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NIIT Q1 net profit seen rising 84%

Indian computer education and software services company NIIT Ltd, is expected to report a sharp rise in first-quarter net profit on Tuesday. This is boosted mainly by increased earnings from its software business.

NIIT is the country's largest computer education company with over 2,000 centres located around India and abroad.

Net profit for the October-December quarter is forecast to rise 83.8 per cent from a year earlier to Rs 340.5 million, according to the average of estimates received from 10 brokerages polled by Reuters.

Estimates of the increase ranged widely from 46.3 per cent to 104 per cent.

The same poll forecast an average of 36.7 per cent rise in net sales to Rs 1.68 billion. Among its 247 customers, NIIT provides software services to clients such as ABN Amro Bank, Britain's Prudential and Singapore's DBS Bank.

"The growth in net profit and sales will come from rising software business. NIIT's education business is seasonal and its contribution to profit is minimal in the first quarter," says Sanjeev Goswami, an analyst with SSKI Securities.

Chetan Shah, software analyst with Bombay-based DBS Securities, also sees growth being driven by the software division. In the past quarter, 250 people were added to this division, Shah said.

"We are looking at a 45 per cent rise in net sales at Rs 1.78 billion and a slight improvement in operating margins," Shah said.

"The focus has been on improving margins," said NIIT's US based chief executive officer, Vijay Thadani. "We have been institutionalising changes in the product mix by focusing on higher productivity. Clients who have renewed their contracts in the last quarter have done so at higher billing rates," he added.

NIIT's billing rates for work performed in the United States have averaged $79.6 per hour, triple the $25.4 per hour billed for work performed in India. The company derives 34 per cent of its software revenue from North American clients.

Around 54 per cent of revenue in the previous July-September quarter came from its international business and 46 per cent from India. The top 10 clients contribute 21 per cent of revenues.

Thadani said that the thrust would now be on new technologies deployed in the wireless media.

"This is the way forward. We've got two clients in this quarter, one from the US and the other from Japan in this area. We obviously enjoy higher margins," Thadani said.

NIIT's education business is chugging at an annual growth rate of 23-25 per cent, less than half the 60 per cent growth rate of its software services business.

Overall revenue is growing at the rate of 32 per cent a year, much behind industry leaders like Infosys Technologies, where revenue is doubling annually.

In December, NIIT won the largest software education contract ever awarded in India, a Rs 1.48 billion order from Karnataka. The revenue will be spread over five years and NIIT will set up teaching facilities and provide software education in 700 schools across the state.

While many analysts view the education business as a drag on NIIT's overall growth rate, the company clearly states that it does not plan to hive off the unit into a separate subsidiary.

"It's a firm NO. We have a perfect managed-risk model and stable revenues from education are just the right thing," Thadani said.

SSKI's Goswami agrees. "It doesn't make sense to hive off the education business now, but they can certainly do with more transparency in this line," he said. "Details such as the franchisee sign-up fee and revenue-sharing are seldom available."

NIIT's shares jumped 7.7 per cent higher on Friday to Rs 1,759.45 and have risen by 10.5 per cent this month.

The stock is still down 54 per cent from its 52-week high of Rs 3,800 hit last January. It is up 47.5 per cent from a low of Rs 1,183 touched in October.

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