Buy NIIT; target of Rs 62: Angel Broking

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Buy NIIT; target of Rs 62: Angel Broking

Angel Broking is bullish on NIIT and has recommended buy rating on the stock with a target of Rs 62 in its October 15, 2011 research report.

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Angel Broking is bullish on NIIT and has recommended buy rating on the stock with a target of Rs 62 in its October 15, 2011 research report.

"NIIT has sold Element K, its US subsidiary, to SkillSoft Corporation (SkillSoft) for US$110mn in an all-cash deal. The company also announced its entry into a strategic long-term services and licensing agreement with SkillSoft. Element K was part of NIIT's corporate learning solution (CLS) business."

"Element K was operating in the areas of online products for corporates and e-learning libraries. NIIT had acquired Element K in August 2006 for a consideration of US$35mn. In FY2006, Element K had reported net revenue of US$66mn, with EBITDA margin of ~5%, and was loss making at the PAT level. Element K contributed US$85mn to NIIT's net revenue in FY2011 (~30% of NIIT's overall revenue) with EBITDA margin of ~8.1%, implying a revenue CAGR of ~5% over FY2006-11. This deal has been finalized at a consideration of US$110mn, which is ~70% of NIIT's market capitalization; Element K contributes just ~30% to NIIT's overall revenue. Thus, the deal brings in applaud for NIIT's superior value unlocking capability. Also, with a muted ~5% CAGR and margin tad less than NIIT's anchor businesses such as individual learning solution (ILS) and school learning solution (SLS), this clearly was a rational move by the company. NIIT has entered into this deal to focus on one of its primary growth drivers - managed training services (MTS). Management indicated that it would further invest in growing NIIT's four platforms - MTS, cloud campus, private school venture and university program. In conjunction with the deal, NIIT has also entered into a strategic agreement with SkillSoft for content development of SkillSoft's e-learning products and collaboration in R&D initiatives."

"Management's move is in-line with its mission to improve its RoCE. Element K, which is highly exposed to global macroeconomics, especially the US, proved to be a growth and profitability laggard during the downturn and as traction for learning products was relatively subdued vis-à-vis the MTS business. In summary, the deal has proved to be OPM, EPS as well as RoCE accretive, thus clearly unlocking NIIT's value. Earlier, the company's stake in NIIT Tech was the only rationale for an upside in its valuation; but with Element K's monetization, the company's core profitability would improve substantially. Hence, we maintain our Buy recommendation on the stock with a target price of Rs 62, based on SOTP EV/EBITDA valuation," says Angel Broking research report.

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To read the full report click on the attachment