By Tanu Sharma

India Ratings and Research (Ind-Ra) has affirmed NIIT Limited’s Long-Term Issuer Rating at ‘IND AA-’. The Outlook is Stable. The instrument-wise rating actions are as follows.

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based bank facilities

-

-

-

INR614 (reduced from INR1,000)

IND AA-/Stable/IND A1+

Affirmed

Non-fund-based bank facilities

-

-

-

INR668 (reduced from INR1,600)

IND AA-/Stable/IND A1+

Affirmed

Long-term debt

-

-

-

INR700

WD

Withdrawn (instrument repaid in full)

Commercial paper (carved out of fund-based bank lines)

-

-

29 March 2017

INR340

IND A1+

Affirmed

Short-term debt

-

-

-

INR400

IND A1+

Affirmed

Proposed non-fund-based bank limits*

-

-

-

INR1,100

Provisional IND AA-/Stable/Provisional IND A1+

Assigned

* The rating is provisional and shall be confirmed upon the sanction and execution of the loan documents for the above facilities by NIIT to the satisfaction of Ind-Ra.

KEY RATING DRIVERS

Ind-Ra has taken a consolidated view of NIIT’s business and financials for the rating purpose.

Gradual Recovery in Business Profile: NIIT continued to have a strong balance sheet, robust liquidity and resilient credit profile in FY16. In FY15, NIIT exited loss-making products and geographies, and reduced headcount in its skills and career (SNC) business to rationalise high fixed cost structure. These measures led to a positive EBITDA margin of 1.5% in the SNC business in FY16 compared with EBITDA losses in FY15. However, the profitability has not recovered to the commensurate levels; the recovery would require a significant correction in revenue. In FY16, consolidated revenue was INR10 billion (up 5.2% yoy), EBITDA margin was 7.1% (FY15: 4.5%) and net income was INR672 million (negative INR1.3 billion). However, the recovery is tepid against Ind-Ra expectations.

Weak 3QFY17 Results: NIIT reported weak 3QFY17 results due to the impact of demonetisation, which affected the SNC business (13% yoy decline in revenue). The corporate learning group (CLG) business’s EBITDA margin was lower at 10% in 3QFY17 than 11.6% in 3QFY16 due to the loss of a customer owing to regulatory changes. The loss was offset by the addition of two customers and a strong order pipeline during the third quarter. Overall, consolidated revenue grew 7.6% yoy to INR8.3 billion and EBITDA remained flat at INR588 million in 9MFY17. The impact of demonetisation will spill over to 4QFY17. Thereafter, the management expects a recovery in earnings, driven by product launches and new customer addition.

CLG Core Earnings Driver:
Over the years, NIIT’s business mix has changed, with revenue from the CLG business growing 16.4% yoy in FY16, driven by steady momentum in the managed training services (MTS) business. The CLG business accounted for 56% of consolidated revenue and 92.3% of EBITDA in FY16, followed by the SNC business (33%). The share of the SNC business in consolidated revenue has been falling since FY13. NIIT’s focus on IP- and annuity-based revenue in the CLG business through MTS contracts has helped it tide headwinds in other businesses. As on 31 December 2016, the company had 32 MTS customers (including one new customer and one renewal contract), providing revenue visibility of USD221 million until FY20. Going forward, the sustenance of growth and profitability of the CLG business is critical to NIIT’s credit profile.


New Business Strategy: Ind-Ra recognises the new management’s strategy towards building a new ecosystem with a common delivery platform, lower overheads and increasing partnerships to achieve faster growth. The IT industry is undergoing transformation, which is creating both challenges and opportunities for companies such as NIIT as new-age courses, platforms and retraining opportunities can offset the decline in enrolments due to lower IT hiring. However, the strategy could take some time to deliver results, which Ind-Ra will monitor. The ratings continue to reflect NIIT’s established brand name and its leading position in the IT training market.

Its planned exit from government information and communication technology contracts and capex-driven products in private schools (only service contracts) is translating into softer revenue in the school learning group (SLG) business (FY16: negative 24.8% yoy; FY15: negative 9.1% yoy; FY14: negative 13.9% yoy). With the strengthening of the leadership, the management expects a turnaround in the SLG business.


Comfortable Credit profile:
NIIT’s working capital cycle was one day in FY16 (FY15: negative three days; FY14: 19 days). The company’s focus on working capital cycle improvement and low capex appetite resulted in a low leverage. Net adjusted leverage improved to 2.6x in FY16 from 3.85x in FY15. Gross interest coverage improved to 2.7x in FY16 from 1.8x in FY15, driven by an increase in EBITDA.

Associate income of INR663 million in FY16 (FY15: INR550 million) from NIIT Technologies Limited continued to support earnings/cash flows. Ind-Ra expects NIIT to report positive cash flow from operations for FY17, benefiting from significant collections of old receivables. FY16 capex was higher at INR907 million than FY15 capex of INR432 million, due to capital advances paid for building offshoring capacities.


RATING SENSITIVITIES

Positive: Future developments that could lead to a positive rating action are a significant improvement in the business profile resulting in a sustained improvement in revenue and consolidated EBITDA margin, along with continued low financial leverage.

Negative: Future developments that could, individually or collectively, lead to a negative rating action are as follows.

- Consolidated net adjusted financial leverage staying above 2.75x in the long term due to any pressure on revenue and/or EBITDA margin, and/or any significant debt-led capex/acquisitions
- Further deterioration in the SNC business and/or underperformance in the CLG business affecting the improvement in consolidated revenue and EBITDA margin


COMPANY PROFILE

Established in 1981, NIIT, a global leader in skills and talent development, offers multidisciplinary learning management and training delivery solutions to corporations, institutions and individuals in over 40 countries. NIIT has three main lines of business across the world: CLG, SCG and SLG.  The company has a multi-product, multi-geography offerings portfolio spread across individuals, corporates, schools and other educational institutions.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Outstanding

Limits (million)

Rating/

Outlook

12 February 2016

3 December 2014

24 September 2013

Issuer rating

Long-term

-

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

Fund-based bank facilities

Long-/short-term

INR614

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

IND AA-/IND A1+

IND AA-/IND A1+

Non-fund-based bank facilities

Long-/short-term

INR668

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

IND AA-/IND A1+

IND AA-/IND A1+

Long-term debt

Long-term

INR700

WD

IND AA-/Stable

IND AA-

IND AA-

Commercial paper (carved out of fund-based bank lines)

Short-term

INR340

IND A1+

IND A1+

IND A1+

IND A1+

Short-term debt

Short-term

INR400

IND A1+

IND A1+

IND A1+

IND A1+

Proposed non-fund based-bank limits

Long-/short-term

INR1,100

Provisional IND AA-/Stable/Provisional IND A1+

-

-

-


COMPLEXITY LEVEL OF INSTRUMENTS

Bank facilities and commercial papers are instruments with low complexity levels, where the relationship between inherent risk factors and intrinsic return characteristics is straightforward.

For more information, visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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For more information, visit www.indiaratings.co.in.

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Analyst Names

  • Primary Analyst

    Tanu Sharma

    Associate Director
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687243

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121