By Priyanka Bansal

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 limits

-

-

-

INR414

IND AA-/Stable/IND A1+

Affirmed

Non-fund-based limits

-

-

-

INR368

IND AA-/Stable/IND A1+

Affirmed

Short-term debt

-

-

-

INR200

IND A1+

Affirmed

Analytical Approach: Ind-Ra has continued 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

Nearly Stable Revenue and EBITDA Margins in FY20: NIIT reported a moderate 3% yoy growth in revenue to INR8.9 billion in FY20. The company’s EBITDA margins stayed stable at 9.6% in FY20 (FY19: 9.6%). The company’s overall financial and business profile is largely dominated by its corporate learning group (CLG) segment, which contributed 78% to its total revenue in FY20 and reported a revenue growth rate of 9% yoy.  

The CLG segment has a strong business profile for the following reasons:

-      it is largely represented by medium-term contracts, having a maturity of minimum three years, commonly termed as the managed training services (MTS) business

-       its contracts are largely entered into with reputed corporates (Fortune 500), ensuring assured and timely payments and business continuity, and

-     the management is focused on improving the efficiency and effectiveness through this segment, for the employees through customised curriculum and trainings, which ensures customer stickiness.


NIIT’s skills and career (SNC) segment, which largely targets improvement in the employability of candidates, is in the transformation phase and reported a 15% yoy decline in revenue in FY20; generated losses at EBITDA level, and contributed the remaining 22% to the company’s overall revenue. During FY20, NIIT announced the closing of its school’s business segment, which contributed less than 5% to NIIT’s overall revenue till FY19. The company’s ratings are supported by the strength of its CLG business, which the agency expects, will remain
the major revenue and profitability driver for the company, at least over the next two-to-three years. 

CLG Segment Continues to Drive Growth: NIIT’s CLG business continued to be the main growth driver, and reported a strong 9% yoy growth in revenue to INR6. 9 billion and healthy EBITDA margin of over 13% in FY20 (FY19: about 14%). Supported by a strong customer profile; consistent customer additions in the MTS business (net customer addition of eight new MTS customers in FY20), and repetitive contracts from the customers (owing to a largely customised nature of the trainings) have resulted in strong profitability from the CLG segment, offsetting the losses in the SNC segment. Additionally, a strong revenue visibility of USD259 million at end-1HFY21; a large contract in Canada (from the Real Estate Council of Ontario) that went live in FY20; and consistent efforts by the company to penetrate into diverse sectors gives medium-term revenue visibility. 

The management also believes that a significant upside is possible in the CLG business, since currently less than 3% of the total expenditure of the corporates worldwide is incurred in trainings. Ind-Ra draws comfort from the sustainable growth track record and healthy margin profile of this business. 

Resilient Financial Profile in 1HFY21: NIIT’s overall financial profile witnessed resilience in 1HFY21, as reflected by almost stable revenue of INR4.2 billion (1HFY20: INR4.3 billion) and EBITDA margin of about 14% (1HFY20: nearly 12%). The dip in margins in 4QFY20 owing to COVID-19 was made good in the subsequent quarters through various cost-cutting and efficiency-improvement measures. This is largely due to the strength of new customer acquisition and strong revenue growth in the CLG segment, which has more than offset the dip in revenue and completely absorbed the losses in the SNC segment, which was significantly impacted after the outbreak of COVID-19. 

Ind-Ra believes a partial dip in the revenue in the CLG segment from the existing contracts is likely during FY21, after the outbreak of COVID-19, owing to the discretionary nature of spending on training. However, this, the agency believes, will be offset by the incremental business from the new MTS customers and the additional opportunities which may have become available to NIIT owing to its strong virtual presence. This is also exemplified in the company’s 1HFY21 financial performance of 14% yoy growth in revenue in the CLG segment to INR3.7 billion supported by the addition of two MTS customers. Additionally, the company was able to scale up the margins of the CLG segment to 19.1% in 1HFY21 (4QFY20: 8.2%). 

Liquidity Indicator—Superior: NIIT’s cash & equivalents got a significant boost after the company sold its entire 23% stake in NIIT Technology Limited to Baring Private Equity Asia for a cash consideration of INR20.2 billion in May 2019. After adjusting for tax and transaction related cost, and even after the utilisation of the proceeds towards the repayment of debt (INR1.6 billion in FY20); dividend pay-outs (INR2.4 billion) and share buyback (INR4.1 billion), the cash & equivalents stood strong at INR12.1 billion at FYE20. Despite the management keeping aside about INR2.2 billion (included in cash & equivalents) as prudent reserve for indemnity for two years (ending May 2021) owing to its stake sale, its liquidity remains robust. 

The management expects the cash & equivalents to be utilised towards rewarding the shareholders; investments for the purpose of generating organic growth, and for any inorganic growth propositions. The agency believes that even after NIIT’s recently-announced share buyback up to INR2.4 billion to be executed in FY21, the company’s liquidity situation will remain comfortable given the company’s strong internal cash flow generation, limited capex requirements, low debt levels. 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 Ind-Ra believes that a part of the cash & equivalents can be invested 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, nearly zero use of the fund-based limits in the 12-months ended September 2020 provides additional comfort. NIIT did not avail of the COVID-19 led moratorium. 

Sustained Comfortable Credit Profile:  NIIT reported a net cash position at FYE20 owing to significant cash & equivalents. The company’s gross interest coverage (operating EBITDA/gross interest expense) also improved to 4.2x in FY20 (FY19: 3.7x) due to the reduction of debt and hence interest expense, and a higher absolute EBITDA in FY20.  

The company’s working capital cycle improved to 12 days in FY20 (FY19: 19 days), primarily on account of a significant reduction in the receivable days to 57 (70). The improvement in receivable days reflects the company’s exit from high-working capital-intensive businesses. An exit from capex-driven business models and focus on asset-light businesses has led to the company’s low working capital intensity. Its receivable days improved further in 1HFY21, which reflects no stress on the collections of NIIT, even after the outbreak of COVID-19, due to its strong clientele. 

Voluntary Exit from the Schools Business: NIIT announced an exit from its schools’ business, owing to its meagre contribution to the overall revenue and consistent losses at EBITDA level till end-FY20. The company during FY20 decided to focus on the other two major business segments, namely the CLG and the SNC businesses. The school business has been classified as held-for-sale and will be sold as, and when the company gets a suitable buyer. 

SNC Segment in Rebuilding Phase: The revenue from the company’s SNC segment declined to INR2.0million in FY20 (FY19: INR2.3 billion), owing to a planned exit from its low-margin business. Owing to the involvement of huge fixed expenses in this segment, and the business related to increasing the employability of candidates, which itself was impacted during lockdown, both the segment’s revenue and EBITDA was impacted in FY20 and 1HFY21. NIIT is in the process of rebuilding this business segment over the medium term and eventually plans to transfer the face-to-face trainings provided through its centres to virtual and online trainings. The company’s new programmes, namely StackRoute and TPaas are expected by the management to drive majority of the growth in revenue and margins. 

A longer-than-expected delay in the revival of the SNC segment and any regulation impacting the outsourcing of training, and thereby the CLG segment, could negatively impact the company’s profitability and revenue. However, the company’s presence in diverse sectors such as telecom and technology, energy, banking, financial services & insurance, life sciences, etc. through its CLG segment provides comfort.


RATING SENSITIVITIES

Positive: A significant improvement in the SNC business, along with continued growth in the CLG business, while maintaining the margins, coupled with continued low financial leverage, will 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 & equivalents

-        higher-than-expected losses in the SNC business impacting the consolidated revenue and EBITDA margins

-        any further decline in the 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 (INR billion)

FY20

FY19

Operating revenue

8.9

8.7

EBITDA (after factoring in foreign currency translation impact)

0.8

0.8

EBITDA margin (%)

9.6

9.6

EBITDA (without factoring in foreign currency translation impact) 

0.9

0.9

Gross interest coverage (x)

4.2

3.7

Adjusted net leverage (x)

-12.3

2.4

Source: NIIT, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook/Rating Watch

Rating Type

Rated Limits (million)

Rating

7 October 2019

12 April 2019

29 May 2018

22 March 2017

Issuer rating

Long-term

-

IND AA-/Stable

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-/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

INR368

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

IND AA-/RWE/IND A1+/RWE

IND AA-/Stable/IND A1+

IND AA-/Stable/IND A1+

Short-term debt

Short-term

INR200

IND A1+

IND A1+

IND A1+/RWE

IND A1+

IND A1+


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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Analyst Names

  • Primary Analyst

    Priyanka Bansal

    Senior 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

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121