NIIT Limited (500304) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the NIIT Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vijay Thadani, Managing Director and Vice Chairman of NIIT Limited. Thank you, and over to you, sir.

Thank you. Good afternoon. First of all, my very sincere thanks to each one of you for your continued interest and encouragement to NIIT and for joining the call today. I do know this is a busy results season. So for you to spend your time with us, we really value it a lot. I also believe I hope that you and your families are staying safe and healthy. We are going to talk about the business performance for quarter 3 of FY '21. We would also -- Sapnesh, who is the CEO, will take us through that. And we would also discuss possibly how the future is looking and the opportunities in front of us. I do want to make a comment that these results show a marked recovery and improvement in performance now consistently over the last 3 quarters. And this is, I would like to believe, due to agile and decisive actions of the leadership team. The transformation has also shown the kind of efficiency that digital learning models can help us achieve. So neither the times before this were a steady state nor the ones which we experience are a steady state, I think steady state will get discovered as the new normal set is on. But definitely, there is lots to learn from these 9 months. I also want to mention just one line, and I can talk more about that, that during the quarter on December 24, the Board also announced the second buyback out of the proceeds of the divestment. And it was to be done at the earliest possible opportunity. We triggered it exactly 12 months after the completion of the previous one. The buyback is for 985,000 shares at a price of INR 240 per share, which is a 92% premium over the previous buyback price. The buyback is subject to approval from our shareholders and other statutory bodies. If people have questions on this, I'll be happy to answer. But right now, I think main focus of this will be performance of quarter 3 and the outlook from here onwards. I would now like to hand over to Sapnesh to take us through that and then we'll open it for questions. Just want to tell you that we also have in the room the full leadership team. We have Sanjay Mal, the CFO. We have Kapil Saurabh, who heads Investor Relations. We have Gaurav, who also looks after important functions in finance and accounts and who also is responsible for preparation and finalization of these results in the format in which it is now available to you. So with that, I would now like to hand you over to Sapnesh, who will take us through the whole exercise. Thank you.

Thanks, Vijay, and thanks, everyone, for joining. I echo Vijay's comments about health and safety. And I hope each one of you and your families are continuing to be safe. I said this to NIITians many times when I say to you that the killer is still outside, so please stay safe and employ all caution that you possibly can. Please note that the results of previous year have been restated for like-for-like comparison in accordance with the accounting standards. Also given the impact of COVID-19, we are emphasizing Q-o-Q performance as that is more relevant to show that there is continuing income. This, as a clarification, the net result, revenue minus expenses of asset held for sale as well as discontinued operations, is reported as a separate line item below the operating results. This includes the net results of the Schools business housed in our wholly owned subsidiary, MindChampion Learning Systems Limited, which has been classified as asset held for sale. In terms of business highlights, I think Vijay said it well, and I would echo that the business has seen a strong recovery due to agile and decisive actions taken by the leadership team, more specifically backed by -- with a robust execution. While the environment has remained uncertain, driven by the pandemic and geopolitics, NIIT has remained focused on new customer acquisition, driving business transformation towards digital and helping our customers create adaptive learning organization so that they can be more successful in an uncertain environment. The success of that is visible in our results as well. The consolidated revenue stood at INR 2,534 million, up 16% quarter-on-quarter and 4% year-on-year. This quarter also saw us grow on a Y-o-Y basis. The EBITDA was at INR 471 million, up 37% Q-o-Q versus INR 344 million previous quarter and up 64% year-on-year versus INR 287 million. The EBITDA margin improved to 19%, up 287 basis points from a quarter-on-quarter perspective and up 685 basis points on a year-on-year basis. The net other income was at INR 220 million, which included INR 215 million in treasury income. The PAT was at INR 415 million, up 53% year-on-year and 59% Q-o-Q. The EPS stood at INR 2.9 per share. One interesting stat I wanted to share with all of you, we've been talking about NIIT's digital platform. I wanted to let you know because digital platforms are becoming popular and their statistics are becoming popular these days. Our digital platform, NIIT Digital, now has over 1.8 million active users who are pursuing their education at NIIT. Drilling down into our results. First, with the Corporate business. The Corporate business contributed 86% to NIIT's revenue in the quarter versus 78% in Q3 of last year. Our investments in Corporate Learning continue to drive growth for the business even through some -- though some of our largest customers have had to reduce their consumption in L&D because of COVID. The revenue for the Corporate business was at an all-time high of INR 2,175 million. The revenue was up 12% quarter-on-quarter and 15% year-on-year. The growth in constant currency was 9% year-on-year and 12% quarter-on-quarter. EBITDA stood at INR 500 million, up 70% year-on-year and 26% quarter-on-quarter. The EBITDA margin stood at 23%. Improvement in margin was driven specifically by a better product mix, improved productivity because of the continuing work from home as well as lower travel expenses, but more importantly, higher utilization of headcount and then, of course, because of the increase in revenue, improved leverage. The Corporate business saw continued traction in Q3 with new wins and renewals. We won 3 new MTS customers in the third quarter. And that brings our tally to 58 at the end of December. The first one is a global leader in energy and natural resources; the second, a global leader in technology and telecom industry; and the third, a global leader in life sciences. The Corporate business also renewed contracts with 4 existing customers in this quarter. Revenue visibility, given the contract timing and renewals, has improved to INR 270 million, 4% quarter-on-quarter and 2% year-on-year. As we've been pointing out, we are continuing to see momentum in new customer wins as well as strong renewals from existing customers. This is enabling growth for the business despite reduced levels of consumption by some of our largest customers. In their partnership with us, our customers see NIIT as an organization that can help them become an adaptive learning organization, an organization that can pivot and respond to fast-changing business needs that have been accentuated during this COVID time. This service delivery ethos and our DNA of innovation and of keeping our customers at the center of all our efforts is inspiring our new customer acquisition efforts. Our project in Canada is starting to reach steady state. Our investments in digital transformation has helped to enable continued access of high-quality real estate education and a potential second career in these COVID times for learners aiming for a career in real estate. Drilling down into our Skills & Career business. The revenue for Q3 was INR 359 million. The EBITDA improved to negative INR 29 million compared to negative INR 54 million in the previous quarter. The business is down year-on-year due to impact of COVID, however, grew sequentially by 45%, predominantly due to the positive impact of our international business, given seasonality of enrollment and the enrollment accumulated towards the end of Q2 and Q3, initial part of Q3, because the universities took time to restart, given the COVID situation. As I have indicated to you earlier, NIIT Skills & Careers business has been transformed to a digital ad tech business. So that to accelerate the digital transformation of our SNC business, we are putting to use platform and pedagogy we have perfected over the last 4 decades of our existence, the technology platforms that have won us many accolades and awards over the last several years. That's the technology and platform that's powering our digital business in India. In the career education business, we pivoted to a digital delivery model in April of last year and have spent the last several months ensuring that we are able to deliver the outcomes that we promised to our students and, of course, their employers, the outcomes that large corporations expect from a student who has studied at NIIT. As India incorporated starts its efforts to service the acceleration in digital transformation globally, NIIT StackRoute is at the forefront as a key enabler for this transformation. We've seen positive endorsements from our placement partners of our students on our mastery learning pedagogy when delivered digitally. And we believe that the methodology and the pedagogy and the delivery modality, digital delivery modality, has now been tested and starting to deliver results at the initial scale at which we are at this time. Achieving this significant milestone has enabled us to start investing in accelerating the NIIT Digital business with new products as well as higher investments in customer acquisition. I would, of course, continue to provide more details about our investments and the expected outcomes as we -- as this business starts becoming material and, more importantly, as it goes through the first few milestones, some of them, which it will cross in Q4. Overall, what makes us stand apart is that we have grown year-on-year due to significant new wins over the last 6 quarters. We have continued to focus on driving higher efficiencies and improved resource utilization. And with adoption of digital, we've been able to significantly lower our expenses, including requirements of real estate. The previous 2 quarters show the efficiencies and returns we can achieve with a fully digital model for our Corporate business. While some of the costs would return as vaccinations lead to opening up of travel and resumption in -- of in-person training, the margin trajectory that can be expected is likely to be meaningfully better than the historical range in which we have delivered. Also [indiscernible] expenses as a percentage would likely to remain lower in the near to medium term as compared to the past. The increased efficiency and strong balance sheet creates space for us to scale up investments in NIIT Digital and other growth-oriented activities going forward. We continue to believe that demand for deep skilling and hiring of skilled professionals just in time is likely to remain important, especially for digital skills. In fact, it's going to become more important than it has ever been. As businesses adapt their products and services to digital, they need employees that are not only better trained but also more confident learners. As of December 31, our people count stood at 2,435 compared to 2,386 at the end of previous quarter, indicating some of the scale-up and ramp-up that we are seeing because of new wins in our [indiscernible] business as well as the ramp-up in our investments in NIIT Digital. A note -- another note on the people side, we did announced wage increases for all NIITians globally effective 1st of January 2021. Looking at our balance sheet. Our balance sheet metrics continue to be strong. Net cash position improved quarter-on-quarter to INR 13,240 million as compared to INR 12,117 million end of September due to higher collections, given that December is end of financial year for several of our customers. Gross cash was at INR 13,533 million. And debt further reduced to INR 293 million versus INR 382 million that we reported last quarter. The DSO was at 63 days as of December 2020, more or less at the same level as it was same time last year. Both the strong growth in revenues and then, to some extent, offset by strong collections that kept the DSO at more or less the same level. The operating cash flow in Q3 was INR 1,055 million and free cash was at INR 1,015 million. The ROCE recovered -- the operating ROCE recovered sharply. On a trailing 12-month basis, our business generated an ROCE ex cash on books of 14.5% versus 7.2% reported previous quarter. Going forward, given the strength of our balance sheet, we will continue to pursue investment opportunities to drive growth across many of the dimensions that we have discussed with you in the past, more specifically, continued geographic and capability expansion for our Corporate business, both organically and inorganically; achieving leadership in our career education business through investments in NIIT Digital; and expanding access to our StackRoute and talent pipeline and the service products globally. With that -- I know Vijay touched about -- upon the buyback a minute ago. Vijay, did you want to spend any more time if there further questions...

[indiscernible] is available.

If there are a few questions around the buyback, Vijay can answer those. But that concludes my opening comments. And I would invite any questions, anything that you might have and discuss the last quarter's performance.

[Operator Instructions] The first question is from the line of Divyesh from Dolat Capital.

There are two questions. First is can you share me the wage increase? What will be the percentage? And how much can be the impact? And another question is that can you share with us the share of business of StackRoute and impact as of now? That's it.

So the wage increase is approximately 7% of the total wage bill. It starts as of 1st of January 2021, about INR 65 million per quarter. And just remind me what was your second question.

StackRoute and some outlook and the current share of business.

We do not declare product line-based numbers. But what I did want to say was that StackRoute as an offering grew on a year-on-year basis. And TPaaS as an offering grew on a Q-o-Q basis.

The next question is from the line of [ Neel Vora ], an individual investor.

Yes. I have just two quick questions. First one is that the EBITDA margin for CLG business has been at 23%. The reason for this increase [indiscernible] highlighted earlier has been reduction in the travel cost, basically. So in the last annual report as well, we have seen that the travel cost has been 6% of the total sales. So once the situation normalizes, is it safe to assume that the CLG margins around 15%, 16% as it has been doing earlier, given the wage increase that is then in line?

I would say, what happens in the future is still uncertain. But I feel that some of the digital transformation will stick, and it will be more digital going forward than it was when we got into the crisis. So it's possible that the margin will be better than what you have seen historically.

Okay. Sure. And the last, tally of cash flow remaining up at NIIT Technologies was around INR 750 crores for which now we have announced a buyback of, say, INR 248 crores. So right now, cash available from that transaction is around INR 500 crores. So of the total INR 1,400 crores, INR 900 crores has been distributed in the common buybacks and dividend. So I just wanted to ask what is the plan for that remaining [indiscernible] buyback would, let's say, for 12-month or 18-month period from now? So what is the management going to do with that INR 500 crores?

Okay. So even at the time of divestment, what we had said was the divestment proceeds will be used for 3 purposes. One was for debt reduction. Second was for investments in new initiatives. And the third one was that we would share at the fastest possible rate of the rewards with the shareholders. And if by that ratio, the debt reduction has been on course and it's following the trend that was most appropriate. And there is a little bit of debt left. As far as the investments are concerned, those have begun, as Sapnesh also talked about NIIT Digital, there are some others. And we are actively looking at acquisitions, some very important acquisitions. And those all we will be able to share with you. The third was for sharing with rewards with the shareholders. So while the original plan at that time, we had said 50% to 60%. As we stand, 68%, 68% of the net proceeds have already been shared after this buyback is completed, of course. And as you rightly pointed out, the next step in this direction would be taken based on the deliberations that the Board does. But in terms of the original indication that we had given, we have already exceeded the indications that we had shared at the time when the divestment took place. There would be a need for a certain amount of cash requirement in the balance sheet for investment in strategic initiatives, of which there are a few. And I think all those you will get to know more in the next few. And the uncertainty in the economic environment, which can create temporary ups and downs. And of course, the growth momentum of the business, which will also require additional working capital as we go along. So I think we are well poised as we speak. The rest will now depend on how the business performs over the next year. And then we would go with the natural trend of how we have been rewarding shareholders in the past.

Okay. So just one quick question, is there any guidance on acquisitions as of now?

See in case of an acquisition, there is no guidance. There's nothing called guidance because it happens when it happens. So normally, in fact, we have said from time to time that we will not be looking for a mega acquisition because we would not want to risk -- take such a heavy risk. But definitely, these will be mid-sized acquisitions which will -- which are strategic in nature, not just in additions of revenue, but either they would open a certain market segment for us or a certain geography or a certain product capability that horizontal or vertical that we may be missing out on. So it is in that context that we have been looking. We have been fairly active. At this time, with this so much churn, it is also very difficult to do valuations. And -- but nevertheless, I think we are hopeful that something good should come out after putting -- having put so much effort. So we'll share that with you as and when something is available.

[Operator Instructions] The next question is from the line of Rahul Jain from Dolat Capital.

Congratulations. I have a question for the CLG business as we've been very consistently adding on to the number of MTS customers. However, our revenue visibility has not improved significantly. And also, we have seen that some of our large customers, our existing customers, has not rolled out as much business as they usually do. So has that also been a factor here in terms of reducing the accounts, which -- and you see the net number? Or any other color you would like to give here?

Sure. Thanks. I think the visibility number that you see is a composite. As I mentioned, that due to COVID, a number of our large customers who we've had for many, many years, they have reduced their overall consumption of training. And that's understandable because their business is affected. We haven't lost anything. But their consumption has gone down. And then like I also pointed out that, over the last 6 quarters, we have won a number of new customers. In fact, the top 5 of new customers that we have won contribute about 25 -- or have contributed about 25% of the revenues for our Corporate business in this quarter. Now what that does is, because of reduced consumption of some of the large customers, that brings the visibility down. That gets offset by the new customers that we have acquired as well as the renewals that we've had. So I would say the new customer additions that we have done are significant. And that is what has enabled us to grow our business from a quarter-on-quarter and year-on-year perspective. As far as visibility is concerned, as our existing customers start increasing their consumption once there is more certainty in the marketplace, we see that visibility go up.

Right. Just a clarification, you said top -- so the 5 customers that we have added this quarter have contributed 25% of the revenue? Is that what you said?

No, that's not what I said. What I said is that the top 5 customers that we've added over the last 6 quarters have contributed 25% of our revenues this quarter.

Okay. So you think these recent wins have become much larger contributor? And this definitely do not include RECO? Or is that one of them?

We don't comment about growth in specific customers because of competitive reasons. But like I pointed out, I'll say it again that the customers that we've added in the last 6 quarters have contributed a significant amount to our revenue this quarter.

Right. Secondly, going into your Skills & Career business, there has been a significant improvement on a sequential basis. However, we have also seen a good cost increase as well. So if you could share in terms of how we are -- how the revised cost look for us on a more sustainable basis and how -- what part you say international business enrollment has led to this jump? But in general, if you would like to share more that in terms of what the annualized number on a normal basis look like for this business, given that the kind of a sum we have seen in the past? What more looks like a sustainable thing here?

So the Skills & Career business has seen uncertainty. It has had a significant quarter-on-quarter improvement because of the bunching-up of some of the enrollments with universities, international universities. But I think some of the uncertainty that the Skills & Career business has seen will continue. I think that as the IT services companies or IT businesses in India, GICs in India as well as banks in India start their hiring, we will see an uptick in that business. That might take 1 or 2 quarters to get completed, but that's where I see it.

Right. And from a cost point of view, do we still have some costs which are not related to the current mix of business? Or any cost related to the franchise kind of a model are still coming up in the expenses?

So like I pointed out, we have transformed the India business to a purely digital business. We will continue to have investments in the digital platform and digital products. So those costs will continue to come or may get accelerated.

Yes. And last, if I can squeeze in one more, you gave one insight into the number of users we have on our digital platform. So what kind of opportunity are we having right now on this? And what looks like the direction which we think for this business over the time?

Yes. I think like in all digital businesses, the platform is going to be the heart of that business. And as our digital business grows, I see multidimensional growth in that platform.