The affirmation factors in the improvement in NIIT’s credit profile and strengthening of its balance sheet post divestment of its US-based Element-K business for a cash consideration of around $110 million.
"The Element-K business had lower margins than NIIT’s consolidated margins of around 12-13% and required significant intellectual property renewals which involved continued capex," India Ratings said in a press statement.
Liquidity also improved with a cash balance of Rs 1 billion as at end-March 2012, unused fund-based limits of Rs 1 billion at end-June 2012 and low debt maturities. Element-K was acquired at $36.5 million in FY07.
The ratings also benefit from NIIT’s established brand name and its wide training centre network besides being continually supported by the company’s stable financial profile as marked by a low net cash cycle and no major capex plans. India Ratings has taken a consolidated view of NIIT’s business and financials for the purpose of the rating.
"However, the ratings are constrained by NIIT’s moderate consolidated Ebitda margins (FY12: 12%, FY11: 13%). The FY12 margins were lower due to one-time costs related to new delivery models, initial investments in non-government school business and one-time ramp-up expenses in managed training services (MTS) businesses. A scale-up in MTS and non-government school businesses should lead to an improvement in profitability in the short-to-medium term."
NIIT’s individual learning business is facing a challenging operating environment with weak domestic IT hiring, leading to weaker student sentiment and lower enrolments although pick-up is expected in second half of 2013. NIIT aims to recover from this slowdown by adding new short-term IT training courses while also increasing non-IT courses and leveraging on new training delivery models.
In its corporate learning business, NIIT continues to focus on IP-based and annuity-based businesses providing visibility on future revenue stream and profitability. The current order book includes nine key global customers with overall revenue visibility of $125 million over the next five years.
In the school learning business, NIIT is highly selective on government instructional and computing technology (ICT) contracts which are more capital intensive to improve margins and cash release. The revenue decline in the government ICT business from maturity of old contracts is offset by an increasing focus on non-government schools segment via integrated product offerings branded as ‘nGuru’.
NIIT added 267 schools in Q1FY13 and 687 private schools in FY12, and is increasing its sales staff to improve reach.