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NIIT Q3 results disappoint analysts

NetScribes/Ganesh Ramamoorthy

Despite a 4 per cent rise in operating margins and higher contribution from the onsite business, analysts are disappointed with training and software major NIIT's results for the quarter ended December 31, 2000.

For the first quarter just ended, NIIT reported a 27 per cent growth in net sales for the quarter against an expected 55-60 per cent growth. Net profit grew 62 per cent against the expected 80 per cent.

The markets also gave the thumbs-down to NIIT's quarterly results. On Wednesday, the NIIT scrip closed at Rs 1,643.05 on the Bombay Stock Exchange, down 6.24 per cent from its previous close of Rs 1752.35 with 531,000 shares traded. On Thursday, the stock was trading at Rs 1560 at 1400 IST.

Analysts are blaming NIIT's poor show on extremely low operating margins and the cyclical nature of the training industry. "The December quarter is a weak one for training companies. Expenses remain fixed in terms of manpower, but revenues are booked in other quarters. So the lower growth is understandable. But the margins are still very low," said an analyst at Asit C Mehta Brokerage.

Though operating margins increased by about 4 per cent to 22.3 per cent during the quarter, they are still lower than the industry average of 29-30 per cent. NIIT's lower operating margins are on account of its limited presence in the US, which translates into low average onsite rates. Offshore rates are around $27 per man-hour, while onsite rates are around $56 per man-hour (in India) and $80 in the US.

"The software business is now a larger portion of NIIT's revenues, but it is not growing as swiftly as its peers. Also, the company has no significant presence in the higher end of the value chain. So, margins are bound to be lower. That is a big concern," said an analyst at Pranav Securities.

Lack of any US-based software client and higher contribution of the onsite business to NIIT's revenues have also caused the disappointment among analysts.

The company added 31 new customers, including Veriprise, IBM Life Sciences and Unilever Singapore, during the quarter. But it still does not have a US-based software client. Onsite revenues grew to 49 per cent in the quarter from 45 per cent a year back. This makes the 60 per cent growth in global software revenues seem inadequate, say analysts.

Although NIIT says its long-term contracts are looking up - the pending order book improved to $82 million, including fresh order intake of $35 million - and that it is doing some high-end work, analysts have their doubts.

"Investors look at NIIT as a safe investment largely because of its stable training business. While that is true, there are inherent risks in its training-cum-software business model. So, investors would do better to switch," the Asit C Mehta analyst said.

Analysts expect the scrip to fall to its earlier levels of Rs 1,500-1,550 in the next two weeks. A leading foreign-based brokerage is said to have put a huge 'sell' order at the NIIT counter following the results announcement on Wednesday. If institutional investors start selling, the scrip could come under severe pressure and decline sharply, say analysts. These institutions hold about 14 per cent in the company.

At its current market price, the scrip is trading at a forward earnings multiple of 23.9 times its annualised EPS of Rs 74 for the fiscal ending September 30, 2001.

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