Dear Friends,
We are recommending Buy on our Actionable ViewPoints "NIIT Ltd" as per following:-
CMP: Rs 97 Target: Rs 121 (25% Upside)
Key Points:
NIIT Limited: Viewpoint - Exciting times ahead, reasonable valuation
- CLG entering into a higher growth trajectory, huge runway for growth: The corporate learning group (CLG) division (70% of revenue in Q1FY2019) of NIIT Limited (NIIT) offers managed training services (MTS) to global multinational companies in the U.S. and Europe under multi-year deal. MTS services include custom content development and curriculum design, learning delivery, learning administration, strategic sourcing, learning technology and advisory services. Global organisations spend around $1,000 per employee per year or 1% of their revenue on average for employee training, taking an estimated amount of spending on workforce training to $150 billion-$300 billion per annum. We believe global corporate learning and development (L&D) spending would continue to increase on account of a) technology disruption and b) mandatory training due to regulatory changes. Currently, Fortune 1000 companies outsource less than 20% training, of which NIIT has 39 clients. NIIT's recent large MTS deal ($55 million-$60 million) for five years with Real Estate Council of Ontario (RECO) is expected to start contributing to revenue from Q2FY2019. Another contract with Pitney Bowes reduces revenue volatility and creates a revenue source that is like an annuity. Order intake ($25.7 million, up 25% y-o-y in Q1FY2019) along with increased L&D spending and underpenetrated outsourcing of training markets provide significant opportunities to NIIT to grow in the coming years.
- Change in business mix increases revenue visibility and profitability: With increased revenue contribution from CLG business (61% in FY2018 against 42% FY2014), NIIT has shifted its revenue model to export-oriented corporate training outsourcing business along with multi-year contract from domestic retail training programme. Further, NIIT plans to strengthen its presence in the U.S., Europe and China with a view to increase exports. Increasing acceptance of outsourcing of training among global companies along with rupee depreciation would drive NIIT's revenue growth and profitability going ahead.
- Focus on asset-light, IP-driven private school model: NIIT has shifted its focus on the asset-light and IP-driven business models with the strategic decision of planned ramp-down and exits of capital-intensive business in government schools. NIIT expects to exit completely from the governments' schools contract in Q2FY2019. This strategic decision has helped NIIT to improve liquidity (substantial reduction in receivables and capex) and ROCE profile of the business. Further, the company consciously exited its loss-making operations in Africa to improve its profitability.
- Robust earnings business, reasonable valuation: Taking a conservative view, we have not assigned any value to the retail and school learning business of NIIT. Nevertheless, with estimate EBITDA of close to Rs. 110 crore from CLG business in FY2020 and giving a modest target multiple of 10x (20% discount to midcap IT companies), we have arrived at an enterprise value of Rs. 900 crore for CLG business (net debt of Rs. 200 crore), which itself is double the adjusted market cap of the company (considering 40% holding discount to its investments in NIIT Technologies Limited (NIIT Tech), resulting in Rs. 1,180 crore, and the adjusted market cap of NIIT is arriving at Rs. 433 crore). Further, any strategic stake sell in NIIT Tech will unlock major value for investors in the coming years. Hence, we initiate our viewpoint coverage on NIIT with a Positive stance and expect 23-25% upside over the next 8-12 months.
Regards,
sharmila
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