Hiring pickup will boost NIIT

With economic growth gathering pace, companies across sectors have lined up expansion plans, which is leading to increased hiring and higher spends on employee training to increase productivity.

NIIT, a leading global talent development corporation, stands to benefit from this improved business confidence.

Business
NIIT Ltd provides information technology (IT) learning solutions for individuals, enterprises, schools, and colleges in India and abroad. The company has a learning content development facility with presence in more than 40 countries worldwide and a global student strength of 5 million. The company’s business is divided into four major verticals:

* Individual learning solutions (ILS): Under this segment, the company offers IT training to school and college students, housewifes and working professionals though various programmes like GNIIT,  Edgeineers, Globalnet+ (for network and infrastructure management) and Swift (for basic IT skill development).

This segment constitutes almost 60% to the system-wide revenues and almost three-fourths to operating profits. With a 20% rise in order book to `141.7 crore in the September 2010 quarter, NIIT has 68% of orders executable in the next 12 months.

* School learning solutions (SLS): NIIT, under this segment, offers turnkey IT integration programmes for schools in India through the ‘eGuru suite’, catering to the requirements of over 15,000 schools (government and private) for IT education, multimedia education for all subjects and  teachers training.
This segment, which contributes almost 10% each to topline and bottomline, has seen degrowth as the company is adopting a cautious approach in the government segment, where there have been delays in ordering and more competition.

However, private school addition of 350 in the first half of this fiscal has surpassed the additions made for the whole of last fiscal, and is growing at a faster rate. The company’s pending order book in this segment stands at `465 crore, with 30% expected to be executed in the next 12 months.

* Corporate learning solutions: Under this segment, which contributes almost 25% to overall revenues, NIIT offers advisory, IT and soft skills training, content development, content library and training administration services. The segment has seen recovery with more number of corporates outsourcing training activities apart from increased adoption of online learning products by corporates.

* New businesses: NIIT has recently ventured into finance and management training, BPO training and basic English training. Large hiring in banking and desire by professionals to upgrade their educational qualifications is driving strong enrolments for this segment, which now contributes 2% to overall revenues.  

Investment rationale
With the domestic economy back on track to achieve over 8% growth, employee-hiring trends in IT, banking and other services sectors are extremely robust.
IT majors like TCS, Infosys and Wipro are expected to hire nearly 90,000 people in the current fiscal, while the banking industry would absorb close to 50,000 new people. This would drive demand for IT training, leading to higher enrolments.

The company has a well-diversified business model with each of the segments contributing significantly to the overall revenues. Also, within each of these segments, it has multiple products for various category of people which makes its product mix balanced. Though India continues to contribute majority to revenues, NIIT is witnessing increasing traction in emerging markets like China, which offers huge potential. Also, its new businesses such as banking and finance training, have seen a turnaround and contributed to profits last quarter.

Concerns
Any slowdown in the economy may affect the hiring plans of the corporates across sectors, which may lead to lower enrolments. Also, the company which has a presence in developed markets like the US and Europe, may suffer due to slower growth there.

Valuations
Driven by higher enrolments in the ILS segment and strong order book across the segments, the company is expected to show decent revenue growth in coming years. Revenues are expected to grow at CAGR of 10% over FY10-FY12E and net profits at 25% over the same period.

At current market price of Rs54.35, the stock trades at 9.97 times its expected FY11 earnings and at 8.16 times its expected FY12 earnings per share. Investors with 1-2 years perspective can consider the stock at current levels.

Disclaimer: The writer does not hold any share in the company