NIIT has recently announced the demerger of their company into 2 entities (Ed-tech and corporate learning)
Currently they have 2 verticals -
- Corporate Learning Group (CLG): NIIT partners with large companies and help them with their internal training of employees which is sometimes either regulatory training or by company’s own mandates.
Regulated training example - Life sciences cos and ONGCs are required by law to have their employees trained for particular tasks and have certifications, so companies outsource this to companies like NIIT as their Managed Training service (MTS) partner.
They are well diversified in terms of client sectors such as ITs, BFSIs, Life sciences, ONGCs, Mining etc.
Current MTS client count at 65 and revenue visibility at $326M (2x sales) with 100% contract renewal track record.
This business has EBITDA margins of 25% currently and growth rate of 30% for FY22 with management guidance of sustainable 20-25% growth over the years and recently announced $500M target revenue in 4 years time for CLG
NIIT is one of the Top 5 MTS players.
They also partnered with RECO Canada to provide real estate agents license training and examination for which they earn fees per reco agent application and further exams.
2nd vertical -
Digital Learning and TpaaS (Talent pipeline as a service) - In this, NIIT has 2 things going,
- Stackroute and TpaaS
- RPS consulting - Recent acquisition for 80 crs for 70% (balance over milestones) which has a run rate of 120cr annually and ebitda margins in high teens
Currenly Stackroute and TpaaS are in growth phase (20% QoQ and 60% YoY) but in minor losses due to small base and operating leverage issues.
Overall this vertical is EBITDA positive (largely due to RPS acquisition) at 10% ebitda margins at revenue runrate of 320+ crs annually.
Management recently announced 5x potential in 5 years time for this vertical.
So after Demerger, NIIT has proposed seperate listing of these 2 verticals.
NIIT currenly has a very strong balance sheet with cash of 1200cr on books (due to sale of their NIIT tech (now Coforge) stake a year ago)
So management has said they’ll give 500crs to CLG as CLG is highly profitable business hence not much requirements. 700crs to Digital Learning biz as it will be required to fund high growth and sustain the company meanwhile without taking debt.
Management and employees are already different for both the verticals so it will be smooth process but due to regulatory approvals etc some 18 months time required but Appointment date is 1 April 2022.
So currently, due to the drag of digital learning biz, the overall margins for NIIT is diluted to 21% but after Demerger it will bump up to 25% for the CLG entity stock.
Currenly, NIIT trades at 28x TTM PE with a growth rate of 25% guided for and margins at 20%+ levels and 1200cr cash on book
After Demerger, we are getting a Ed-tech company with high growth rate and good TAM and can command good valuations due to the scope and valuations of peers such as Byjus while being profitable overall.
They had their physical school biz which is now discontinued and they are looking for buyers of that biz.
Key risks -
Travel cost benefits due to covid however if clients are okay with digital training in CLG then these costs will be nominal.
Biz has existed for 40+ years but the growth has really picked up in 2020-2021 onwards so this might be one-off or covid benefits but I don’t see it that way as war of talent is on and biz are focusing on outsourcing non-core activities such as training and certifications.
Can’t really asses the quality of training provided, so no personal experience however they have won several awards over the years and have a 100% renewal track record and clients are top in their field eg. Shell, Bank of America, Nokia, Ebay, Citi, Metlife, Dell, SAP, BP, Sanofi, GSK, Hitachi etc to name a few.