, the enrollments, which grew by 8% in 2QFY10, will start
growing faster in the future quarters. However, we will watch this enrollment
data closely.
