NIIT Limited (500304) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Q4 and FY '21 Earnings Conference Call of NIIT Limited. [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, Margaret. Good afternoon. My apologies. We had a little delay in starting. Some technology issues we were trying to resolve. But thank you very much for joining us, like always, on -- when we share our quarterly results. And this time, we have the quarter 4 as well as the annual results for FY '21. Just to make sure that all of you are and your families are staying safe and healthy. This call, we are going to discuss very quickly the business performance for the quarter and the financial year. We'll also discuss the future direction and opportunities in front of us. The business has shown phenomenal transformation that the company has achieved over the last 4 quarters, resulting in a very strong financial recovery. This recovery was driven by a very, very agile leadership; a very cohesive and resilient team; and it leveraged the depth and width of our experience in learning technologies and the strong execution capability of our company. The results have also shown the acceleration and efficiency that digital learning models can help us achieve. There are a few of the corporate actions which have taken place, which are available in the press release, but we would all like to share those with you more in detail. I have with me our full management team, Chairman, Rajendra Singh Pawar; P. Rajendran, Joint Managing Director; Sapnesh Lalla, CEO; Kapil Saurabh; Sanjay Mal, the CFO, and we would all do our best to answer all your questions. I do understand that time will be short, but we'll keep our remarks to the minimum, hoping that you have gone through the results in detail, and we would take this opportunity to ask you all -- for you to ask us all the questions. And last but not the least, that in case you still have follow-ups to do, we'll be very happy to answer your individual questions later in one-on-one calls. With that, I hand you over to Sapnesh, the CEO.

Thanks, Vijay, and thanks, everyone, for joining. Please note that the results of the previous year have been restated for a like-to-like comparison in accordance with accounting standards. I'll take you through some of our prepared comments, and then we'll open it up for Q&A. During this past pandemic year, NIIT remained focused on driving business transformation towards digital. There has been an acceleration in our Corporate business in spite of COVID impact, which caused lower volumes from large existing customers, but the business was more than compensated by a significant ramp-up in new customers added over the last few quarters and scope expansions with a number of our existing customers. NIIT achieved digital transformation of the Skills & Careers business during this past year to address the need -- growing need for digital-ready talent and take advantage of the recovery that we are starting to see in hiring. Going forward, we will continue to invest in acceleration of the Corporate business, expanding digital capability and accelerate our growth in our India business. Our revenue stood at INR 2,755 million for the quarter. It was up 30% year-on-year and 9% on a quarter-on-quarter basis. EBITDA stood at INR 694 million with an operating margin of 25%. The improvement highlights the sharp improvement in profitability due to the transition to the digital model over the past few quarters. Profit after tax was at INR 465 million as compared to INR 6 million last year. The EPS for the quarter stood at INR 3.3. Please note that these numbers do not include the impact of buyback on the number of outstanding shares as shares were extinguished in May '21. For the year, the revenue stood at INR 9,495 million. It was up 7% on a year-on-year basis. The strong recovery was aided by addition of significant number of new customers over the last few quarters. The EBITDA was up 106% year-on-year at INR 1,753 million. The profit after tax was at INR 1,430 million, up 134% year-on-year on a like-to-like basis. Coming to our Corporate Learning business. With industry-leading performance, the Corporate business recorded a growth of 34% in Q4 and continues to drive improvement in performance for the company. Our investments in sales and marketing and digital capabilities have helped the business achieve growth with ramp-up in new customers despite near-term reduction in consumption of learning and development services for some of our large customers due to the coronavirus pandemic. In Q4, the revenue of the Corporate business stood at INR 2,353 million, was up 34% Y-o-Y and 8% Q-o-Q. On a constant currency basis, the revenue grew 28% year-on-year and 8% on a quarter-on-quarter basis. The EBITDA was at INR 675 million, up 35% Q-o-Q. Q4, which is typically a weaker quarter as compared to Q3, stood out given the growth in our North America real estate training business. The real estate market continues to be very strong in the near term in North America and is driving strong uptake of our courses, in addition to the benefit of increased convenience due to the shift to digital learning models. The improvement in margin was driven predominantly by better product mix, higher productivity, continued work from home and no travel expenses, improved leverage of fixed expenses as well as the full impact of cost optimizations achieved during the pandemic year. The Corporate business saw strong deal flow during the quarter, including 1 new Managed Training Services customer; 2 significant expansions, 1 with a large global bank and another 1 with a large technology company; as well as a significant number of renewals. For the year, the revenue was up 19% year-on-year, 13% in constant currency terms. Continuous investments in sales and marketing over the last few years and new capabilities developed over the last few quarters have helped the Corporate business recover from the impact of the pandemic in a remarkable way. The company plans to keep investing in sales and marketing as well as capability development to accelerate growth. As I mentioned earlier, the growth has been driven by new customers added over the last quarters in spite of seeing volume declines in some of our existing customers. For the year, the EBITDA was at INR 1,885 million, up 103% year-on-year. The EBITDA margin improved by 938 basis points year-on-year to 23%. During the year, the Corporate business added 9 new Managed Training Services customers, expanded its business with 5 customers and renewed 12 contracts. As of March 31, the company had 58 Managed Training Services customers, and the visibility stood at INR 287 million. While India is emerging from the second wave of COVID, we are starting to see our target markets, which include the United States, North America overall and Europe, start to come out of the COVID-related stresses and lockdowns and start to open up. This is likely to lead to some resumption of costs and investments that were deferred due to restrictions in the past year. Coming to our Skills & Careers business. For the quarter, the business is starting to show growth. The revenue was at INR 402 million, up 12% on a quarter-on-quarter basis as well as 12% on a year-on-year basis. The EBITDA improved to INR 19 million as compared to a loss of INR 100 million in Q4 of last year. Sequential growth of 12% quarter-on-quarter in the Skills & Careers business was driven by resumption of some of the hiring in BFSI and IT sectors. Revenues have recovered sequentially through the year driven by transition to digital models of learning. We see this business to become a strong EdTech platform for digital talent transformation for both individuals and corporations. As I mentioned earlier, we pivoted to the digital delivery model in April of 2020 and have spent the last year ensuring that we are able to deliver the outcomes our students and employers have come to expect from NIIT. As India starts its effort to service the acceleration in digital transformation globally, NIIT will continue to be seen as a key enabler for this transformation. We have seen positive endorsements from our placement partners and our students of our mastery learning pedagogy when delivered digitally as well. Achieving this significant milestone has enabled us to start accelerating investments in NIIT Digital for the new products as well as new methods of digital customer acquisition. We've launched new programs in areas of 5G, cloud, cybersecurity, game development, data science and full-stack product engineering over the last few months. For the year, the revenue for the Skills & Careers business stood at INR 1,241 million. Overall, NIIT has achieved significant transformation over the last 12 months. Today, the company has 2 high-potential growth businesses. The Corporate business is a top 5 player globally in Managed Training Services with industry-leading growth, margins and return profile. The target market provides multiyear growth potential due to the large spends and low penetration of managed training services or learning outsourcing across Fortune 1000 companies. The Skills & Careers business is transitioning to an EdTech business, engaging in rising demand for digital talent transformation for both individuals as well as corporations. The company has the necessary ingredients for creating value for its customers, a differentiated pedagogy for deep skilling, strong brand, innovative business models and a strong balance sheet to invest. We continue to believe that more companies will adopt outsourcing post pandemic and the demand for trained talent will continue to be in short supply and will fuel growth for the business. The company plans to continue to focus on accelerating growth in this coming year. Our balance sheet continues to be strong and was strengthened during this past year. The net cash position improved quarter-on-quarter by INR 448 million to INR 13,689 million and by INR 2,260 million for the year. Gross cash was at INR 13,894 million. Days of sales outstanding declined to 54 days as of March 31 compared to 63 days as of December 31, 2020. Our operating cash flow in Q4 was INR 520 million. The operating ROCE has improved sharply over the year, highlighting the capital efficiency in the business. The ROCE stood at 38.4% as compared to 7.3% last year. As mentioned earlier, we will continue to pursue investment opportunities, both organically and inorganically, to drive growth across all dimensions of NIIT's business. We will continue to expand our Corporate business through expansion and creating a global platform to improve geography coverage, addition of new capabilities and penetration in new customer segments. For our India business, we will continue to achieve leadership in digital talent transformation through investments in the NIIT Digital platform as well as new programs from StackRoute. That brings my prepared conference to an end. I'll send it back, Vijay, to you for further comments.

Okay. Thanks, Sapnesh. Indeed, an exceptional quarter. Just wanted to give 2 important updates. One, the Board proposed a final dividend of INR 2.50 per share, which is 125% of face value per share. And the second, that while the buyback process was started in December of '20, the process was fully completed on 11th of May when 9.875 million shares were bought back and extinguished. And the total shares outstanding post the buyback are 132.47 million. The buyback process was quite successful. It was 5.5x oversubscribed. And the buyback was for 6.97% of the shares of NIIT at a price of INR 240 per share. And that price was 92% premium to the previous buyback price. So with that, I think the financial highlights are over. There have been some Board expansions, and I would request Raje Pawar to talk about that.

Good afternoon, everybody. I just wanted to take some time to highlight a very important development in the history of our company and the growth of our company. So you have heard about the results. You've heard that in difficult circumstances as well, the leadership team, the management team led by Sapnesh has managed exceptional performance. And I think they have [indiscernible] opportunity that digital transformation is showing up in an accelerated way in the world now. So we have all been talking about digital transformation, and that has been going at a reasonable progress. But COVID did many bad things, but it also accelerated a few good changes, and digital transformation is one of them. So while the world was busy coping with it, we saw Sapnesh and team leveraging this opportunity. Now this we see as a very important dimension of the future. So as a company, we have been preparing for it. As you're aware, we now have had capital which we are looking to deploy for growth, and we've been building ambitious plans for our growth. And so commensurate with that thinking, we've also been thinking of expanding and enhancing the capability of our Board to cope and deal and leverage the next phase of growth. So we are making additions to the Board, and let me lay out the addition that we are doing. So we are adding 2 independent directors. They become effective from tomorrow. And of course, finally we'll be putting the recommendation and discussing it at the AGM for their approval. But from tomorrow, we have 2 additional directors. The first one, Ms. Sangita Singh, joined with about 3 decades of experience after working in Wipro, Infosys as well as IBM. And she has been focused on the U.S. and European markets, has run a $1 billion line of business, focused on health care towards the end of her career in these companies but has very good capability to deal with Fortune 500 companies and to look at large, multiyear transactions with exceptional relationships at the top levels and, therefore, a very deep understanding of the market. So her experience, as you can understand, will be extremely helpful as we grow our B2B international business of the learning process outsourcing that we are building a very strong recognition. The second person -- the second independent director to join is Ms. Avani Davda. She comes with more than 2 decades of experience in the consumer, retail and business leadership. For the longest part of her career in the Tata, she was the youngest CEO to head a venture, and that was the Tata Starbucks JV, after which she spent some time in Godrej, dealing with a company -- leading the company called Nature's Basket and now is joining our Board. She serves on another Board of Mahindra Logistics, and is also advising Bain & Company on their retail and consumer activities. So she then brings very deep and good understanding of consumer markets and consumer behavior and something that will aid us as we expand our NIIT Digital B2C line of business. So between them, they add a very strong capability to the Board in the 2 dimensions of B2B and B2C that we're looking at. The third addition to the Board, which is, in a sense, part of a larger process of succession or, let me say, preparing the organization for perpetuity comes with our CEO, Sapnesh Lalla, being elevated to the Board as Executive Director and CEO after having served in the company for more than 2 decades but also having played this role very successfully for the last 4 years. So this, again, represents an important development in the company of management coming into governance. And this will be effective from the date of AGM, when the AGM will approve the appointment. Then as promoters, Mr. Thadani and I also have our personal succession of our family holding and the family office, which has been going on for some time. And to reflect that in the ownership, we are inviting 2 more people to the Board, Udai Pawar and Leher Thadani, representing, in a sense, the family office in the governance of the company on the Board. Now between these 5 additions, we have now managed to add to significantly enhance the diversity on the Board. And the diversity is in many dimensions, and let me comment on those. First and foremost, I think we all know that this whole opportunity in front is showing up as unprecedented changes. And when there's a large amount of uncertainty and volatility, then diversity is a very important attribute to have for an individual or a company or any community. So diversity is coming in the following dimensions. First and foremost, it comes in the dimension of experiences. So 2 people coming from large, successful corporations with a great culture, Wipro, Infosys, IBM, Tatas, Godrej, that enhances those capacities in our Board. In addition, of course, to the competency that I mentioned earlier of understanding the international or the global information services business, where India has excelled, as you know, and built the capability to do very large size, multiyear deals and which is the direction in which Sapnesh is building the business. We'll also have an enhanced diversity in terms of gender. We now will have 4 women directors on our Board. The third dimension of diversity, equally important, is in terms of geography. We are getting international experience coming to our Board as well. And finally, and perhaps very significantly, is the diversity of age as well. Just to let you know that the existing Board average age is 63, and the new additions are all at an average age of 45. So the Board is becoming younger, more diverse, more versatile, more experienced, and we see that as a very important development as we embark on what we think is a very exciting period of change. We are equipped with capital coming from the transaction, which you all know about. We have started deploying it, and we are now building the capacity to cope with all the new strategies, changes and opportunities that are in front of us. So with that, back to you, Vijay.

Thanks, Raje. I think now we would like to open it for questions, and I'm sure you will have plenty of them. And depending on the number of questions we have, we will check if we need to extend the time because we've gone beyond our normal briefing time which we have, but that will depend on the questions. So operator, can you open it for questions, please?

[Operator Instructions] The first question is from the line of Ashish Aggarwal from Principal India.

Sir, 3, 4 questions on my side. First one on the Corporate Learning business. Despite the problem in -- because of COVID, et cetera, we were able to grow the Corporate Learning business in double digits this year also. So I wanted to understand how should we look at the growth in this business going forward given the fact that with the global economies opening up, hopefully we will have some of the existing clients also now starting to grow, which -- in the next year? And secondly, I wanted to understand on the profitability front of this business. We have expanded the margins in this business considerably. Q4 margins of almost 29% is the highest ever. So how should we look at the profitability of this business? Earlier, we have been indicating this -- maybe this business would do high teens or maybe 17%, 18%, 19% type of margin. So how should we look at the profitability of this business going forward?

Okay. Sapnesh will answer.

Thanks for asking that question. I think your first question was from the point of view of growth that we expect in the Corporate business. I think, like you pointed out and like many people are saying, it's possible that the economies are going to start opening up. I do see, given the vaccination rates in the United States, U.S. might be the first one off the block. While there are uncertainties around how that might take shape, but you're right, it's likely that both United States and Europe as economies will start opening up. And given that, it's also possible that our existing customers, where we've seen significant decline in L&D volumes, will start consuming more training. Our -- my expectation of growth is in the mid-teens to high teens this coming year. And I would just like to make sure that you understand that while economies are going to start opening up, the uncertainty continues. There is a significant number of people who are yet to be vaccinated in the United States and Europe. So we are expecting mid to high teens in terms of growth for the next year. You're right, our profitability is -- was significant in Q4 owing to the growth that we experienced as well as the control on -- the significant control on expenses that we put in, some because of COVID and some because we wanted to conserve cash. I think some of these expenses will start coming back as the economy opens. And we will also start investing -- or making investments that we had deferred out given our desire to conserve cash this past year. So we expect the margin to be higher than what was typical before the pandemic year. We expect the margins to be in the 20-plus percent range for the Corporate business this coming year.

Got it, sir. But sir, on the growth front, given the fact we are already exiting at 14% annualized growth rate for FY '22, right, that would mean that even if we grow at 1% to 1.5% Q-on-Q, we will be closer to 20% rather than on the mid-teens front?

I didn't understand quite the math that you had. But like I pointed out, while economy will open up, it will take time for the consumption of learning and development to start. When economies open up and come out of recession, there are a number of priorities that organizations spend money on before they get started to spend money on learning and development. By way of comparison, spend on IT starts ahead of spend on learning and development.

All right. Sir, my point was simply that we did INR 235 crores in this quarter. So even if I analyze that, that is close to INR 940 crores. And we have already done -- we did INR 825 crores last year in FY '21. So that itself is a 14% growth rate even if we don't grow quarter-on-quarter in FY '22. So that was the math that I was trying to do.

Yes, I think you are referring to the comment I made about North American real estate business that we participated.

Right.

Real estate in North America is on a tear, as you may have noticed, over the last few months predominantly because of COVID -- earnings because of COVID that folks have had, which they want to reinvest in real estate. My expectation is that, that market will normalize. It is not natural for the real estate market to be on such a tear. It's likely that it will normalize. If it doesn't, yes, it's possible that we will grow at a higher pace. But my expectation is that, that market is likely to normalize over the course of this year.

Got it. And sir, lastly, on the -- 2 things on this -- on the skills business. Is it fair to assume that it is out of the woods and we might see in -- the business starting to show profitability on a yearly basis now?

I think this business is on the path for growth. It will require us to continuously invest in that business for it to continue to be a path-breaking digital business. It will see double-digit growth going forward, but it will take a little bit for profitability.

Got it. And lastly, any update on the monetization of the schools business?

We have been in conversation with companies. As you might imagine, schools have been shut down for a fair part of this past year and are likely to be -- to stay shut till India comes out of the grips of the virus. As soon as there is something to share, we will come back to you.

The next question is from the line of Vimal Gohil from Union Mutual Fund.

Just wanted to understand again on the margin expansion that the company has seen. And now going forward, we are expecting 20% plus EBITDA margins. Just wanted to get a sense, given the fact that the Corporate Learning solutions business is going to have much higher -- I mean, 20 -- much higher -- I mean, about 25% EBITDA margin, and that is growing at significant pace, so -- but on a blended basis, we are still expecting that 20% plus. So I just wanted to understand the conservatism in margin expectations going forward. That would be question number one. My second question is on the...

Let me pause you there because there were a couple of things that you mentioned which were not quite what I had said. So let's pause there, so that I can make some of the corrections in what you said. I expect that the Corporate business -- or at least I mentioned that the Corporate business is likely to grow in mid-teens to high teens. Not 25% that you mentioned, but mid to high teens, as I had mentioned earlier. And we are expecting the margin of the Corporate business to be in the 20% range.

Fair enough. Okay. Okay. And sir, how much of the normalization in margins going forward? Is it going to be because of some of the travel costs, et cetera, coming back? And how much of that is going to be structural in nature going forward? And my second question was a related -- or rather, the second question would be, the corporate learning solutions industry as a whole -- and maybe let me put it that way, your addressable market as such, how much is that growing at? How large is the market? Can you just quantify that for me?

Okay. I think you asked 2 questions. Let me see if I can phrase your first question. I think your question was, by how much are the expenses likely to grow because of normalization with respect to travel and other things? I think there are 2 dimensions to normalization of expenses. One is the travel and related expenses with respect to facilities owing to markets opening up both globally as well as in India. The second is, like I pointed out earlier, investments that we had deferred are starting to get made so that the business continues to get the oxygen that it deserves. And third, overall, organic investments and initiatives that are likely to help us perpetuate the growth trajectory that we are on. It's hard to quantify each one of them on this call. But suffice it to say that we are planning to make significant investments to continue the growth trajectory that we have seen, continue to strengthen it. Like I pointed out, we have a global platform to build, we have new capabilities to build and new market segments to address with respect to our Corporate business. And each of these activities will require investments either in organic initiatives or inorganic initiatives. The investments in organic initiatives will affect the operating expenses and, therefore, EBITDA. So from an overall perspective, the expenses will go up because of normalization of some of the activities as travel and related expenses come back, but also due to the investments that we have not made over the last 1 year.

Fair enough, sir. And sir, if you can just comment on the second question, the size and the growth of the corporate...

Can you say the second question again? Say the second question again.

Yes. So what would be the overall size of your addressable market in the Corporate Learning solutions...

Addressable market and how it's growing?

Yes.

So during the pandemic year, it's possible that the addressable market shrank because the consumption or the spend on training went down. But in the simple terms that I typically use to look at the addressable market size, if you look at our market, it's Fortune 1000 companies who are significant in terms of their spend on learning and development. It is our estimate that only about 250 or so of Fortune 1000 companies have outsourced their learning and development to a reasonable extent -- not fully, but to a reasonable extent or a material extent at this point in time. So in terms of just the headroom with respect to Fortune 1000, there are a majority of companies still left who do not materially outsource learning and development. And then in the 25% or so who do, there is significant headroom in terms of how much they outsource. So from an overall perspective, there is significant headroom. Also, as you're probably aware, whenever an economy comes out of recession, outsourcing is a tool that they often use to transform themselves and start focusing on what's most important for the organization to grow and come out of a slow growth rate as caused by the recession. We think that learning outsourcing will gain from that. It has gained in the past recessions, and I think it will gain in this one as well, though learning outsourcing is second to IT outsourcing in terms of sequencing.

Congratulations on a great year and all the best for FY '22.

Thank you. Are there other questions, operator?

The next question is from the line of Vijay Sarda from Crescita Investment.

Right. Congratulation on good set of numbers. Sir, I just wanted to take 2, 3, which are -- I mean, basically, can you share in terms of the profile of the customer, I mean, which industry we are getting into in terms of how this mix is currently? Like you said, this quarter, the real estate has contributed significantly. So how is the mix of that revenue that is coming in CLG? And just secondly, coming to the organic -- inorganic growth point of view, what is the strategy going to be? Because currently, you are sitting on a huge cash pile, as we can see from the balance sheet. So -- I mean, if you look at the kind of inorganic initiatives and all that, so what kind of company that we are looking at in terms of size and scale? Are we actively pursuing it? Or we are in process of doing so?

Sure, thanks. I think your first question was on the profile of our customers?

Correct.

Our customers come from a diverse set of profiles. We have customers -- or significant customer percentages in technology, in oil and gas and energy, commodities, banking, financial services and insurance and more recently in the area of life sciences. Those are our key customer segments. The real estate project that you mentioned is a large project that we undertook about 3 years ago and is starting to pay dividends. I think your second question was with respect to inorganic growth.

Inorganic. Yes.

In terms of the profile of organizations that you asked, I think from a Corporate business perspective, our goal is to improve our global platform to cover gaps that we might have in geographic coverage. There are gaps we have in Europe. There are gaps that we have in Latin America. Second, to look at increasing our -- or improving our capability set. And third, looking at new market segments that we can pursue our business in. Those are the 3 dimensions that we look at. We would be looking at midsized companies. We are not one to do inorganic for the sake of adding revenue. We like to look at inorganic activity to build capability or to close geography gaps or to pursue new market segments.

Okay. Sir, just the last thing in terms of the kind of investment in the -- as you said, in real estate, you started investing 3 years back. So what kind of investment is needed to get into particular sector? Because, as you rightly said, we are getting into all kind of sector like oil and gas, technology related. So how this investment has to be done. And basically, if I look at the kind of depreciation, so it's some function of that only. So we need to create a platform or course material or whatever. So we need to invest on that. And that is what we are talking about the investment in the -- or apart from sales and marketing.

That's one way of investing, and that's the significant mechanism we use to invest for -- on the real estate project. The other way of looking at similar investment to get into market segments is an investment we made by acquiring Eagle Productivity Solutions, I think, about 3 years ago now. That was an acquisition to get us into life sciences as a segment. And when we made that acquisition, NIIT had only 1 customer -- 1 MTS customer in life sciences. Over the -- these past 3 years, because of that acquisition, we've been able to grow those number of Managed Training Services customers to over 10 now. And they represent more than 15% of our revenue.

Okay. Sir, just last question. How is basically the overall retention, basically new -- repeat business as well as new business? As you pointed out, there are so many companies which are yet to come up for this and -- basically to outsource the training part of it. So the companies that you've been working, how those companies have been growing along with you. And basically, I just wanted to get repeat business versus the new business. How is the mix for you currently?

So we have a very high track record of renewing our contracts with our Managed Training Services customers. We haven't lost a contract over the last several years now. In terms of how our customers are growing, our customers are very large Fortune 200, Fortune 300 companies. Several times, our business with them is not necessarily aligned with their growth patterns. But we -- what I can say is our customers tend to be the top 5 or top 7 of their categories. So in oil and gas, for example, our customers include organizations like Shell and BP and Equinor, who are top oil and gas companies.

Congratulation again on the good set of numbers.

Thank you.

Thank you.