NIIT Ltd

Demerger has concluded.
Record date is 8th June 2023 with listing within 60 days.

NLSL (CLG entity) will be the one to be listed separately and NIIT Ltd. (S&C entity) will go ex-NLSL on 8th june.

As expected S&C has faced severe headwinds due to recruitment halts and layoffs hence the poor result.

CLG has fared well with 20% YoY growth (11% organic), considering the macros this growth is quite good.

MTS count at 80 vs 66 in FY22 (7 additions due to STC acquisition)

Revenue visibility at $363M vs $328M in FY22

EBITD margins has remained within the 23-25% band in FY23.

Management has given around 700 crs in cash to S&C and 570 crs in cash to NLSL.

NLSL is operating at a ROCE of 49% and ROE of 29%(lower mainly due to Goodwill on books due to STC acq.)

Dividends to be paid after listing as per the 2 companies own capital allocation policy.

Guidance –

NLSL – 20% revenue growth and 20%+ EBITDA margins
NIIT – 8-10% revenue growth

I would ascribe ~Rs. 80 /share to NIIT (mainly derived from book value of ~900crs) since its not profitable and in growth stage.

That gives ~Rs.320/share to NLSL as per CMP of Rs. 400
Which gives a Mcap of 4,300 crs for a company generating Rs. 200 crs+ in Free cash Flow at a ROCE of 49% growing at a CAGR of above 15%+ with 20%+ EBITDA margins.

Key risks –

1. Significant revenue concentration for top 10 clients.

2. Competition from – IBM, Accenture, Raytheon etc.

3. Revenue visibility growth is lagging Revenue growth (future contract renewals might adjust it, but remains a major risk)

Demergers opens up opportunities for re-rating of stocks as the demerged businesses are judged purely basis on their own merits and not bogged down by the baggage of other biz it had before. It also reinforces mgmt incentives towards growing that particular business they have got after demerger.

Majority of gains are made in mostly 2 phases –

1. After announcement of demerger and the proposed structure and plans.

2. After listing – Auctioned price adjustment + further momentum fuelled by various forces such as exits by forced sellers/disinterested parties.

Some past demerger case studies you can read – Mirza int, Borosil, Hindware, Meghmani, Jubilant Life Sciences etc.