By Priyanka Bansal

India Ratings and Research (Ind-Ra) has affirmed NIIT Limited’s Long-Term Issuer Rating at ‘IND AA-’ while resolving the Rating Watch Evolving (RWE). 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 limits

-

-

-

INR414

IND AA-/Stable/IND A1+

Affirmed; Off RWE; Outlook Stable

Non-fund-based limits

-

-

-

INR368

IND AA-/Stable/IND A1+

Affirmed; Off RWE; Outlook Stable

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

-

-

up to 365 days

INR340

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

Short-term debt

-

-

-

INR200

IND A1+

Affirmed; Off RWE

Proposed non-fund-based limit

-

-

-

INR700

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

Proposed long-term debt

-

-

-

INR400

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

Analytical Approach: Ind-Ra continues to take a consolidated view of NIIT and its subsidiaries to arrive at the ratings, due to the presence of operational and strategic linkages among them, driven by a similar business lines.

KEY RATING DRIVERS

Completion of Stake Sale: NIIT sold its entire 23% stake in NIIT Technology Limited to Baring Private Equity Asia for a cash consideration of INR20,204 million in May 2019. Of the total proceeds, NIIT intends to utilise nearly INR1,800 million towards tax and expense payments on the transaction, INR1,000 million for dividend payment, INR3,350 million for share buyback, ~INR0800 million for tax payment on share buyback and INR1,700 million towards debt payment. Additionally, the management has kept aside about INR2,200 million as prudent reserve for indemnity for two years owing to its stake sale.

Liquidity Indicator - Superior:
The aforementioned sale has given a boost to the overall liquidity of the company.  NIIT will have about INR11,000 million in cash and equivalents after adjusting for tax, share buyback and dividend payments, and debt prepayment from the consideration of stake sale. Of this, nearly INR2,200 million will be set aside as indemnity for two years, while the remainder will be available to NIIT for capex (FY20: about INR700 million, FY21: INR600 million)/acquisition/repayment of loans (INR200 million over FY21-FY22). The agency believes the company will be able to generate free cash flows of about INR600 million on an average over FY20-FY23. However, Ind-Ra has precluded any possibility of a significant investment in acquisitions and/or distributions to the shareholders, which will remain a key monitorable. Although the management intends to invest part of the remaining INR11,000 million for inorganic growth through acquisitions, the agency expects acquisitions to remain mid-sized, leading to a net cash position over the next two-to-three years. Moreover, about 6% average use of the fund-based limits in the 12 months ended July 2019 provides additional comfort.

Sustained Comfortable Credit Profile:
 NIIT’s revenue grew 7% yoy to INR9,102 million in FY19 primarily due to growth in the corporate learning group (CLG) business segment. Company generated EBITDA of INR739 million (FY18: INR 706 million) after factoring in the impact of foreign currency translation. EBITDA excluding the impact of foreign currency translation stood at INR 842 million in FY19 (FY18: INR 746 million). NIIT had net leverage (net debt/EBITDA) of 0.90x in FY19 (FY18: 0.71x) and interest coverage (EBITDA/gross interest expense) of 3.49x (3.50x). The agency expects the credit metrics to improve by end-FY20 after debt repayment of about INR1,700 million.

The working capital cycle elongated to 20 days in FY19 (FY18: 11 days), primarily on account of a reduction in payable days, which more than offset the decline in receivable days, which remained at 20-25 days over FY17-FY19. That said, exit from capex-driven business models and focus on asset-light businesses has led to low working capital intensity. Additionally, appointment of a special committee for deciding on prudent allocation of funds ensures future investments towards high-margin accretive business requiring less consumption of capital.

CLG Business Continues to be Growth Driver:
 The corporate learning group (CLG) business continued to be the main growth driver with a 22% yoy increase to INR6,324 million in FY19, on account of customer additions in the managed training services (MTS) business (FY19: 46; FY18: 39). Consequently, the CLG segment’s EBITDA increased to INR 906 million in FY19 (FY18: INR 761 million). Also, strong revenue visibility of USD264 million at 1QFYE20 attributable to its existing contracts with large companies and addition of new customers, including one large contract in Canada from Real Estate Council of Ontario (started on 16 September 2019), ensures sustained revenue growth. NIIT’s acquisition of Eagle International Institute has enabled it to expand its training capability for global rollout of cloud-based enterprise applications in the pharmaceutical and life sciences industries and provides further support to the revenue. Ind-Ra opines this segment to remain the major revenue and profitability driver for the company at least over the next two-to-three years.

SNC Segment in Rebuilding Phase:
 Revenue from the skills and career (SNC) business declined to INR2,428 million in FY19 (FY18: INR2,729 million), owing to planned exit from low-margin as well as government contracts. The segment reported an EBITDA profit of INR6 million in FY19, as opposed to a loss of INR30 million in FY18 owing to the management’s increased efforts on new initiatives such as StackRoute and TPaas. Ind-Ra believes continued restructuring of the segment would prevent any growth in revenue and margin generation at least till FY20. New product launches and initiatives could help drive growth from FY21.

Shift of SLG Business towards Asset-Light Model:
 The school learning group (SLG) segment’s revenue plunged to INR350 million in FY19 (FY18: INR593 million) due to the planned ramp down of government school projects and the completion of government contracts in FY19. The SLG segment booked EBITDA losses of INR70 million in FY19 (FY18: EBITDA profit INR15 million) owing to higher expenses on completion of the government contracts and continued fixed costs relating to the government business. As part of its strategy to exit capex-driven business models and focus on intellectual property (IP) and service-driven offerings, the company is focusing on the Go Forward and IP-led private school businesses. Lower-than-expected growth in the Go Forward business could negatively affect the profitability of the SLG segment.

Concentration Risk:
 The CLG segment contributes about 70% to NIIT’s revenue and almost accounts for NIIT’s entire EBITDA. Thus, longer-than-expected delay in the revival of the SNC and SLG segments and any regulation impacting the outsourcing of training could negatively impact the company’s profitability and revenue.


RATING SENSITIVITIES

Positive: Significant improvement in the SNC and SLG businesses reducing the concentration risk, along with continued growth in the CLG business, while maintaining the margins, coupled with continued low financial leverage, would be positive for the ratings.

Negative:  Future developments that could, individually or collectively, lead to a negative rating action include:

·       -  any large acquisitions, leading to a significant reduction in cash and equivalents;

·      -  higher-than-expected losses in the SLG business and/or further deterioration in the SNC business impacting the consolidated revenue and EBITDA margins; and 
- decline in margins or loss of key customers in the CLG business.

·    


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. The company has a multi-product, multi-geography offerings portfolio spread across individuals, corporates, schools and other educational institutions.


FINANCIAL SUMMARY

Particulars

FY19

FY18

Operating revenue (INR million)

9,102

8,505

EBITDA(after factoring in foreign currency translation impact) (INR million)

739

706

EBITDA margin (%)

8.1

8.3

EBITDA (without factoring in foreign currency translation impact) (INR million)

842

746

Gross interest coverage (x)

3.49

3.50

Net leverage (x)

0.90

0.71

Source: NIIT, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

12 April 2019

29 May 2018

22 March 2017

Issuer rating

Long-term

-

IND AA-/Stable

IND AA-/RWE

IND AA-/Stable

IND AA-/Stable

Fund-based limits

Long-term/Short-term

INR414

IND AA-/Stable/IND A1+

IND AA-/RWE/IND A1+/RWE

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

Non-fund-based limits

Long-term/Short-term

INR1,068

IND AA-/Stable/IND A1+

IND AA-/RWE/IND A1+/RWE

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

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

Short-term

INR340

WD

IND A1+/RWE

IND A1+

IND A1+

Short-term debt

Short-term

INR200

IND A1+

IND A1+/RWE

IND A1+

IND A1+

Proposed long-term debt

Long-term

INR400

WD

Provisional IND AA-/RWE

Provisional IND AA-/Stable

-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please 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

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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Applicable Criteria

Analyst Names

  • Primary Analyst

    Priyanka Bansal

    Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40356148

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121