Management Speak: NIIT Ltd (Unrated) - Play on training outsourcing with high margin of safety

NIIT Ltd (NIIT) is a training and education services company with ~US$130mn revenues in Q3FY18 (annualised). The company focuses on three key verticals – Corporate training (CLG; predominantly in developed markets), Skills and Careers (SNC) and Schools business (MindChampion Learning Systems Limited - MLSL). The CLG business (US$80mn in Q3FY18 annualised) drives NIIT’s overall revenues and has been growing at 15%+ per annum; NIIT provides training outsourcing to enterprises within CLG. The company’s SNC business is a drag, where the management is focussing to maintain breakeven. NIIT trades at 6.7x adjusted Q3FY18 annualised EV/EBITDA (ex- NITEC stake). Consistent execution could aid earnings upgrades and help drive re-rating.

Corporate training outsourcing – Attractive scale: Training outsourcing by enterprises is a large underpenetrated category where NIIT has scaled well over last 6 years. NIIT’s managed training services business has grown 6-fold in last 6 years and continues to post 15%+ growth at a healthy 15% margin. NIIT’s acquisition of Eagle gives the company entry into Life sciences vertical, also providing strong revenue and growth visibility with new deal wins.

Consolidated financial performance has improved over past 12 months: SNC has been a drag on NIIT’s consolidated financials apart from ramp down in government schools. With most of the ramp down in government business largely complete, and with CLG contributing 65% of revenue and 100% of EBITDA in FY17, consolidated numbers should begin to reflect growth trends in CLG. Strong EBITDA growth and improving return ratios already reflect the change.

Valuations – High margin of safety: Management is executing well in the training outsourcing space and sees it as an interesting opportunity. The category remains underpenetrated with limited scale players. Additionally, we note that stock offers high margin of safety as holding in NITEC comprises nearly 75% of NIIT’s current market cap; the existing business implies a value of ~6.7x Q3FY18 annualised EV/EBITDA. Superior execution could aid re-rating in the stock. We currently do not have a rating on the stock.