NIIT: Pare exposures, book profits

Krishnan Thiagarajan

EXISTING investors of NIIT can contemplate cutting exposures and booking profits in the stock. At the current market price of Rs 246, the NIIT stock is trading at a price earnings multiple of 10 times its 2000-01 earnings. In line with the buoyant trends at Nasdaq, the stocks in the technology sector in India have also soared in recent times. The stock has run-up sharply in the past two months. Between October and November, 2001, the stock witnessed an uptrend of over 50 per cent, after appreciating by 87 per cent in the previous month (between September and October 2001). NIIT is to be dropped from the BSE Sensex with effect from January 7, 2002.

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For investors seeking a broadbased portfolio in the software sector, NIIT as a software education-cum-software major continues to be a good portfolio choice. Till the beginning of 2000-01, NIIT had profitably leveraged the synergies between its education and software multimedia business and extended it to the software services domain. But the onset of slowdown over the past year have severe dented these synergies for NIIT and dealt a severe blow to its financials.

The adverse effects of profit warnings/management guidance from its software and computer education business were visible in the earnings performance for the year and fourth quarter ended September 30, 2001. For the year, NIIT has recorded a 8.32 per cent decline in revenues to Rs. 687.51 crores and a sharp 57.19 per cent drop in post tax earnings to Rs. 95.96 crores. The deterioration in the financials for the fourth quarter was even more significant. While the revenues declined by 23.64 per cent, the post tax earnings suffered a steep drop of 86.23 per cent in the fourth quarter of 2000-01 vis-a-vis the corresponding period of the previous year.

The only ray of hope for NIIT appears to be an improvement in the

sequential (quarter-on-quarter) performance in the fourth quarter of 2000-01. From an unimpressive performance in the third quarter of 2000-01, NIIT has managed to record a 9 per cent growth in revenues and more than doubled the post tax earnings in the fourth quarter of 2000-01. NIIT has also recorded an improvement in the operating profit margins (OPMs) by 6.2 percentage points to 15.53 per cent in the fourth quarter, but it is still a far cry from the OPM's of over 30 per cent in 1999-2000.

PROSPECTS: Going forward, the future performance of NIIT will hinge upon the pace of consolidation in the computer education business. Although NIIT has indicated that the enrollments in its flagship long term career programme -GNIIT has gone up, it is not indicative of any long term trend. Similarly, in the software business, NIIT is aiming to impart stability to its revenue stream by aiming to focus on legacy maintenance, re-engineering and migration kind of work. As these segments are currently being addressed by all software majors, fierce competition may make it difficult for NIIT to make headway into these segments and may put pressure on billing rates in the near term.