NIIT Limited: New Entity, New Horizons

The Indian IT training sector was one of the worst hit due to the slowdown in

the IT services market post dotcom burst in 2001. While a number of small

localized players had to shut shop, the large IT training companies faced the

challenge to sustain their revenues and manage costs. The slowdown resulted in

consolidation with Aptech's training division getting acquired by SSI and NIIT

consolidating its operations in the international market and de-merging the

software services business to ensure management focus on individual businesses.

NIIT's strategy to focus on the international market paid off with the company

currently achieving 51% of revenues from the international market. As the

software services market is back in action with recruitment by IT majors growing

at brisk pace and demand for BPO training rising as a result of mushrooming BPO

companies in India, NIIT is getting ready, yet again, to play a key role in the

Indian IT training segment.

Formed almost two decades ago, NIIT commenced operations as an integrated

software training and services company. NIIT has remained a leading player in

the Indian IT training sector with reach spanning more than 3700 centers in and

outside of India. The Indian IT training sector witnessed peak in 2001 after

which, the sudden slowdown in the software sector saw a sharp decline in

enrolments. Last year, NIIT decided to de-merge both the business to ensure

management focus on individual business.

The restructuring resulted in each shareholder of NIIT getting 75 shares of

NIIT Technologies, the software services company and 50 shares of NIIT, the IT

training company. NIIT, which also holds 25% stake in NIIT Technologies, is

currently an exclusive IT training company.

The company's education offerings include GNIIT, an industry-endorsed

program for students seeking careers in the IT and BPO segments through which

NIIT offers Futurz a high-end career program for college students, CATS, which

offers training programs on advanced technologies for IT professionals and

SWIFT, which is considered a platform for equipping ordinary people with basic

internet and computer literacy skills. In addition to this, NetVarsity.com,

which is an e-learning portal offers a blend of content, technology and

services, while NIIT@School provides a turnkey, IT integration program offering

computer-based learning in government and private schools. NIIT's customers

include individuals, companies, universities, technology companies, training

corporations and publishing houses.

The

company's network is spread across 33 countries over the globe with 3,786

centers including 280 centers internationally. Currently, the promoters hold 37%

of the total shareholding with institutional investors holding 43%, Indian

public holding 17% and the balance 3% held by other investors.

While NIIT offers different courses based on the requirement of the students,

it has aligned its business into three parts, India individuals, India

institutional and international. In FY04, NIIT achieved 49% of revenues from the

international operations followed by 31% from India individuals and balance 20%

from India Institutional. In the India Individuals segment.

NIIT has reported impressive numbers in the first half ended September 2004,

although its enrolment numbers in the peak quarter period of September have been

discouraging. In the second quarter ended September 2004, NIIT earned revenues

of Rs 110.9 crore, growing at 15% sequentially and 12% year-on-year. Systemwide

training revenues were up 10% y-o-y with international business growing 2%,

India individuals business growing 14% and India institution business growing

28% y-o-y. International business formed bulk of revenues at 51% of total

revenues down from 55% last year. The international business saw fresh order

intake of $8 million with pending order as on September 2004 at $19 million.

Indian individual revenues formed 28% of the total revenues against 27% last

year whereas India institutional formed 21% of total revenues up from 18%

reported in the same period last year.

NIIT has reported operating margins of 13% for the quarter ending September

2004, declining marginally over the immediate previous quarter but higher than

4% reported in the same period last year. The net profit of the company grew 9%

amounting to Rs 11.8 crore as compared to Rs 10.8 crore on a sequential basis.

On the enrolment front, total enrolments in the second quarter of 67,833 were

lower than 70,500 in the first quarter and 114,303 in the same period last

year.  The half year, especially the second quarter ended September, is

traditionally a peak period for IT training companies and as such, the decline

in the enrolments is a cause for concern.

The growth witnessed in the IT services sector is bound to have a positive

impact on the IT training companies. We expect the sector to see revenue growth

in the forthcoming quarters as enrolments gradually improve with the training

companies offering tailor-specific offerings. In the international market, NIIT

is focusing on e-learning for US corporates and University training in the

Chinese market. NIIT has a strong presence in China Universities training with

its centers located in the University campus.

The third quarter is traditionally weak for training company and we expect

the next two quarters to remain subdued. We expect NIIT's operating margins to

improve as the company witnesses a higher enrolment rate and consolidation of

its centers. We expect NIIT's profits to grow by 58% and 26% in the next two

fiscals respectively

NIIT currently trades at Rs 181, discounting our estimated March 2005 EPS by

12 times and March 2006 EPS by 9 times. Post de-merger, NIIT was listed at Rs

151 in August 2004 and moved in the range of Rs 150 to Rs 181. While we expect

renewed growth momentum in NIIT's revenues, we feel that the current share

price reflects the business potential and at 12x FY05 earnings, we feel that the

stock is fairly priced. In the long term, we expect NIIT to move in line with

the market. Market Performer

Sushanto Mitra The

author is the founder of Technology Capital Partners The views reflected

here are of the author and not of this publication. No liability is accepted for

losses based on the information presented here