NIIT: Swallowing the Small Fry

One of the worst hit by the slump in the global IT industry has been the IT

education sector. The sector, which was growing at a rate of 16-20% per annum

during 1998 to 2001, suddenly collapsed as the slowdown gripped the software

companies. While Nasscom still maintains that there is likely to be a large

deficit of technical human resources until 2008, the IT education sector has

failed to take off despite showing some signs of revival.

While the deficit has persisted since the IT education sector went down,

among the many reasons for the slowdown is also the increasing demand of niché

technical persons by the IT industry, rather than just the generalized training

offered by most institutes. Increasingly, non-technical graduates have found it

difficult to enter the software sector despite spending thousands on learning

programming skills. This has affected the IT education companies adversely,

which has been witnessing low enrolments from such students.

Today, most of the IT education companies are witnessing marginal to negative

revenue growth and difficulty in reporting profits at operating levels. NIIT too

has been going through a tough phase as competition and the slowdown continues

to hurt its margins. The acquisition of Aptech by SSI and the closure of local

IT education centers is expected to lead to further consolidation in the

industry. The slump in the IT education sector followed by consolidation

indicates revival of the sector although the pace may be much slower than

expected. NIIT, which has witnessed sequential topline growth in the IT

education segment, would be the first to benefit from such a revival. While the

education sector continues to reel under pressure, NIIT has gone ahead and made

five acquisitions in the past five quarters to boost its services business.

Based in Delhi and with operations spread across 38 countries, NIIT is a

prominent player both in the software services and education segment. Currently,

software services, namely NIIT Technologies, forms the major part of its revenue

size and is growing at an impressive rate. NIIT closed the full year ended

September 2002 with consolidated revenues of Rs 654.07 crore and net loss of Rs

19.27 crore. The company has changed the method of accounting of education

revenues and hence the figures are not comparable to that of the previous year.

NIIT Technologies reported revenues of Rs 430.85 crore, down by 32% over the

previous year. NIIT’s Technologies provides customized software development

and maintenance, legacy maintenance and enterprise integration for verticals

such as finance, transport and retail segments. Its services in the high-end

spectrum of consulting include ERP implementation in the SAP and Oracle

platform. NIIT’s acquired US based Osprey Systems last year. Osprey is a $10

million full life cycle SAP solution provider. Osprey clients include Coats

American, Compass Group, SAP and Sulzer among others. The acquisition was made

at $3 million and NIIT expects revenues of $35 million in the next three years

from Osprey. NIIT also acquired US based Data Executive International, which

provides solutions in the insurance and financial sector. Both the acquisitions

have been fully integrated in the company. The company had earlier in the year

made its first acquisition when it bought the custom development business of

Click2Learn.

NIIT Education provides an entry into high end IT education through a number

of courses under various brands. Among these, Futurz is a high-end career

program for college students, Cats is a skill enhancement program aimed at IT

professionals and engineering students, Swift is an entry level course for

individuals who wish to gain computer literacy. The company also provides online

training through netvarsity.com and to address the need of fast growing IT

enabled services, the company provides distinct training programs through

Planetworkz. NIIT’s strength is its strong brand in the education segment as

well as its global reach in the software segment with operations in 38

countries. NIIT currently has 2,447 operational centers operational in 28

countries that include China, Asia Pacific, South Asia, Africa, Middle East and

Americas. NIIT had 28 overseas centers at the end of September 2002

NIIT also entered the growing Business process outsourcing space by setting

up 560-seat facility located in Gurgaon. The BPO subsidiary, NIIT SmartServe

secured its first major $10-million order from Misys Independent Financial

Advisory Services Plc in UK in November 2002.

In the first quarter ended December 2002, NIIT reported consolidated revenues

of Rs 162.30 crore down by 16% sequentially. Revenues from the NIIT Education

declined 33% on sequential basis to Rs 48 crore. Education revenues

traditionally witness a dip in the quarter ended December. On the other hand,

revenues from NIIT Technologies were up 14% y-o-y but down 2% sequentially to Rs

114.30 crore. NIIT reported a net loss of Rs 8.60 crore compared to a loss of Rs

4.90 crore in the immediate previous quarter. During the quarter, the services

segment saw new orders intake of $37.50 million.

The new orders intake has shown sequential growth in the past six quarters

and this is expected to drive the services business in the coming quarters. The

order book position at the end of December 2002 stood at $95.20 million out of

which $47.30 million is executable by December 2003. The company also acquired

AD Solutions, Germany, which would enable it to spread its growth in the region.

The company added 8 new customers from Europe and 2 from America. Its employee

strength stood at 1,922 compared to 1,849 in the previous quarter.

In the first quarter, NIIT made it’s fourth acquisition of the year by

acquiring German AD Solutions AG, which is a 75 consultant company providing

custom solutions in the area of logistics and finance. Recently, NIIT’s

acquired US based Cognitive Arts, which provides simulation based knowledge

solutions to Fortune 500 clients in the area of retail and finance vertical.

The education segment seems to be recovering and the new enrolments in the

quarter were 1.45 lakh. The company added 8 new centers in Morocco and Sudan to

take its global center size to 247. In terms of revenues, Futurz form 79%, Swift

forms 13% and Cats forms 8% of the total IT education revenues. The IT education

segment has shown consistent improvement in the past 5 quarters and is expected

to post y-o-y growth in the coming quarters.

NIIT is currently trading at Rs 96 discounting our projected September 2003

EPS by 81 times and September 2004 EPS by 40 times. NIIT touched a high of Rs

350 during April 2002 on expectations of a sharp recovery in the education

business.

However, poor performance of the education segment at the operating levels

pulled the price down. The price further slumped after the announcement of the

latest quarterly results. NIIT’s valuations are attractive following the sharp

decline in the company’s market price recently and the share price may see a

rebound form the current levels. Market Performer.

Sushanto Mitra 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