Citigroup analysts interacted with the CEO of NIIT Vijay Thadani. Below are the key highlights from that discussion: Individual Learning Solutions (ILS) on an uptick: Enrollments in India are increasing with products like Infrastructure management, 99 Day diploma and GNIIT doing well. A prominent trend in ILS is that there is a preference for shorter duration courses. ILS should benefit from the positive trends in the IT Services sector with increasing (i) volumes; and (ii) attrition. continues to accelerate ?growth last quarter was 13% YoY up from 6-11% YoY in the prior quarters.
Corporate Learning Solutions (CLS) showing pickup: CLS is seeing a pickup in demand with (i) Corporates spending on training; and (ii) Government spending on skills training in places like India. The Learning Products and Managed Training segments are showing good pickup. Management expects good volume growth in FY11 with some good deal wins in the recent past.
School Learning Solutions (SLS) slow: Private schools are doing well; Government schools are slow in decision making. Small players are under cutting in the government schools space—NIIT has decided to be selective. Management expects marginal growth in FY11 (like on like). The Banking (IFBI) and Management (Imperia) courses are doing well with significant growth in enrollments. The New Businesses on an overall basis is expected to break even in FY12. growth in SLS is a positive from a balance sheet perspective.
Valuation: We reiterate Buy. We value NIIT at Rs 81 based on our SOTP (sum-of-the-parts)-based methodology given the fact that the company has four different business segments. We value the ILS segment at 7 times March 2012e EV/Ebitda (enterprise value/earnings before interest, taxes,depreciation and amorti- sation) SLS segment at 6 times March 2012e EV/Ebitda, CLS segment at 6 times March 2012e EV/Ebitda and New Businesses at 2 times March 2012E EV/Sales (given that we expect breakeven only in FY12). We value the 25% stake held in NIIT Technologies at a 25% holding company discount. Our target price implies a target multiple of about 13-14x (times) which is towards the lower end of the historical trading band of about 3-36x over the past three years and is also lower than the average of about 15x over the same period. With complete recovery still uncertain, we believe that NIIT will trade towards the lower end of its historical trading band. Further, we expect revenue and Ebitda CAGR (compound annual growth rate) of about 8% and about 15% respectively over FY10-13e (slower than the about 15% and about 25% CAGR witnessed over FY07-10a).
Risks: We rate NIIT Medium Risk inline with other Educational Services companies that we cover, despite our quantitative risk rating system suggesting Low Risk. Key downside risks to our target price include: (i) Lower enrollment in IT courses; (ii) Lower price realisation in the retail training business; (iii) Higher inflation in fixed costs; (iv) Slower fresh orders in the institutional business; (v) Lower fresh orders in the corporate business; (vi) Lower growth in new businesses.
?Citi