NIIT Learning Systems Q2 FY26: Profit Decline Overshadows Revenue Growth

The quarter's performance highlights a concerning trend: whilst the company continues to expand its top line with impressive consistency, margin compression and rising costs are eroding profitability. Operating margins excluding other income contracted to 19.49% from 22.02% in the same quarter last year, signalling operational challenges that management must address urgently. For investors holding this small-cap stock, the results raise fundamental questions about the sustainability of the company's growth trajectory and its ability to protect shareholder value in an increasingly competitive education services landscape.

The September quarter results reveal a company grappling with the challenge of scaling operations whilst maintaining profitability. Revenue growth of 19.69% year-on-year demonstrates NIIT Learning's ability to capture market share and expand its customer base, with net sales climbing from ₹397.45 crores in Q2 FY25 to ₹475.72 crores in Q2 FY26. However, this top-line expansion has come at a considerable cost, with employee expenses rising to ₹208.79 crores and interest costs surging to ₹7.31 crores—the highest in recent quarters. The net result is a profit after tax margin of just 9.87%, down from 14.35% in the corresponding quarter last year.

Financial Performance: Revenue Strength Masks Profitability Concerns

NIIT Learning's Q2 FY26 financial performance presents a paradox that investors must carefully dissect. On the surface, the company achieved its highest-ever quarterly revenue of ₹475.72 crores, marking sequential growth of 5.40% and impressive year-on-year expansion of 19.69%. This consistent top-line momentum—with seven consecutive quarters of positive revenue growth—demonstrates the company's strong market position and ability to win new business in the competitive education services sector. Operating profit before depreciation, interest, and tax (excluding other income) also reached a quarterly high of ₹92.71 crores, up from ₹87.52 crores in Q2 FY25.

However, beneath this revenue success lies a more troubling narrative. The company's operating margin excluding other income contracted sharply to 19.49% in Q2 FY26 from 22.02% in the year-ago quarter—a compression of 253 basis points. This margin erosion accelerated sequentially as well, with the metric declining from 20.03% in Q1 FY26. The culprit appears to be rising employee costs, which climbed to ₹208.79 crores in Q2 FY26 from ₹197.85 crores in Q2 FY25, representing 43.89% of revenue compared to 49.78% previously. Whilst the absolute employee cost ratio improved, the pace of revenue growth hasn't been sufficient to offset overall cost pressures.

The most concerning aspect of the quarter was the sharp decline in net profit, which fell 17.67% year-on-year to ₹46.96 crores despite the strong revenue performance. Sequentially, profits declined 4.75% from ₹49.30 crores in Q1 FY26. This profit deterioration reflects not only margin compression but also a significant increase in the tax rate to 32.24% in Q2 FY26 from 23.49% in Q2 FY25. Interest costs also surged to ₹7.31 crores—the highest quarterly figure in recent history—up from ₹7.12 crores in the year-ago quarter, suggesting increased debt servicing requirements or higher borrowing costs.

On a half-yearly basis for H1 FY26 (April-September 2025), the company reported net sales of ₹927.07 crores, up from ₹804.68 crores in H1 FY25, representing growth of 15.21%. However, net profit for the same period stood at ₹96.26 crores, down 18.17% from ₹117.06 crores in H1 FY25. The PAT margin for H1 FY26 contracted to 10.38% from 14.55% in the corresponding period last year, highlighting the sustained nature of the profitability challenges rather than a one-quarter aberration.

Capital Efficiency: Strong ROE Despite Recent Headwinds

Despite the recent profit decline, NIIT Learning continues to demonstrate robust capital efficiency metrics that distinguish it from many peers in the education services sector. The company's average return on equity (ROE) stands at an impressive 20.84%, whilst the latest half-yearly ROE of 19.49% remains well above industry benchmarks. This strong ROE indicates that management has historically been effective at generating shareholder returns relative to the equity capital employed, even as near-term profitability faces pressure.

The company's return on capital employed (ROCE) tells a similar story of fundamental strength tempered by recent challenges. The average ROCE of 61.60% is exceptional by any standard, reflecting highly efficient deployment of capital and strong underlying business economics. However, the latest half-yearly ROCE of 50.07% represents the lowest level in recent periods, dropping from 15.41% in the previous measurement—a concerning trend that investors must monitor closely. This decline in ROCE mirrors the margin compression visible in the quarterly results and suggests that incremental capital deployed is generating lower returns than historical averages.

The company's working capital management shows mixed signals. The debtors turnover ratio for H1 FY26 fell to 0.53 times—the lowest in recent periods—suggesting that the company is taking longer to collect receivables from customers. This deterioration in working capital efficiency could indicate competitive pressures forcing more lenient payment terms or challenges in collections. However, cash flow from operations remains healthy at ₹247.00 crores for FY25, demonstrating that the company continues to convert profits into cash effectively despite the working capital headwinds.

Margin Dynamics: The Compression Challenge

The sustained compression in NIIT Learning's margins represents the most critical challenge facing the company and demands detailed examination. Operating margins excluding other income have declined from 24.34% in Q1 FY24 to 19.49% in Q2 FY26—a cumulative erosion of nearly 500 basis points over six quarters. This isn't a temporary blip but a persistent trend that reflects fundamental shifts in the company's cost structure or competitive environment.

Several factors appear to be driving this margin pressure. Employee costs, whilst declining as a percentage of revenue from 49.78% in Q2 FY25 to 43.89% in Q2 FY26, remain elevated in absolute terms at ₹208.79 crores. The education services sector is inherently people-intensive, and NIIT Learning's ability to scale without proportionate increases in headcount will be crucial for margin recovery. Depreciation charges have also risen steadily, reaching ₹18.39 crores in Q2 FY26 from ₹15.26 crores in Q2 FY25, reflecting ongoing capital investments in infrastructure and technology platforms.

The tax rate surge represents another significant headwind. In Q2 FY26, NIIT Learning paid taxes at an effective rate of 32.24%, substantially higher than the 23.49% rate in Q2 FY25. This 875-basis-point increase in the tax rate alone reduced net profit by approximately ₹6.50 crores compared to what it would have been at the previous year's tax rate. Understanding whether this higher tax rate reflects a permanent shift or temporary factors will be crucial for projecting future profitability.

Industry Leadership: How NIIT Learning Compares to Peers

NIIT Learning Systems occupies a distinctive position in India's education services landscape as the second-largest company by market capitalisation in the "Other Consumer Services" sector with a market cap of ₹4,183.40 crores. The company's valuation and financial metrics reveal both relative strengths and areas where it lags behind select peers, providing important context for assessing its investment appeal.

NIIT Learning's valuation appears reasonable relative to peers, with a price-to-earnings ratio of 20.13 times trailing twelve-month earnings—significantly lower than Urban Company's 89.29 times and a fraction of the astronomical multiples commanded by some smaller peers. The company's price-to-book ratio of 3.64 times reflects a moderate premium to book value, considerably lower than MPS Ltd's 8.08 times but higher than Urban Company's 0.95 times. This valuation suggests the market recognises NIIT Learning's quality franchise and profitability, but isn't pricing in excessive growth expectations.

The company's return on equity of 20.84% stands out as a key strength, ranking second among peers behind only MPS Ltd's 24.14%. This ROE substantially exceeds Urban Company's 7.98% and the negligible returns generated by smaller players like Veranda Learning and Lucent Industries. NIIT Learning's ability to consistently generate returns above 20% on shareholder equity demonstrates superior capital efficiency and business quality compared to most competitors. However, the company's dividend yield of 0.93% lags behind MPS Ltd's more generous 3.67%, suggesting that NIIT Learning retains more earnings for reinvestment rather than returning cash to shareholders.

Valuation Analysis: Attractive Entry Point or Value Trap?

NIIT Learning's current valuation presents a complex picture for investors attempting to assess whether the stock offers genuine value or represents a trap. Trading at ₹305.10 with a market capitalisation of ₹4,183.40 crores, the stock has declined 32.41% over the past year and sits 41.32% below its 52-week high of ₹519.95. This significant correction has compressed valuation multiples to levels that appear attractive on the surface but must be evaluated against deteriorating fundamentals.

The stock's price-to-earnings ratio of 20.13 times trailing earnings sits at a 28% discount to the industry average P/E of 28 times, suggesting the market is pricing in concerns about the company's growth trajectory and profitability challenges. The price-to-book ratio of 3.64 times, whilst elevated in absolute terms, appears reasonable given the company's ROE of 19.49% (latest) and historical average of 20.84%. A simple Gordon Growth Model calculation suggests that at current levels, the market is pricing in modest single-digit earnings growth—a far cry from the double-digit revenue expansion the company continues to deliver.

The company's enterprise value multiples provide additional perspective. With an EV/EBITDA of 10.65 times and EV/EBIT of 13.23 times, NIIT Learning trades at relatively modest multiples for a company with its market position and growth profile. The EV/Sales ratio of 2.13 times reflects reasonable expectations for a services business with operating margins around 20%. However, these multiples must be viewed in the context of margin compression—if margins continue to deteriorate, the apparent valuation attractiveness could prove illusory.

The stock's valuation grade has oscillated between "Attractive" and "Very Attractive" over the past year, currently sitting at "Attractive" as of August 2025. This assessment reflects the tension between reasonable valuation multiples and deteriorating near-term fundamentals. The dividend yield of 0.93%, based on a ₹3 per share annual dividend, provides minimal income support for investors, with the company maintaining a conservative payout ratio of 33.33% to retain capital for growth investments.

Shareholding: Institutional Confidence Waning

The shareholding pattern of NIIT Learning reveals subtle but significant shifts in investor sentiment that merit close attention. Promoter holding has declined marginally but consistently over recent quarters, falling from 34.52% in September 2024 to 34.21% in September 2025—a cumulative reduction of 31 basis points. Whilst this decline is modest in absolute terms, the consistent quarterly reduction pattern (15 basis points in Q2 FY26 alone) suggests ongoing promoter divestment, albeit at a measured pace.

Foreign institutional investors (FIIs) have similarly reduced their stake, declining from 17.66% in September 2024 to 17.43% in September 2025. This 23-basis-point reduction, including a 5-basis-point decline in Q2 FY26, indicates that sophisticated foreign investors have been trimming positions, likely in response to the deteriorating profit trajectory and margin compression. The fact that 126 FII accounts hold positions in the stock suggests broad-based institutional interest, but the consistent selling pressure raises questions about conviction levels.

The most positive development in the shareholding pattern is the increase in mutual fund holdings, which jumped to 18.47% in September 2025 from 14.35% in September 2024—an increase of 412 basis points. Notably, mutual funds added 126 basis points to their holdings in Q2 FY26 alone, suggesting that at least some domestic institutional investors view the recent price correction as creating value. With six mutual fund schemes holding positions, the increase reflects genuine institutional accumulation rather than a single fund's outsized bet.

Non-institutional holdings have declined sharply from 29.08% in September 2024 to 24.61% in September 2025, with a particularly steep 139-basis-point reduction in Q2 FY26. This exodus of retail and high-net-worth investors aligns with the stock's poor price performance and reflects waning confidence among individual investors. The silver lining is that institutional ownership (combining FII, mutual funds, insurance, and other DII) now stands at 41.18%, providing a stable ownership base that typically brings longer-term investment horizons and reduced volatility.

Stock Performance: Deep in the Red

NIIT Learning's stock price performance over the past year has been nothing short of disastrous, with the shares declining 32.41% whilst the Sensex gained 3.78%—resulting in a negative alpha of 36.19 percentage points. The underperformance has been broad-based across all time horizons, with the stock posting negative returns of 4.89% over one day, 6.85% over one week, 8.73% over one month, and 7.28% over three months. The year-to-date decline of 31.97% contrasts sharply with the Sensex's 6.76% gain, highlighting the stock-specific nature of the sell-off.

The technical picture reinforces the bearish fundamental narrative. NIIT Learning's stock trades below all key moving averages—the 5-day MA of ₹324.22, 20-day MA of ₹327.61, 50-day MA of ₹329.88, 100-day MA of ₹332.60, and 200-day MA of ₹369.30. This alignment of moving averages in descending order represents a classic bearish configuration, suggesting continued downward momentum unless fundamentals improve dramatically. The stock's current price of ₹305.10 sits precariously close to its 52-week low of ₹304.10, with minimal technical support visible until much lower levels.

The stock's beta of 1.35 indicates higher volatility than the broader market, with an annualised volatility of 32.50% compared to the Sensex's 12.45%. This elevated volatility, combined with negative returns, places NIIT Learning in the "high risk, low return" quadrant—the worst possible combination for investors. The risk-adjusted return of -1.00 for NIIT Learning contrasts sharply with the Sensex's positive risk-adjusted return of 0.30, highlighting that investors have been penalised rather than rewarded for taking on the additional volatility risk.

Interestingly, NIIT Learning has outperformed its immediate sector peers, with the "Other Consumer Services" sector declining 42.35% over the past year—worse than NIIT Learning's 32.41% decline. This relative outperformance of 9.94 percentage points provides little consolation to shareholders but suggests that sector-wide headwinds may be exacerbating company-specific challenges. The technical trend classification of "Mildly Bearish" as of November 3, 2025 (changed from "Bearish") offers a glimmer of hope that the downtrend may be losing momentum, though this remains highly tentative.

Investment Thesis: Quality Company Facing Execution Challenges

NIIT Learning Systems presents investors with a classic quality-versus-momentum dilemma. On one hand, the company possesses several enduring competitive advantages: a strong market position as the second-largest player in its sector, exceptional historical return on capital employed averaging 61.60%, robust return on equity of 20.84%, zero promoter pledging, and a debt-free balance sheet with net cash position. The company's 5-year sales CAGR of 8.32% demonstrates consistent growth, whilst institutional ownership of 41.18% provides a stable shareholder base.

However, these quality attributes are being overshadowed by deteriorating near-term fundamentals. The company's financial trend is classified as "Negative," with net profit declining 17.67% year-on-year in Q2 FY26 despite strong revenue growth. Operating margins have compressed by 253 basis points year-on-year, whilst the latest half-yearly ROCE of 15.41% represents the lowest level in recent periods. Interest costs have surged to quarterly highs, the debt-to-equity ratio has risen to 0.60 times, and the debtors turnover ratio has deteriorated to 0.53 times—all pointing to execution challenges.

The technical picture compounds these fundamental concerns, with the stock in a "Mildly Bearish" trend and trading below all major moving averages. The 32.41% decline over the past year, combined with negative alpha of 36.19 percentage points versus the Sensex, reflects sustained selling pressure from both institutional and retail investors. The stock's high beta of 1.35 and annualised volatility of 32.50% mean that any further negative news could trigger sharp downside moves.

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