niit ltd - edelweiss ltd 2 edel invest research corporate training is imperative in todays dynamic...

NIIT Ltd

Rebooting, Reshaping

October 2015

Debashish Mazumdar +91-22-4088 5819

[email protected]

1 Edel Invest Research

Rebooting, Reshaping CMP: INR97 Target Price: INR135

Edel Invest Research BUY

Mahindra CIE Ltd. NIIT Ltd.

The call of the 'new world' is for a dramatic change in the way human resources are managed. Sans strong

engagement and a meaningful work environment, professionals/job seekers will disengage. Corporates, world

over, are increasing spending on employee training to reduce capability gaps and increase engagements. NIIT’s

Corporate Learning Group (CLG) is superiorly placed to gain from the changing market dynamics in favor of

training outsourcing. Back in India, under the new management, NIIT has completely restructured and

revitalised its Skill and Career Group (SCG) and its School Learning Group (SLG). This is expected to boost margin

performance due to operating leverage benefit kicking in. We initiate coverage on NIIT Ltd with ‘BUY’

recommendation. Our SOTP based target price is INR135, 40% upside from CMP of INR97.

Corporate Training is imperative in today’s dynamic world In today’s dynamic world, employees appear more like customers or partners rather than subordinates. Without strong engagement and a meaningful work environment, people will disengage. Again, Focus on training becomes imperative with the increasing capability gaps across various fields. These factors are leading to the need for greater and more comprehensive training in an organisation. Businesses are responding by investing increasingly in employee development. Global spend on corporate training currently totals US$135bn, and within that USA’s share is US$85bn.

Training Outsourcing is picking up pace Corporate training is a complex operation. A small group of people is expected to build and deliver a wide range of training. One solution being adopted increasingly by large organisations is to partner with leading corporate training companies, to provide the requisite end-to-end training services. The year 2014, saw a sizeable increase in the average expenditure for training outsourcing in USA. In 2014, US companies spend US$6.1bn on training outsourcing, up by 7% YoY.

NIIT’s CLG is well placed to take advantage of the Corporate Training market dynamics NIIT is well placed to gain from the changing market dynamics in the corporate training industry. NIIT has been identified as one of the top 20 training companies in the world for eight consecutive years. The company’s CLG business reported 19% CAGR over FY12-15. Going forward, with higher contribution from the managed training services, the CLG business is expected to grow at 15% CAGR over FY15-FY18E and EBITDA margin will likely improve to 13% in FY18E from 11.5% currently.

Skill & Career Group (SCG): Restructuring to create value; Skill India to provide growth With decrease in entry level training requirement, SCG was under significant pressure over the last few years. Under the new management, NIIT took a decision to launch a comprehensive business transformation programme to get back onto the profitable growth path. Although, the growth of SCG will likely be anemic in near term; we believe that with demand pick-up, the benefit of operating leverage would kick in and operating margin would improve significantly to 8% in FY18E. NIIT, under skill development programme, has committed to train 1cr people across 16 sectors over the next five years and that should aid growth in the SCG business going forward.

Restructuring of School Group (SCG) to drive value Under the new management, NIIT has also decided to exit from the government and capex driven private school business and focus on IP driven school business to become more asset light and improve return ratios. The company believes that there is a large opportunity in the K-12 market and is also exploring avenues to enter the B2C segment. Going forward, we expect the non-capex driven private school business to grow by 10% over FY15-18E and operating margin would also improve significantly.

Valuation We value NIIT based on SOTP. The CLG business is valued at INR808cr, taking a INR101cr EBITDA and EV/EBITDA multiple of 8x. The other 2 business are valued at INR622cr taking a 1.5x EV/Sales multiple. The investment in NIIT Technologies is valued at INR600cr after putting a holding company discount of 20% on the current market capital. We initiate coverage on the company with a SOTP based target price of INR135, 40% upside from CMP of INR97.

Financials (Consolidated) (INR Cr)

Year to March FY13 FY14 FY15E FY16E FY17E

Revenue 961 951 957 972 1,089

Rev. growth (%) (23.8) (1.0) 0.7 1.5 12.1

EBITDA 42 51 22 73 104

Net profit (25) (36) (167) 2 25

EPS growth (%) 27.4 32.6 (881.8) 146.7 47.1

ROCE (%) -9% -6% -26% 1% 11%

Diluted P/E (x) 59.7 88.6 (11.3) 24.3 16.5

EV/ EBITDA (x) 38.3 31.5 72.1 22.1 15.4

EV/Sales (x) 1.7 1.7 1.7 1.7 1.5

Debashish Mazumdar +91 (22) 4088 5819 [email protected]

Bloomberg: NIIT:IN

52-week range (INR): 100/35

Share in issue (crs): 16.52

M cap (INR crs): 1,351

Avg. Daily Vol. BSE/NSE

:(‘000): 2540

SHARE HOLDING PATTERN (%)

Date: 9th October, 2015

Promoter, 34.25

FIIs, 12.80DIIs,

11.23

Others, 41.72

60

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NIIT Sensex

NIIT Ltd


Corporate Training is imperative in today’s dynamic world In today’s dynamic world, global organisations are navigating into a ‘new world of work’— that requires a

dramatic change in strategies for leadership, talent and human resources. The balance of power in the

employer-employee relationship has shifted — today’s employees appear more like customers or partners

rather than subordinates. Without strong engagement and a positive, meaningful work environment, job

seekers/professionals will disengage and look elsewhere for work. Hence, employee retention is at the

centre of this modern organisation structure. Moreover, with considerable change in way of doing business,

a substantial capability gap is visible in all important areas of human resource management and this is

consistently rising. All these factors are leading to the need for greater training in an organisation.

Businesses are responding by investing more in employee development, with training budgets increasing on

an average by 15%, in 2013. Global spend on corporate training currently totals US$135bn and within that

USA’s share is US$85bn.

Dynamic work environment and rising capability gap is placing training at the forefront

In today’s dynamic world, global organisations are navigating into a ‘new world of work’— that requires a

dramatic change in strategies for leadership, talent and human resources. As the economy grows and skills

become more specialized, the competition for talent acquisition has increased. And in this dynamic world,

the most important parameters across regions and industries are employee engagement, organisation

culture, leadership and learning development. Sans strong engagement and a positive, meaningful work

environment, professionals will disengage and look elsewhere for work. The balance of power in the

employer-employee relationship has shifted — making today’s employees more like customers or partners

rather than subordinates. Demographic changes are also in play. Millennials, who now make up more than

half the workforce, are taking centre stage. Their expectations are vastly different from those of previous

generations. Hence retention of employees is at the centre of this modern organisation structure. These

stated factors are leading to the need for greater training in an organisation.

Focus on training becomes imperative with the increasing capability gaps across various fields. Research

concludes substantial capability gaps in all key areas of human resource management. Moreover, the

capability gap in several of these areas has increased in magnitude, suggesting that the accelerating

economy and rapid workforce changes have created an even greater urgency to adapt HR and people

practices around the world.

Capability gap is high across various fields

Source: Deloitte University press, Edel Invest Research.

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“The two corporate support

functions that will be most

impacted by the talent crisis

are HR and Learning”

Josh Bersin President,

Bersin & Associates

NIIT Ltd


And it’s rising

Source: Deloitte University press, Edel Invest Research.

Training is a more economical way of increasing the organisation’s productivity

There is a host of reasons why it makes sense for an organisation to invest in the development of its existing

talent. Perhaps the most persuasive argument is that new hiring costs a lot more — some estimates indicate

that it takes 150% to recruit new talent versus developing that of existing employees. The costs of recruiting

a new employee include selection costs such as interviewing, reference checks, drug testing and on-the-job

training. While there are clear physical costs involved with turnover, like separation processing costs,

overtime, hiring of search firms and temporary agencies, there are also hidden costs. The latter include

lower productivity, lower employee morale, overburdened employees, lost knowledge and training costs.

These real and hidden costs of employee turnover can be significantly minimized when employers invest in

their existing talent. Hence, investing in training and employee retention is not only the more economical

option but also results in better overall productivity. Training directly impacts employee retention,

motivation, engagement, and productivity. Talent development investment also reduces staff turnover

because employees are more engaged and satisfied with their jobs and are less likely to leave the

organisation. Millennial employees, in particular, are interested in learning and have indicated that they are

likely to look elsewhere if their employers fail to offer opportunities to learn and acquire new skills.

Therefore for every organisation, it is important that the cost of turnover and its link to talent development

investment is best not overlooked.

-34

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Leadership Culture & engagement

HR & people analytics

Reinventing HR Performance management

Learning & development

Workforce capability

2014 capability gap 2015 capability gap

NIIT Ltd


These factors lead to rising investment in learning and employee development

Employees are taking center stage in the new dynamic organisational structure and thus focusing on

employee retention today is becoming more economical. This need, coupled with the increased capability

gap across various fields, has led to training becoming the central point for many organisations. Businesses

are responding by investing more in employee development, their training budgets increasing, on an

average by 15% in 2013. In mature organisations, this investment is not just for short-term training — it

includes identifying capability gaps today and into the future, and building a ‘supply chain’ of skills to fill

these gaps over the long term. In 2014 oganisations across the US have spent an average US$976 per learner

on learning and development (L&D) initiatives. With recovery in economic activity, corporates in the USA

have increased their training spends significantly over the last three years. In terms of hours of training per

employee, there was ~9% YoY growth across firms reaching 40.7 hours. Firms are also, increasingly, looking

to not only increase the scope of training but also increasing the number of learners served. Amongst

industries, the manufacturing and retail sectors have reported a sharp increase in corporate training

budgets.

Source: trauiningmag.com, Edel Invest Research.

43% corporates increased training budget in 2014, against only 16% cut it down

Budget increase is maximum to enhance the scope

Per learner training spent is rising steadily Hours of training per employee is also rising

Increased, 43%

Remained, 41%

Decreased, 16%

6%

16%

30%

23%

15%

65%

51%

51%

Other

Budget Adjusted to Reflect Higher …

Purchased New …

Increased Outside …

Attended More Outside Learning …

Increased Scope of Training

Increased Number of Learners …

Added Training Staff

$903

$819

$1,238

$976

$490

$829

$1,092

$881

$864

$1,104

$1,115

$1,059

Large (10,000 or more employees)

Midsize (1,000 to 9,999 employees)

Small (100 to 999 employees)

All Companies

2012 2013 2014

36.2

41.6

42.2

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37.5

38.8

36.5

37.5

Large (10,000 or more employees)

Midsize (1,000 to 9,999 employees)

Small (100 to 999 employees)

All Companies

2013 2014

NIIT Ltd


Global corporate training industry offers a huge growth opportunity

Global spend on corporate training currently totals US$135bn and within that USA’s share is US$85bn.

Talent development budgets are a kind of economic bellwether. As a result of the recession and the

slowdown during 2008-2009, companies had to downsize their training and development spends at a

massive pace. As a result, employers have begun to notice skill gaps in their organisations. In fact, more than

70% of organisations cite ‘capability gaps’ as one of their top five organisational challenges. These gaps,

combined with the looming exodus of Baby Boomers from the workplace as they begin to retire, pose a real

challenge for employers. Post the fall for two consecutive years in 2008-09, training spending by corporates

USA has risen at 12% CAGR over 2010-13.

US corporate training industry is gaining momentum

Source: Bersin by Deloitte, Edel Invest Research.

Therefore, corporate training represents a big opportunity for training solution providers like NIIT to offer an

entire gamut of products and services. The business scope for corporate training is also widening as more

and more Small and Medium Businesses (SMBs) embrace such products and services along with large

organisations. Traditionally, training programmes were designed only for the IT sector, but now the scenario

is changing and companies in other sectors have also started adopting corporate training for their

employees. Also, training programmes are finding applications in managerial and leadership development,

which is expected to further expand the market. The new report on the Global Corporate Training Market

2015-2019 expects the training industry to grow at a CAGR of 8.77% from 2014-2019.

6%

-11% -11%

2%

10% 12%

15%

2007 2008 2009 2010 2011 2012 2013

“To win the war for talent,

business leaders must make

talent management a top

strategic priority – and then do

whatever it takes to convert

that strategy into action.”

Deloitte Consulting

NIIT Ltd


Some important facts about global corporate training industry

Leadership development claims 35% of the budget

The largest share of the L&D budget went to leadership development, with 35% of the training budget, on an average, spent on developing leaders at all levels—from first-line supervisors to executives. Leadership has always been important, but has become an even bigger concern as the economy recovers and many firms look to expand globally. Companies today are struggling to improve their leadership skills; more than 60% of all companies cite ‘leadership gaps’ as their topmost business challenge.

Mature companies spend 37% more Spending also differs according to the maturity of the L&D organisation. Mature L&D organisations, those at levels 3 and 4 of maturity model, spend US$1,353 per learner, on an average — 37% more than the least mature groups. Our research concludes that spending allocations vary by maturity level as well. Organisations at level 1 spend a greater proportion of their funds on regulatory, compliance, and job-specific training. As they mature to level 2, many begin to build their infrastructures, and thereby greater training is required for processes and systems. At levels 3 and 4, organisations invest more in leadership development and function-specific training, such as sales and customer service training.

Approximately 75% of the global spend for training pertains to North America and Europe

The top 5 non-BPO market segments for outsourced training are IT (4.9%), Leadership (4.4%), Learning Technologies (6.7%), Sales Training (3.8%), and Content Development (5.9%). All other segments account for about 74%.

Recent research indicates, for example, that the oil and gas industry needs 60,000 petrochemical engineers by 2016, yet only 1,300 graduate

from US schools each year. This means that oil companies have to train, retrain, and jointly educate many energy engineers, helping them to

grow.

Technology is revolutionizing this market. Research shows an explosive growth in technology tools that are used to train people today. Self-authored videos, online communication channels, virtual learning, and MOOCs (Coursera, Udacity, Udemy, edX, …) are all growing rapidly as training tools. People still need formal classroom education, but this is now less than half the total ‘hours’ that people consume in training around the world. And among the highly advanced companies, as much as 18% of all training is now delivered through mobile devices.

NIIT Ltd


Training Outsourcing is picking up pace Learning & Development (L&D) and talent management programmes are becoming a regular feature, as

companies are called upon to accomplish more with fewer tools in their constant quest to identify innovative

and dynamic strategies to maintain their competitive advantage. This presents a unique challenge for any

organisation and requires special skill sets that may be wanting internally. Moreover, the quantum of effort

and internal resources required for training can be taxing for any company, as it diverts attention from the

company’s core business activity. Research suggests that while technical and professional skills are a top

priority, corporate training departments have fallen behind. Companies are struggling to redesign their

training environment, incorporate new learning technologies, and utilize the incredible array of digital

learning tools now available.One solution being adopted increasingly by large organisations is to partner with

leading corporate training companies to provide the requisite training services.

Effective training needs specialized expertise; hence outsourcing

Training requires specialized content: Corporate training is a complex and difficult operation. A key group of

people is expected to build, deliver, measure, and manage a wide range of training – covering topics from

field repair, sales skills, IT technology, new manager training, new hire training, all the way to executive

education. This broad and constantly changing set of content forces training managers to constantly look for

outside providers for courses, seminars and events.

Training requires specialized technology: Today, as e-learning is becoming bigger and bigger, organisations

are finding themselves filled with complex technologies to manage. Research shows that more than 55% of

the large enterprises have learning management systems (LMS) and a similar number have virtual classroom

systems. There are dozens of tools and technologies which must be selected, purchased, and managed in

order to run a training operation today. Learning management systems themselves are complex enterprise

systems which touch every employee, manager, and customer in an organisation. Many training

professionals do not have the background or skills to deal with the issues of selection, implementation,

management, upgrade, and integration of these systems.

Training requires specialized skills: As technology continues to occupy a larger and larger role in training,

corporate trainers must learn many new skills. E-learning content development, for example, is a complex

and highly multi-disciplinary process. Research finds that nearly 45% of most training organisation consists

of instructors. It is difficult for internal training departments to find the instructional design, web-

development, assessment, project management, and integration skills to build e-learning.

Top reason for pursuing training outsourcing

Source: Industry sources, Edel Invest Research.

31%

27%

38%

41%

20%

20%

Other

Better alignment of learning function with company's business strategy

Cost reduction

To increase speed to market

As a means to increase competitiveness

Training is not my company's core competency

Training is one of the most

multi-disciplinary functions in

corporations. Outsourcing of

many functions is mandatory

to deal with the wide range

of training demands

NIIT Ltd


Outsourcing training functions have myriad benefits for the organisation

The growth in training outsourcing is based on two facts: (a) training boosts organisational productivity, and

(b) external training providers increase an organisation’s ability to train more employees faster and more

cost-effectively versus the in-house staff. The benefits of carving out the entire training function and

handing it over to a provider can yield myriad benefits for employers. Training outsourcing can:

Rein in cost savings: The potential for cost savings is the initial reason most companies zero in on

outsourcing. The supplier reduces costs through consolidation of services, re-engineering of processes,

automation of administration and delivery, leveraging economies of scale across multiple clients and

driving deeper vendor discounts. A training outsourcing company can save clients 30%-40% on their

training costs. Training outsourcing also reduces fixed investments of the organisation and provides

flexibility of scale. Firms that outsource, spend 31% less in total annual training expenditure per learner

than firms that run training internally. In terms of personnel involved to training activities, outsourcing

firms have 26% fewer staff per 1,000 learners than companies that manage all training internally.

Training outsourcing save cost and reduce resource involvement

In House Training

Operations Outsourcers % reduction

Total Spending per Learner $1.191 per learner $827 per learner 31% reduction

Total Training headcount per Learner

10.5 Staff per 1,000 learners

7.8 Staff per 1,000 learners 26% reduction

Source: Industry sources, Edel Invest Research

Deliver high-quality, efficient services and products: By outsourcing training, companies can focus on

improving their core business and operation. Specialized training providers not only reduce the cost,

they improve the functional quality of the training and thereby improve employees’ skills. Hence, on

one side companies have more time to focus on their respective core businesses and more efficient

employees to achieve their long term goals.

Provide cutting-edge technology: With recent improvements in technology, there are a lot of different

ways to provide knowledge and it is tough for a small internal training team to be on the top of all

technology development taking place globally. Specialized training organisations find best practices

and methodologies globally and deploy them to get maximum customer satisfaction.

Expand global training capabilities: In today’s world of globalization, large corporates have a multi-

country presence and hence need a training function that is multi lingual and have the same

effectiveness and suitability in different cultures. Internal training departments have normally proven

unsuitable to provide support in this globally connected world.

Comparison between Training outsourcing and IT outsourcing

We can draw several comparisons between the evolutions of IT outsourcing over time and the stage in which the training outsourcing is currently.

In the IT industry, it began with outsourcing of Hardware in the 1960s. The 1970s saw the rise of computer software. Companies started to

increasingly rely on software, and standard application packages began to enter the market. Then, in the 1980s, IT started to be viewed by

managers as a commodity, which led to an increase of outsourcing IT activities or as a ‘general-purpose technology’ that can be purchased more

cheaply on the market than being provided expensively in-house. As time passed, the providers were soon able not just to provide contract

programming or other highly specific services, they were able to provide the whole IT package for their customers at a quality and at a price that

most companies could not match. This paved the way to total solutions outsourcing in the 1990s.

Training outsourcing is going through a similar transformation. Initially, mundane activities like LMS and admin was outsourced. As the training

outsourcing market evolved, organizations started outsourcing content development as well. Now with training outsourcing gaining momentum,

we are in the space between outsourcing of LMS & Content development and that of providing entire solutions.

NIIT Ltd


Managed training outsourcing is picking up pace

According to TrainingIndustry.com, many large corporations spend as much as 1% of their revenues on

learning services. In the training industry, the management of these resources and effective use of the value

chain are keys to maximising the efficiency of training and thereby creating value for the organisation.

Powerful partnerships between the organisation and the training provider generate benefits and optimise

returns for the businesses.

Fundamentally companies are looking at how it is best to strategically source the best training products,

services and talent at the best possible price and how to ensure the learning function adds increasing value

to the bottomline organisational goals. With increasing pressure on training budgets and senior

management emphasis on improved ROI of training infrastructure, strategic outsourcing proves to be the

answer for many organisations. Specialist providers are now offering a managed service approach. In the

learning field, this arrangement has come to be known as Managed Training Outsourcing. In a collaborative

partnership with a training outsourcing provider, the internal learning teams are free from simple, highly

repetitive but essential training tasks and can therefore take on a more strategic role. This is the era of

managed services across all business functions. The market opportunity for outsourcing continues to grow

rapidly as organisations look for creative ways to manage operational costs, while at the same time

embracing technology that will help maintain competitive differentiation in their own markets.

HSBC signed multi-year and multi-million dollar MTS deal with GP Strategies

GP Strategies Corporation has been selected by HSBC as its Managed Services Integrator to provide global

learning services. Under the multi-year agreement, GP Strategies expects to support HSBC's learning

function transition to a more flexible and commercial operating model. As a strategic partner, GP Strategies

will help HSBC drive global consistency and efficient ways of working in concert with the effective

management of operational risks, enabling the learning function to become more responsive to the needs of

HSBC employees and managers. The Global Master Agreement that has been signed requires GP Strategies

to identify over $10 million in total global savings on HSBC’s learning expenses, ranging from $1 million to $4

million per calendar year over the initial three year term. The revenue in turn for GP will be at least $30mn

for the first 3 years.

Different departments of the

organisations have different needs

and the approach and hence

training function is largely de-

centralized. However, the problem

with de-centralized, internal

training is that there is no clear

structure or matrix to measure the

consolidated cost-benefit trade-off

of the training programmes that

are conducted at an organisation

level. Hence, with organisations

increasingly focused on improving

employees’ productivity and skills,

they find it more beneficial to

outsource while making prudent

training investments.

In training, consider the impact of

a major new ERP rollout. A

company may need a large influx

of technical training for 12-18

months during this rollout period.

After the rollout, however, these

skills may not be needed again for

years. If this function is

outsourced, these skills can be

“switched out” easily without the

need to redeploy these skilled

professionals.

NIIT Ltd


Training outsourcing is expected to grow with economic recovery

The use of external service providers to develop, deliver or manage training activities is growing at a faster

rate than in the previous five years. The growth in spend is driven primarily from an increase in variable

labour and a flexible workforce. Content design and delivery is a primary example. Corporate executives’

expectations on the value of training are increasing, which is generating a renewed interest in using outside

companies to drive change and quality of service improvements. This is translating into more complex and

sophisticated engagements, larger deal size and multiple year engagements. We expect this trend in re-

engineering the training function to continue for some time.

The year 2014, saw a sizeable increase in the average expenditure for training outsourcing in USA. Currently

US companies on an average spend US$308,833 on training outsourcing, up from US$140,345 in 2013. An

average 8% of the total training budget was spent on outsourcing in 2014. Large companies outsource more

than the small and mid-sized companies, as the former need a higher quality of specialized services. Among

the activities, LMS services and content development has a higher share of outsourcing.

Content development and delivery has highest level of outsourcing

Source: Industry sources, Edel Invest Research.

Corporate training outsourcing spend is highly linked to economic recovery. Training outsourcing

expenditure in USA was US$6.1bn in 2014, up by 7% compared to the previous financial year. However, total

training outsourcing by corporates were still far lower than its peak of US$16.3bn in 2007. During 2005-

2008, ~26%-28% of total training spends was outsourced compared with 8% currently. We believe that

with the US economy back on track, this kind of high spend on outsourcing of corporate training will

resurface. Organisations are realizing that outsourcing of corporate training to specialists can help them

improve overall efficiency.

Outsourcing of corporate training highly correlated to economic recovery

Source: trainingmag.com, Edel Invest Research.

57%

80%

53%

79%

45%

38%

18%

18%

17%

54%

5%

2%

29%

4%

1%

Custom Content Development

Learner Support

LMS Operations/Hosting

LMS Administration (registration, upload data)

Instruction/Facilitation

No Outsourcing Some Sourcing Mostly or Completely Outsourced

13.5 15.8 16.3 15.4

7 6.9 9.1

7.4 5.7 6.1

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

($ B

n)

What Functions do Training

Organisations Outsource

Content

Delivery of Training

E-Learning

Content Development

Learning Management

Systems and

LMS Operations

Virtual Classroom and other

Learning

Technologies

Administrative Services

and User

Support

(Back-office functions)

Vendor Management

High

Low

Ou

tso

urc

ing

Op

po

rtu

nit

y

NIIT Ltd


NIIT is well placed to take advantage of the training market dynamics NIIT’s team of learning professionals is helping the world’s leading companies transform their training

function through training outsourcing services that reduce costs, add measurable value, and increase

business impact while allowing customers to redirect their resources and energy into core business

functions. The company is focusing on IT, BFSI, energy and pharma segments currently to create a niche

position in the training business. Under guidance of the new management, NIIT has verticalized its sale force

to increase its conversion rate and is developing analytics software so that companies can measure the

increase in productivity of its employees post training. Currently, the only major competitor in this space is

GP Strategies. NIIT is in the top 2-3 considerations for every RFP it applies for. The company has been

identified as 1 of the top 20 training companies in the world for eight consecutive years by Training Industry

Inc.

NIIT’s presence across the value chain helps it to win a marquee client base

NIIT has created a presence and expertise across six pillars of the corporate training value chain:

1. Learning advisory: The company advises management on what kind of training is required, where the

error rate in the organisation can be high and how to rationalize costs for training. This is usually used

to initiate a strategic level conversation with the top management (CLO, CXO).

2. Content development: NIIT has great amount of expertise in content development, with a 1,000 people

team in Gurgaon, India for the same. The company is present across the entire range of content

creation

3. Learning administration: NIIT handles the administration part of the training programmes. It is like

outsourcing the entire training department of a company.

4. Learning technology: NIIT has its own learning management system that it implements for its

customers. It also helps in implementing third party systems when required.

5. Learning delivery: 50% of a company’s budget is spent on learning delivery, hence this is an important

part of the training industry. The company has established a wide network of third party trainers, that it

can tap into as and when the need arises.

6. Strategic sourcing: NIIT manages the entire range of training programme of an organisation from start

to finish and gets management fees for the same.

The company’s presence across all the segments of training business will help the company to not only grow

at a rapid pace but also to add marquee clients. Moreover, this presence would also help the company to

mine the existing client base and increase the business opportunity. NIIT has 25 global customers where the

company provides end-to-end training services and business from them has been consistently increasing.

The focus on BFSI, energy, pharma and life sciences enable NIIT to provide specialised training and demand

better margins. There is also additional stickiness in this business as a large amount of domain knowledge is

required. These industries are also highly regulated, hence spending on training is more mandatory than

discretionary. The gradual shift of the industry to online delivery will also provide a boost to the company’s

margins.

Technology

Oil & gas

Pharma & life science

BFSI

NIIT Ltd


Shift to MTS is leading to larger, multiyear deals and high revenue visibility to NIIT

With the change in requirement and increase in demand from the global corporates, NIIT is moving more

towards MTS from custom projects. MTS includes the entire gamut of training services where the training

service provider will work as a one-stop solution for the entire training need of an organisation. Under MTS,

the deals are large in size and more long term in nature and hence provide higher revenue visibility and

better margin profile. Over the past four financial years, the corporate training business of NIIT is more tilted

towards managed services, as in Q1FY16 MTS contributed 89% to the total training business compared with

33% in FY12. The training revenue visibility also registered huge growth with the increase in contribution

from MTS. As of Q1FY16, the revenue visibility in the corporate training business stands at US$200mn versus

US$120mn in FY12.

The company is also looking to bid for more comprehensive deals that have a deal size of ~US$50mn. These

kinds of deals are signed across a large number of geographies and for the entire range of training sessions.

Although, only one such deal has been signed in the last three years, the company is increasingly focusing its

energies on targeting such deals. The new management has also verticalized its sales force so there is a

specialized sales team to target Fortune 1000 companies in each sector.

MTS revenue in Q1FY16 was almost similar to entire FY12 MTS

Revenues

Revenue visibility is growing at a rapid pace

Source: Company data, Edel Invest Research.

33%

72%

79%

87% 89%

30%

40%

50%

60%

70%

80%

90%

100%

0

100

200

300

400

500

600

FY12 FY13 FY14 FY15 Q1FY16

(IN

R C

r)

MTS Custom Projects % Share of MTS

120

143

176 179

200

80

100

120

140

160

180

200

220

FY12 FY13 FY14 FY15 Q1FY16

(US$

mn

)

Revenue Visibility

NIIT Ltd


NIIT won multi-million and multi-country agreement from Shell

Overview: Shell is a global group of energy and petrochemicals companies, with around 87,000 employees

in more than 70 countries and territories. Shell’s objective was to streamline the planning process across its

projects and technology businesses to enable worldwide adoption of standardized workflows and

technology in a customized application. NIIT developed an award‐winning learning programme to help

thousands of users in 22 locations worldwide adopt the standardized application workflows.

Shell uses the Oracle platform called Primavera for planning global capital projects, routine maintenance,

well engineering, business process improvement projects and integrated activity planning. However, as with

every large scale technology and application change, there come unique challenges in training,

implementation and use.

Problem: Since expertise on the application was limited, it took approximately nine to twelve hours via live

meeting sessions to get on board a new team on the SSP application. Since these teams were globally

distributed, scheduling two to three sessions per team was a big challenge due to availability of team

members and trainers, difference in time zones, and critical time away from work for training.

Solution: The global planning tools project team worked with NIIT to develop a solution for SSP training. The

solution was the “Shell‐Standard Primavera” e‐learning training curriculum of approximately 2 hours seat

time hosted on Shell’s online training portal. The Shell‐Standard Primavera (SSP) training curriculum was

made up of 3 courses: Getting Started, Shell‐Standard Primavera Features and Shell Standard Primavera

Quiz. This training was designed to provide users with the essential knowledge needed to work in

Shell‐Standard Primavera and gain an awareness and understanding of the globally configured set up. The

courses covered a wide range of topics related to day‐to‐day working in SSP, getting help from the global

application support (GAS) team and useful reference materials.

After NIIT took charge, the average time spent on the SSP application training was reduced by over 30% per

person. This has led to significant savings in cost and time spent on training.

NIIT has also helped to develop a simulator for the on-rig training for Shell. This has helped the oil engineers

get practical knowledge on how to operate on an oil rig, the different crises and situations that can arise and

how to deal with them. This reduced the on-site oil rig training requirement from 6 months to 1 month and

led to substantial cost savings for the company as well.

Award:

NIIT US has been honored with the ’Brandon Hall Excellence Gold Award’ in the Best Custom Content

category jointly with Shell for Shell Services on the Road.

NIIT Ltd


Corporate learning will continue to be a growth driver and provide scope for margin improvements

The Corporate Learning Group (CLG) of NIIT has been growing rapidly, outpacing market growth. Over FY12-

FY15, the CLG business reported 19% CAGR in constant currency to US$80mn in FY15. Managed training

services were the main driver of growth. Going forward, the CLG is expected to report 15% CAGR over FY15-

FY18E. When the world is moving towards the MTS space, NIIT would face limited competition, as except for

a few large players, like GP Strategies and HP, the market is highly fragmented with multiple local and small

players. When the corporates are looking for a one-stop solution for all the training needs, it puts players

such as NIIT at an advantage due to higher scale and capabilities across the value chain.

Although, CLG reported CAGR of 19% over the last few years; operating margin of the CLG group is hovering

around the narrow band of 11%-12%. Currently NIIT Ltd is spending a substantial amount on marketing

expenses to acquire clients. As the company gets more clients and builds a stronger brand name, these

expense are expected to come down. Existing clients will also provide an opportunity to cross sell and up

sell, increasing the topline of the company (for example, for Stat Oil, NIIT started with one pillar of training,

it now provides the entire range of products, all six pillars and has signed a multi-year contract with a large

order book for the same). Hence, over the period of FY15–18E, the EBITDA margins in this segment are

expected to increase from 11.5% to 13%. There is also scope for margin expansion as the product mix shifts

to more cost arbitrage pillars of training, which are content development, learning administration and

strategic sourcing. Since these activities can be carried out offshore, they provide better margins to the

company. With the increase in margin performance, CLG EBITDA is expected to grow at 21% CAGR over

FY15-FY18E to reach INR101cr.

CLG expected to grow by 15% CAGR over FY15 – 18E EBITDA expected to grow at 21% CAGR over FY15 – 18E


0

20

40

60

80

100

120

140

160

FY13 FY14 FY15 FY16E FY17E FY18E

(US$

mn

)

CLG Revenue

10%

11%

11%

12%

12%

13%

13%

14%

0

20

40

60

80

100

120


(IN

R C

r)

EBITDA Op. Margin

NIIT Ltd


How to grow in a fragmented market: GP strategy Case Study GP Strategies Strategy: Inorganic growth

GP Strategies has been following an approach to acquire complementary businesses with attractive

valuations. Since 2006, they have acquired over 25 businesses which have expanded their e-Learning

capabilities and added complementary services such as product sales training and leadership development.

Over half of these businesses are located outside of the United States and have strengthened their

international platform, enabling the company to meet the needs of the global clients while providing

additional client opportunities.

Inorganic expansion has aided rapid revenue growth


NIIT to consider strategic acquisitions as well

So far, NIIT has not had a focused acquisition strategy in the Corporate Learning Group. Although there have

been a few acquisitions over the years there has been a lack of consistent hunt for value buys. For example,

In 2001, NIIT acquired Osprey, DEI and Click2learn in the US, to establish its e-learning and corporate

learning practices in the US .In 2006, acquired Element K, a leading provider of learning solutions in North

America. The company was sold off in 2012. Hence in the last 9 years, there have been no significant

acquisitions in the Corporate learning Group.

With the new management coming in NIIT has been indicating that it will look at making strategic

acquisitions that will augment its product offerings and provide a new client group. In an extremely

fragmented market like the training industry, hence, this strategy will provide an additional growth to the

top line of the CLG business.

0.0

100.0

200.0

300.0

400.0

500.0

600.0

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

USD

mn

GP Strategies revenue

18% CAGR

NIIT Ltd


Skill & Career Group (SCG): Restructuring to create value and Skill India to provide

growth NIIT’s Skill and Career group was under significant pressure over the last few years, as with the

mushrooming of private MBA and engineering colleges, demand for retail IT training came down

significantly. Under the new management, NIIT decided to launch a comprehensive business transformation

programme wherein management reduces the number of low-performing centres, reduces manpower,

restructures the number of low-volume course offerings and restricts focus on growing geographies such as,

India and China. The company is now focusing on non-IT courses and has new launched courses to meet new

world requirements. Although the growth of SCG would be anaemic in the near term, we believe that with

pick-up in demand, the operating leverage benefit would kick in and margins will likely improve significantly.

The company is also participating in the promising ‘Skill India’ programme of the new government and under

the joint venture of the National Skill Development Corporation, has committed to train 1cr people across

16 sectors over the next 7-8 years.

Skill & Career Group (SCG) was a significant drag to overall NIIT performance

The Skills and Career Group of NIIT, where the company provides training to individuals, mainly at the

fresher IT industry level, was under significant pressure over the last few years driven mainly by decline in

the retail training segment. NIIT is mainly focused towards IT related training and with the mushrooming of

private engineering and MBA colleges, the demand for IT training has reduced significantly. The number of

new enrolments was falling leading to under utilization of the training centers. Over FY12-FY15, revenue

from SCG fell by 44% to INR328 crore in FY15 versus INR583 crore in FY12. Given the high operating leverage

of the segment, margins have also slipped sharply in recent years.

Enrolment and Utilization falling down Revenue and margin performance under pressure

Source: company data, Edel Invest Research.

Restructuring of SCG business to drive value

Under the new management, NIIT took a decision to launch a comprehensive business transformation

programme, which comprised a review of the entire portfolio of businesses, geographies and products with

the objective of exiting low-margin and low-volume products, capital intensive businesses and instead,

sharpen focus on asset-light, high-return and growth oriented offerings. While the exercise involved one-

time expenses and provisions and impacted normal business, it has led to a material reduction in continuing

costs and also enabled the organisation to expand reach. The following measures were then taken by the

new management:

57% 54%

47%

40% 35%

5.48

2.79

0.00

1.00

2.00

3.00

4.00

5.00

6.00

0%

10%

20%

30%

40%

50%

60%

FY11 FY12 FY13 FY14 FY15

Lakh

s

Utilization rate of SCG Enrollments - RHS

-10%

-5%

0%

5%

10%

15%

20%

-100

0

100

200

300

400

500

600

700


(IN

R C

r)

Revenue EBITDA OP. Margin

NIIT Ltd


Created lean delivery structure and product portfolio: In a major drive, NIIT reduced its SCG seat

capacity by 33% and head count by 24%. Reducing seat capacity and simultaneously providing cloud

campus will aid in pruning costs. The company has consolidated its centers and management has taken

a call to introduce all courses at all centers rather than have specialized centers for specific courses to

ensure efficient utilization of capacity. Earlier, if there were two centers in an area, one for Yuva Jyoti

(skills) and one for NIIT Imperia (management), now they have reduced this sort of overlap . The

management has also cut the product portfolio to 67 from 190 and closed unprofitable and redundant

courses.

Delivery centres reduced significantly

FY13 FY14 FY15

India Centres Seat Capacity 2,20,000 2,02,000 1,59,000

No of centres

India 597 531 365

China & ROW 253 188 105

Total 850 719 470

Owned

India

68 29

China & ROW

8 8

Total

76 37

Channel Partners

India

463 336

China & ROW

180 97

Total

643 433


Restricted geographic focus: The individual skills and career business was present across Emerging

Markets (EMs) in Asia and Africa. The company took a conscious decision to sharpen focus on the SCG

business in the larger markets and exit other international geographies. Since India and China account

for 40% of the working age population amongst the global EMs, NIIT decided to focus on these two

regions alone.

Leverage brand equity of NIIT for better utilization of assets: NIIT also intends to leverage the goodwill

associated with the 'NIIT' brand to derive greater revenue synergies for ‘Beyond IT’ training courses

that have always existed within the NIIT stable. The company intends to sweat the existing centers

(fixed assets) by making available all training programmes across multiple disciplines throughout their

network – both company-owned and channel partner-owned centres.


One SCGIndiaChina

Service Sector Skills

Integrated B2B/B2C business

Technology Intensive /

Multi Modal

Skills Marketplace

with 360◦Partner Ecosystem

IT, IFBI, Imperia,

Uniqua, NYJ

IndiaChinaROW

IT,Non-ITCentre Driven

Standalone B2B, B2C

Centre Driven

EverythingIn house

Old Structure

New Structure

NIIT Ltd


NIIT focusing on B2B training and non-IT to drive growth

Although, the training in India at an individual level is coming down, Indian corporates are struggling to

maintain pace with the massively changing world and hence, the demand for training at the corporate levels

is growing at a significant pace. NIIT is expanding its B2B presence to capture this opportunity. The company

has tied up with industry majors like ICICI Bank for NIIT Institute of Finance Banking & Insurance (IFBI) to

support their skill requirements. The recent deal with India Airport Authority to train 5,000 of its employees

is an acknowledgement of partial success of the new strategy of the company. The company has also tied up

with leading business schools in India like IIM Calcutta, IIM Ahmedabad and XLRI, for NIIT Imperia.

The company, over the last few years has significantly shifted focus to non-IT courses, particularly in the BFSI

space, to reduce its dependence on one single industry. The contribution from ‘Beyond-IT’ at NIIT’s topline

increased to 33% in FY15 compared with 9% in FY11. ‘Beyond IT’ revenues grew at a CAGR of 24% over FY11-

FY15 from INR46 crore to INR108 crore in FY15. Going forward, NIIT management has a vision to diversify

the product portfolio with inclusion of new discipline to boost revenue and minimize the adverse impact of

demand slowdown from any particular industry.

Non-IT is gaining momentum


NIIT is expanding presence to gain growth and reduce particular industry impact

Incremental HR requirements by sector between 2013-22 (Mn people)


9% 11%

17%

26%

33%

39%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

100

200

300

400

500

600

700

FY11 FY12 FY13 FY14 FY15 FY16

(IN

R C

r)

IT Revenue Beyond IT Revenue Beyond IT Revenue Share

31

17

10 12 7 6 6 6 5 5 4 4 4 4 4 4 4 3 2 3 2 2 1

-10

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NIIT focusing on the sectors

where skill gap is very high

Portfolio Expansion (Service Skills)

Market Leader

NIIT Ltd


NIIT Imperia, Centre for Advanced Learning, has been specially created to provide quality management

education to working professionals. NIIT Imperia draws upon NIIT's expertise in the design and management

of distributed education programmes to provide the study-environment for students, the technology

platform, and the allied education services & processes that make up the total teaching-learning experience.

This combined with the strategic academic alliances with some of the most prestigious management and

technology institutions in the country today provides a truly rich learning experience. Academicians from

these institutions have worked with NIIT Imperia to design programmes in management, technology and

other specialised areas, where the programme contents and teaching pedagogy have been refined to be

appropriate for working professionals of specified backgrounds. At the core of NIIT Imperia's educational

delivery methodology is state-of-the-art synchronous learning technology. Having designed and used

synchronous learning technology for many years, NIIT Imperia has built around this technology a unique

learning methodology and student experience that includes the best features of conventional classroom

education coupled with advanced e-learning and learning management techniques.

Industry Partners

Academic Partners

NIIT Ltd


NIIT leveraging technology and new world courses to diversify presence

The new management also focused on new courses both in the IT and non-IT space to meet the modern day

requirements. The recent launch of the ‘StackRoute’ training programme to meet start up requirements,

which is aimed at equipping students with full stack programming skills, relevant in the ‘Digital’ demand

areas, is a step in this direction. In our view, the launch of programmes like ‘StackRoute’ is critical to the

business transformation of the SCG, thereby arresting the decline in revenues in the IT training segment.

NIIT has started reducing its traditional IT courses and has been introducing new courses in the areas of Big

Data and Analytics.

NIIT is also leveraging new technology to get quality growth. NIIT Imperia is one example where the

company is leveraging technology. Cloud Campus remains an integral part of the future of NIIT and is the

identified platform of growth in the Skills & Careers business. This platform is gaining momentum as

students are looking for greater flexibility in schedules and want on-demand learning. The cloud campus

delivery platform helps NIIT address these needs, achieve higher scalability with available resources, lower

the delivery cost and achieve better capacity utilization. Over the next few years, we believe, NIIT would be

utilizing e-learning solutions to drive growth. The company also opened ‘Cloud Campus’ to the entire world

to gain better visibility among students as well as corporates.

NIIT’s Cloud Campus — to leverage the e-learning boom


NIIT Ltd


SCG growth to remain feeble near term; but margin performance to improve

Given the technology shift in IT industry towards digital services, we expect the incremental demand for

plain vanilla and entry level IT courses to be limited in the near future. NIIT still gets the bulk of its revenue

from entry level IT courses and hence growth in SCG is likely to remain anemic in the near future. During the

transition period, the company would shift its courses more towards meeting the modern world demand.

We believe, with marginal improvement in utilization, revenue of SCG would grow at a CAGR 4% over FY15-

FY18E.

However, with initiatives like centre consolidation and expansion in e-learning presence, capacity utilization

has already started improving and the breakeven point has started reducing. So, with a pick-up in demand,

we expect the operating leverage benefit to kick in and margin to improve significantly. We believe, with

marginal growth in revenue and lower cost, EBITDA will likely grow at a CAGR of 18% over FY15-FY18E and

EBITDA margin could reach 8% in FY18E.

Utilization to grow with more new enrolments

Operating margins to gain leverage benefit


30%

32%

34%

36%

38%

40%

42%

44%

46%

48%

0

50

100

150

200

250

300

350

400

450

500

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Tho

usa

nd

s

Seat Capacity New Enrolements Utilization

-10%

-5%

0%

5%

10%

15%

20%

-100

0

100

200

300

400

500

600

700

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

(IN

R C

r)

Revenue EBITDA Op.Margin

NIIT Ltd


Government’s Skill India programme — A massive opportunity

The new Indian government, under the leadership of Mr. Narendra Modi, has set a target to develop skills of

40 crore people by 2022 under the National Policy for Skill Development to make the ‘Make in India’ drive

successful. NIIT, under the joint venture of National Skill Development Corporation, has committed to train

1 crore people across 16 sectors over the next five years. Since NIIT has centers across pan India, which are

operating at ~40% utilization levels, Skill India will not only provide a boost to the topline but also a boost to

the bottomline owing to the operating leverage effect. Management intends to extensively leverage

technology to deliver training at this scale and be methodical in choosing terms of engagement to avoid bad

debts and cash-flow related issues.

Although, we have not considered the benefits of Skill India in our assumptions (its visibility being unclear at

this juncture), however, even if we make a conservative assumption that NIIT will train 20,00,000 people

over FY17-FY20, this will add an average of 17% to the topline.

2022 Projections: Huge Capacity Creation Required Skill India could add significant growth to SCG business


678

48

611

115

61.5

Total demand by 2022

Reduction due to ageing/retirement

Reskilling/upskilling of 90% of existing workforce (679 mn)

Addition to workplace @12.8mn per year

Total supply by 2022 @current capacity (2013-14)

11x

0

200

400

600

800

1,000


(IN

R C

r)

Individual learning solution Skill Building Solution

NIIT Ltd


Reassessment of school learning business to become asset light and ROCE focused Under the umbrella of School Learning Group (SLG), NIIT has three types of businesses currently —

government schools, capex driven private schools and IP led private schools. On one side, due to the

elongated payment cycle in government school business, SLG is facing high working capital days and cash

flow problems. Again, the capital intensity in the capex driven private school contracts, is also not

commensurate with the returns. To address the situation, the new management has decided to exit from

government schools and capex driven businesses and focus on IP driven school business to become more

asset light and improve return ratios.

Complete exit from government school businesses to improve cash flow and ROCE

Under the government school business, NIIT provides software, content and faculty for five years to

government schools. But, due to the elongated payment cycle of around 200 days, the cash flow and ROCE

of the overall school business was getting impacted. To reduce its working capital cycle and to improve

return ratios, NIIT has been exiting government schools over the last couple of years. The number of

government schools declined from 15,000 in FY10 to 4,400 in FY15. The revenue from government schools

also reduced to INR54 crore in FY15 compared with INR108 crore in FY12.

Under the new management, this process of exiting was expedited further. NIIT has decided to exit from the

government school business completely. Currently the government school business is present in Assam,

Maharashtra and Chhattisgarh; a major part of the exit will be concluded by FY17E itself. Moreover, to

speed up recovery of these delayed receivables, the company has put in place a strategy of intensive follow-

ups and strong steps for the resolution, including the appropriate commercial and legal actions.

NIIT will fully exit the government school business by FY19E

Financial Year No. of

government Schools

Decline in no. of

government schools

Government School Business

FY15 4420

INR 538mn revenues from ~4,400 government schools

FY16E 3950 470 Company will exit 470 government schools in Assam state

FY17E 2950 1000 1,000 school government contacts in Maharashtra will come to an end

FY18E 1050 1900 1900 government contracts to lapse in FY18E

FY19E Nil 1050 1,050 government school contracts in Chattisgarh will expire


Government business will majorly end by FY17E


35%

45%

55%

65%

75%

85%

95%

0

50

100

150

200

250

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

(IN

R C

r)

Govt School Revenues Non Govt School Revenues Non Govt Revenue Share

NIIT Ltd


School business to get concentrated growth leg

In the private school business also, NIIT has sharpened its focus on asset light-cum-technology intensive

segments which will help in non-linear, scalable growth with limited deployment of capital. NIIT would

continue to focus on the asset light, IP driven business in private schools and exit capital intensive business

models. The company believes that there is a large opportunity in the K-12 market. The company is also

exploring avenues to enter the B2C segment in the SLG business. Currently, NIIT’s existing business targets a

portion of the fee that parents pay to schools. However, spending outside school represents a large portion

of total spending related to education and development of children. The parents spend on tuitions and

classes are estimated to be more than twice that spent on school fees. Hence the scope in this segment is

tremendous. NIIT’s ‘nGuru’ portfolio of products has always been rated well by the customers. NIIT believes

that it has an opportunity to cross sell more within its existing base of private schools. The problems

associated with the erstwhile market leaders like Educomp should also help the company achieve more

success here.

SLG: K-12 opportunity landscape SLG: next frontier for B2B business


School Fee

Out of School Spend

Subject

TuitionsTest Prep Soft Skills

Extra

Curricular

ParentalSpending

NIIT Ltd


With focus shifting on the asset light, technology intensive model, main products it will emphasize are:

Mathlab Plus: An in-depth programme inculcating mathematical aptitude, skill building and logical thinking

amongst students. Its objective is to equip students to learn, reason, connect ideas and think logically. It

offers multiple teaching and learning aids, comprising technology applications, videos, manipulative,

measuring instruments, tables and charts, to schools on the basis of three pillars – ‘Imagine, Investigate and

Interact’. It offers mathematical concepts to verify mathematical facts and theorems using technological

tools like – ‘Geometer’s Sketchpad’ as well as hands-on activities that include a wide variety of mathematical

models.

IT Wizard Plus: An end-to-end solution to address the modern day challenges that schools and teachers face

in IT education. It includes mobile app development, C++ , JAVA, Google Sketchup, Google Picasa etc.

NIIT’s ‘nGuru’ is a holistic range of

school learning solutions, which aims

to make the vital process of teaching

and learning simpler, thus bringing

back the joy of learning for students.

NIIT’s ‘nGuru’ was launched in 1999

with the prestigious BOOT project,

targeting 371 government schools

and has been awarded by the

Government of Tamil Nadu. NIIT,

since then, has extended its ‘nGuru’

range of solutions to 19 states, 88

cities and has covered more than

17,000 government and private

schools across the country.

NIIT Ltd


Subsidiary rationalization to unlock value

Apart from restructuring of the underperforming SCG and SLG businesses, to unlock greater value, the new

management has also put in significant effort and energy to rationalize and simplify the corporate structure

to make NIIT a much more lean and agile organisation. Under the new organisational structure, NIIT will

house CLG and SCG units while the SLG business has been made into a 100% subsidiary.

Since the SLG unit has been made into a 100% subsidiary, it will give NIIT an opportunity to build the future

of this business with greater funding and partnership options than before. Given the growing investor

interest in the education space, it is likely that PE fund/investor could show interest in the SLG business. This

will lead to value unlocking and can serve as an additionally kicker for the company’s valuation.

Business Transformation: Scheme of Arrangement

Business Transformation: Resulting Structure

Source: Company, Edel Invest Research.

NIITLtd.

EvolvIndia

ScantechIndia

NOLLIndia

HIWELIndia

Indian JVs & Operations

OverseasOperations

CLG

SCGSCG

NTL

23.8%

•Transfer of school business1

2Merger of Evolv, Scantech and NOLL with NIIT.

NIITLtd.

NTL MLSLIndian JVs

and operations

Overseas operations

23.8% 100%

CLG

SCG

SCG

NIIT Ltd


Valuation We value NIIT based on SOTP. The CLG business is expected to report EBITDA of INR101cr in FY18E. Based on

EV/EBITDA multiple of 8x, we value NIIT’s CLG business at INR808cr. The SLG and SCG business is expected

to reach a topline of INR415cr in FY18E and based on EV/Sales multiple of 1.5x, the valuation of these two

businesses would be INR622cr. The investment in NIIT Technologies is valued at INR600cr after putting a

holding company discount of 20% on the current market capital. We initiate coverage on the company with

a SOTP based target price of INR135, 40% upside from CMP of INR97.

Valuation FY18

CLG Contribution

EBITDA 101

EV/EBITDA 8

Enterprise Value 807

SCG & SLG Contribution

Sales 415

EV/Sales 2

Enterprise Value 622

NIIT Enterprise Value 1429

- Debt 64

+ Cash 255

NIIT Implied Market Capitalization 1620

NIIT Technologies Contribution

Current Market Capitalization 3000

NIIT Holding value (25%) 750

- Holding Company Discount (20%) 150

Net Holding Value 600

Total Market Capitalization 2220

Share Outstanding 17

Target Price 135

CMP 97

Upside 40%

NIIT Ltd


Company profile NIIT – diversified presence across training and learning

NIIT Ltd is in the business of providing training with a whole gamut of content, delivery and educational

platforms to corporates, individuals and schools. The company has three main business segments —

corporate learning group (CLG), skills & careers group (SCG) and school learning group (SLG). The company’s

learning and talent development solutions have received widespread recognition globally. It has been

ranked among the top 20 training outsourcing companies for the 8th consecutive year by Training Industry

Inc.

NIIT Business Structure

Corporate Learning Skills and Careers School Learning

Revenues (INR Cr) 488 328 141

Revenue Share 51% 34% 15%

Business Lines Managed Training Services,

Custom Project

Service Sector Skills,

Professional Life Skills

Teaching & Learning Solution,

School Services

Geography Presence USA, Europe India, China India

Corporate Learning Group (CLG)

NIIT is a leading corporate training company that offers managed training services (MTS) to leading

organisations mainly in the developed markets of North America and Europe. The comprehensive suite of

managed training services includes curriculum design and content development, learning administration,

learning delivery, strategic sourcing, learning technology and advisory services. The company is focusing on

providing training to companies in the oil & gas, pharma, IT and BFSI sectors. Currently it has 24 global

customers in the CLG business and is targeting Fortune 1000 companies with an objective on future growth.

The CLG business grew at 37% CAGR during FY13-FY15 and contributed 51% to the company’s topline in

FY15. Operating margin from this segment was 12% in FY15 and has remained steady over the last 3 years.

Corporate learning: Marquee customers

Technology

Oil & gas

Pharma & life science

BFSI

NIIT Ltd


Skill and Career Group (SCG)

The SCG business delivers a diverse range of learning and talent development programmes in the areas of

BFSI, soft skills, business analytics, retail sales enablement, management education, vocational skills, digital

media marketing and new-age IT. These programs are delivered through a hybrid combination of the 'Cloud

Campus' online platform, satellite-based 'synchronous learning technology', and a physical network spread

across India and China. To strengthen its SCG portfolio in India, NIIT has tied up with industry majors like

ICICI Bank for NIIT’s Institute of Finance Banking & Insurance (IFBI), and leading business schools (IIMs) for

NIIT’s Imperia. The government’s skill development programme will also give a fillip to this business.

Schools Learning: Credentials

Students 10 mn+

Teachers 400 k+

Nodes 100 k+

Hrs of Content 24 k+

Instructors 45 k+

Schools 16 k+

School Learning Group (SLG)

SLG provides technology based learning to over 15,000 government and private schools in India, Bhutan,

South Africa and the Middle East. They have a wide range of learning solutions for schools, which comprise

interactive classrooms with digital content, technology-driven MathLab and IT Wizard programmes.

Management Profile

Vijay K. Thadani Vice Chairman & Managing Director, NIIT Limited, Co-Founder, NIIT University

Rahul Keshav Patwardhan Chief Executive Officer, NIIT Limited

PR Subramanian Chief Financial Officer

Sapnesh Lalla President,Corporate Learning Group

NIIT Ltd


Financials CLG’s revenue growth to drive overall topline performance

NIIT’s revenue grew a mere 0.6% in FY15 mainly owing to the company having reducing emphasis on the

government school business and exiting unprofitable courses and geographies. Going forward, revenue is

expected to grow by 7% CAGR in the next 2 years and the main driver of the turnaround will be Corporate

Learning Group which is expected to grow by ~17% CAGR.


Low utilization in SCG and lower-growth SLG affected overall margin performance

EBITDA margins have been contracting mainly due to the SCG business, which has posted a 1%-2% margin.

However, the share of this business has been reducing and will continue to fall going forward. CLG’s EBITDA

continues to show growth, with margins remaining constant ~12% for the last three years. WE expect CLG,

which has the highest EBITDA Margin to contribute 62% to the top line in FY17 from 51% currently. This

coupled with, increase in margins from School Learning Group (4% currently to 8% by FY17), will provide a

boost to EBTIDA Margins


0

20

40

60

80

100

120

140


(IN

R C

r)

CLG Revenue

(32.0)

(24.0)

(16.0)

(8.0)

0.0

8.0

16.0

800

1,200

FY13 FY14 FY15 FY16E FY17E

(IN

R C

r)

Overall Revenue

Net Revenue YoY % (RHS)

10%

11%

11%

12%

12%

13%

13%

14%

0

20

40

60

80

100

120


(IN

R C

r)

CLG EBITDA

EBITDA Op. Margin

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0

20

40

60

80

100

120


(IN

R C

r)

Overall EBITDA

EBITDA EBTIDA Margins (RHS)

15% CAGR

NIIT Ltd


One-time restructuring expense led to losses in FY15. Trend reversal in profitability expected

Net Loss of INR138 crore in FY15 was largely due to the restructuring activities undertaken by the

management. The company has reduced its SCG seat capacity by 33% and written off all uncertain

receivables to clean up its balance sheet. Hence, the one-time pain will lead to savings of ~INR25 crore per

year from FY16 onwards. The new managements restructuring and revitalization efforts will lead to a

turnaround in the profitability. We expect the core profit (excluding associates) to be ~6cr and 25cr in FY16

and FY17 respectively.

Adjusted Net Profit & Margin Performance Reported Net profit & margin performance


Expect trend reversal in ROCE due to restructuring

We expect a trend reversal in the company’s ROCE. This will be due to the substantial reduction in balance

sheet size on the back of the restructuring exercise. There will also be a boost in profitability due to the

company’s conscious move to exit from inefficient businesses. By FY17 we expect ROCE to reach 11% and

ROE to reach 8%.

Expect trend reversal in ROCE due to restructuring


(20.0)

(15.0)

(10.0)

(5.0)

0.0

5.0

10.0

(200)

(150)

(100)

(50)

0

50

100

150


(IN

R C

r)

Adjusted net profit Net Profit Margins (RHS)

-500

-400

-300

-200

-100

0

100

200

300

400

-200

-150

-100

-50

0

50

100


(IN

R C

r)

Profit After Tax YoY Growth

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%


ROAE (%) ROACE (%)

NIIT Ltd


Income statement (INR cr)

Year to March FY13 FY14 FY15 FY16E FY17E

Income from operations 961 951 957 972 1,089

Total operating expenses 919 900 935 899 985

EBITDA 42 51 22 73 104

Depreciation and amortisation 86 78 107 70 76

EBIT -44 -27 -85 3 28

Interest expenses 16 16 14 9 7

Other income 9 10 13 10 15

Profit before tax -51 -33 -86 3 36

Provision for tax -43 9 1 1 11

Core profit -7 -42 -87 2 25

Extraordinary items -17 7 -80 0 0

Profit after tax -25 -36 -167 2 25

Minority Interest

Share from associates 51 53 29 63 70

Adjusted net profit 26 18 -139 65 95

Equity shares outstanding (mn) 16.5 16.5 16.5 16.5 16.5

EPS (INR) basic 1.6 1.1 (8.4) 3.9 5.8

Diluted shares (mn) 16.5 16.5 16.5 16.5 16.5

EPS (INR) fully diluted 1.6 1.1 (8.4) 3.9 5.8

Dividend per share 0.0 0.0 0.0 0.0 0.0

Dividend payout (%) 0.0 0.0 0.0 0.0 0.0

Common size metrics- as % of net revenues


Operating expenses 95.6 94.6 97.7 92.5 90.4

Depreciation 9.0 8.2 11.2 7.2 7.0

Interest expenditure 1.6 1.7 1.4 1.0 0.6

EBITDA margins 4.4 5.4 2.3 7.5 9.6

Net profit margins 2.7 1.9 (14.5) 6.7 8.7

Growth metrics (%)


Revenues (23.8) (1.0) 0.7 1.5 12.1

EBITDA (74.7) 21.5 (56.3) 225.9 43.3

PBT (182.3) 34.6 (159.0) 103.6 1,050.3

Net profit after minority interest 91 -484 -105 103 1,050

EPS 27.4 32.6 (881.8) 146.7 47.1

Financials

NIIT Ltd


Balance sheet (INR cr)

As on 31st March FY13 FY14 FY15 FY16E FY17E

Equity share capital 33 33 33 33 33

Warrants 0 0 0 0 0

Reserves & surplus 635 641 697 761 856

Shareholders funds 668 674 730 794 890

Secured loans 149 117 120 104 84

Unsecured loans 0 0 0 0 0

Borrowings 149 117 120 104 84

Minority interest 5 8 6 0 0

Sources of funds 822 798 856 899 974

Gross block 700 655 660 700 740

Depreciation 480 469 550 620 696

Net block 220 185 110 80 44

Capital work in progress 12 18 4 0 0

Total fixed assets 233 203 114 80 44

Goodwill 0 0 0 0 0

Investments 245 295 530 530 530

Inventories 0 0 0 0 0

Sundry debtors 370 254 187 177 182

Cash and equivalents 106 88 86 132 160

Loans and advances 162 200 178 77 87

Other current assets 0 0 60 55 45

Total current assets 638 542 512 442 474

Sundry creditors and others 245 200 207 121 109

Provisions 69 48 17 0 0

Total CL & provisions 313 248 224 121 109

Net current assets 324 294 288 320 365

Net Deferred tax 15 7 0 0 0

Misc expenditure 0 0 0 0 0

Uses of funds 822 798 856 899 974

Book value per share (INR) 41 41 45 48 54

Cash flow statement (INR cr)


Net profit 26 18 -139 65 95

Add: Depreciation 86 78 107 70 76

Add: Misc expenses written off 17 -7 80 0 0

Add: Deferred tax 0 0 0 0 0

Add: Others 0 0 0 0 0

Gross cash flow 130 89 49 135 171

Less: Changes in W. C. 23 -33 -82 27 27

Operating cash flow 107 122 131 107 144

Less: Capex 68 -45 6 40 40

Free cash flow 39 167 126 67 104

Financials

NIIT Ltd


Profit & Efficiency Ratios


ROAE (%) -5% -9% -56% 1% 8%

ROACE (%) -9% -6% -26% 1% 11%

Debtors (days) 141 98 71 66 61

Current ratio 1.5 1.5 1.3 1.6 1.9

Debt/Equity 0.2 0.2 0.2 0.1 0.1

Inventory (days) 4 2 2 2 2

Payable (days) 70 55 55 46 37

Cash conversion cycle (days) 74 44 18 22 26

Debt/EBITDA 3.6 2.3 5.4 1.4 0.8

Adjusted debt/Equity 0.2 0.2 0.2 0.1 0.1

Valuation parameters


Diluted EPS (INR) 1.6 1.1 (8.4) 3.9 5.8

Y-o-Y growth (%) (109.7) (32.6) (881.8) (146.7) 47.1

CEPS (INR) 6.8 5.8 (1.9) 8.3 11.9

Diluted P/E (x) 59.7 88.6 (11.3) 24.3 16.5

Price/BV(x) 2.3 2.3 2.1 2.0 1.8

EV/Sales (x) 1.7 1.7 1.7 1.65 1.47

EV/EBITDA (x) 38.3 31.5 72.1 22.11 15.43

Diluted shares O/S 16.5 16.5 16.5 16.5 16.5

Basic EPS 1.6 1.1 (8.4) 3.9 5.8

Basic PE (x) 59.7 88.6 (11.3) 24.3 16.5

Dividend yield (%) 0.0% 0.0% 0.0% 0.0% 0.0%

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