NIIT Ltd- Disruption in Training

I am just putting a short note on NIIT as I think it may have a run very soon. So due to lack of time I am just touching some of the most relevant points and will share the detailed study at some other time. First time, I advised NIIT at this blog in 2015 at 39 (Click here) and now at 120 I think it is still a great buy. Off late, i am buying it regularly from 80 levels and picked last week at 100.

People still consider NIIT as an IT education firm offering IT courses and as Indians care more for certificates and degrees than authentic knowledge so no doubt this image of NIIT is a drag at least for the share price. NIIT is the one who turned millions of Indians into Techies in the 90’s when our Govt feared how they would survive with huge population. Our education system and universities were not capable of technical education to masses but the likes of NIIT and Aptech brought a big revolution in tech education in India. They designed and developed their own content for Indian market and managed their business with precision and professionalism and they were one of the big reasons that Indians tasted success in IT. But current avatar of NIIT is not about IT education. It has modified its approach at the right time. Our world now is changing very fast and skills are getting extremely specific. So degrees are no longer that important as skills are. That’s why IT/Tech education is moving online as more and more people are doing these online courses for developing a particular skill for a particular job which is not there in university degree as there the focus was more on theory and concepts. 

So, online tech education is disrupting the learning and education models. A great revolution is happening in tech education and the likes of Pluralsight, Lynda and Udacity are the new tech unicorn of the US with revenues around $100-150 million (700-1000 cr). But they have big daddy in the form of Skillsoft with revenues of around $ 500 m to $1 Billion. Cornerstone onDemand and Topyx are the other big names. These online tech education companies are mostly into B2C model even when they are having subscriptions from organizations. And these companies have changed the lives of many with their cheap education services…both of the content providers and students who can take up the courses and do something better with their life regardless of their current education and economic backgrounds. However, NIIT was also having a similar business under Element K and it sold of this business to Skillsoft in 2011 for some 500-600 cr. So it may look surprising that NIIT sold that high growth business. But I think that it was a wise decision because that enabled NIIT to cut its debt however most importantly there was a strategic decision at NIIT to leave that business to focus more on Managed Training Services business (MTS).

Managed/outsourcing Training Services- next big thing in corporate training and learning

There was and still is high competition in online tech education subscription based business model. But big corporations like Citi, Shell, Rio Tinto, GE, Toyota do not opt for these online portals. They need something more serious and concentrated and current trend is for outsourcing their training function to the experts in this field. For these large corporates, training is not core to their business but a necessity for improving the skills and productivity of their employees in today’s highly competitive landscape. So development, management and delivery of training is a big costly distraction for them. But for training management companies this is their core business and so they are highly skilled for this important task. HR department people are not skilled in knowing and understanding the complex training and learning needs of employees. In every HR meet, there is big noise around machine learning, Artificial intelligence, augmented reality etc. which are the current buzz words in the field of high end information technology but nobody is aware of how to implement these breakthrough technologies.

So now is the time to outsource complex training and learning task to the professionals. Further, some businesses with high regulatory and compliance requirements such as oil & Gas, Pharmaceuticals and banking have very complex training and learning requirements and they have no scope for any mistake in tight regulations as associated costs are very high like one mistake in complying with the requirement of keeping full records of data/tests for a drug may result in big losses in the form of cancellation of manufacturing license or recall of medicines from the markets. So there is scope for significant value addition by MTS professionals in the form of high quality training/learning and cost savings. And whenever a process can add create value for itself in the entire business chain then it has a viable high growth business model. US spends the most on training of its employees and now the trend for outsourcing the same is rising. India, as expected is still a very small market for MTS but the pace is going to increase in India because Indian employees are terribly short of training.

And I feel this is where NIIT has made a brave and visionary decision because NIIT had everything to support and motivate this business because of their 30 years’ experience in developing content and running a software development company (NIIT tech). And if we see the results; it prove that NIIT promoters were right in their vision. MTS is growing fast across globe and NIIT has some 40 clients globally with the likes of Shell, Citi, Riotinto, Nokia, ABB, Sanofi, GSK, Signify, Ebay, Skillsoft, Hitachi etc. In MTS, NIIT does everything from content development, technology services, delivery, selection of third party suppliers, consultancy etc. NIIT has managed to grow their MTS/CLG business from 85 cr in 2011 to 700 cr in 2020.

We have not yet counted the possible growth of India business in CLG. Indian employees are terribly under trained; our tech students are markedly not adequately trained in practical aspects. Earlier, Indian companies survived due to low competition but now we’ll see high investments in training from here on.

Its skill and careers business where it offers IT education has revenues of some 230 cr. As compared to India, NIIT is a big force in IT education in China and has achieved great results in training around half a million students in around 100 Chinese universities. In China, Job placement rate for students trained by NIIT is over 90 per cent. I feel with proper planning and renewed focus NIIT should do well in India again as now the focus on skill based digital education is growing in India and NIIT has one of the best content in IT education. Using training centers for IT education is a very costly choice and so not suited for all. But deep internet penetration is going to raise the demand for online IT courses in India.

Any acquisition in Tech/digital education space is the next big growth Catalyst

In mar-2019 NIIT sold its 23.5% holding in NIIT Tech for some 2100 cr. After paying taxes, buy back and dividends they have around 1200 cr in books as on Mar-2020 and this is where the real game will begin. I am sure that NIIT is going to do some big acquisition in the field of tech/digital education or MTS in the near time. Covid crisis may even help them in finding acquisitions targets at lower value now. Traditional education delivery models and corporate training models are going to see huge disruption in the near future and now is the right time to build the scale. That’s why I think the best way to use the proceeds from the stake sale is to build a new age business. Even the likes of Zee learn (kidzee) will be a great fit for NIIT. Its promoters already have one of India’s best IT education universities in Neemrana, Rajasthan (NIIT University).

It has 1200 cr cash in books and at CMP of 120 it is trading at a market value of 1700 cr so there is a huge valuation gap and margin of safety. Its EBITDA is around 100 cr on revenues of 900 cr and with further growth in revenues operating leverage is going to come into the picture. Its promoters have raised their stake from 31.5% last year to 35.3% this year. Also recently, MIT has picked 2% stake in NIIT and it already holds some 2% sake. Dividend yield of 8% is great and this is going to be stable in the future.

So it has some strong high growth catalysts in the future in its business- 1) big order wins in MTS business (right now orders for some 1700 cr in hand) 2) scaling up its IT education business 3) Any big acquisition in Tech/digital education field and I just feel that we are going to see all 3 happening very soon. But as much work is yet to be done in these 3 catalysts and from hereon it will get most of its value from future performance (cash in the books is almost discounted and future is uncertain as of now) so treat this one as risky option and invest only riskiest capital into it.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).