Ladies and gentlemen, good day and welcome to NIIT Learning Systems Limited Q2 FY2026 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the call, please signal an operator by pressing star then zero on your touchstone phone. I now hand the conference over to Mr. Vijay Thadani, Vice Chairman and Managing Director. Thank you, and over to you, sir.
Thank you. Good afternoon, all of you. For everyone who's joining the call. Thank you for your interest in NIIT Learning Systems Limited and for joining the call today. The agenda today is to provide an update on the results of Quarter Two FY2026. Which were announced yesterday, but because of being a public holiday, could not be shared. We could not do this call yesterday. We also want to provide you an update on the inorganic activity which was completed during the quarter. That, of course, was shared earlier, but this will be a reiteration of that. As a starter, I just want to mention that this quarter's results is a significant validation of our AI-first strategy, with the recognition by Fosway, the leading research firm, of our pole position in AI for learning. And our AI-enabled revenues are now contributing almost 10% of our business. This quarter.
We would like to share that with you as well as the outlook for this business. As usual, I have the whole team with me as we attend to this call. Mr. Sapnesh Lalla, our CEO, will lead the call. Sanjay Mall, our CFO. Kapil Saurabh, our M&A and investor relations. Mr. Jaswindra Chandra, who looks after finance of NIIT Learning Systems global operations. Many of our colleagues are joining this call and will be participating in answering your questions. With this, I now hand you over to Sapnesh, who will take us through the initial brief, and then we'll open up for questions.
Thank you, Vijay, and good afternoon to all of you, and thanks for joining this call. In our prepared comments, I will review the performance and also share expectations on the path ahead. First, let me set the context. The global economic environment continues to remain volatile and uncertain, driving longer decision cycles and stakeholder changes across sectors. We're starting to see marginal pickup in consumption, although our clients continue to remain focused on cost discipline and continued scrutiny of discretionary spending. That said, the situation remains dynamic, and we continue to adapt to the volatility in the environment. AI is continuing its rapid march to becoming mainstream, with significant investments by early movers, including several of our clients across different segments. Despite this challenging backdrop, the business delivered a strong operating performance. Our revenue grew 20% year-on-year and 5% quarter-on-quarter.
In constant currency terms, the revenue was up 15% year-on-year and 3% quarter-on-quarter. As shared earlier, as well as by Vijay. We completed the acquisition of MST Group in Germany in July. Excluding contributions from the MST Group, the revenue was up 17% on a year-on-year basis and 3% quarter-on-quarter. Please note that our fiscal Quarter Two is a vacation quarter in a lot of Europe, more specifically in Germany. Overall, the revenue came in at the upper end of our guidance. This performance was driven by ongoing customer additions and ramp-ups, once again underscoring the strength of our go-to-market engine and the value that we bring to our clients, as well as the trust and faith our clients have in our delivery and execution for their critical needs. We continued to see strong customer traction, securing three new MPS logos. Further, we renewed.
Three existing contracts and expanded the scope of one large client. Maintaining our 100% renewal record. As we have guided earlier, the addition of MST added seven marquee clients in Germany, taking our MPS clientele for the first time past the 100 mark to 104. Our ability to expand share of wallet with existing clients remains a key growth driver, supported by deepening relationships and demonstrated delivery excellence. While spending from existing clients saw marginal improvement, the recovery remains gradual, and overall spending remains meaningfully below slowdown levels. We remain cautiously optimistic on the recovery as we continue to create new value for our clients. Notably, the business continues to outperform peers, demonstrating resilience to industry-leading growth and profitability. Please note that, as guided earlier, we successfully completed the North American real estate contract on June 30th. We have also finished the teach-out and transition this quarter.
As shared earlier, we have made significant progress in building our AI capability. We now have a pole position, as acknowledged by our clients, as well as industry analysts, as Vijay pointed out earlier. NIIT has always been at the cutting edge of technology in learning. Our AI-first strategy in learning has evolved into a considerable point of differentiation for us. We have gone live with a number of enterprise deployments of our AI solutions. Notably, total AI-enabled revenue grew to about 10% of the business this quarter. We expect this percentage to grow rapidly as we look ahead into the next several quarters. Coming to our financial results in Q2. Revenue for the quarter was INR 4,757 million. This was up 20% year-on-year and 5% QOQ. In constant currency terms, revenue was up 15% and 3% quarter-on-quarter.
EBITDA for the quarter was INR 966 million, was up 2% quarter-on-quarter, with EBITDA margin of 20.3%. As guided by us in the past. Business highlights. Let me touch on some of the business highlights. Like I pointed out earlier, we added three new MPS contracts. Three renewals. One expansion. As mentioned earlier, added seven new MPS clients by way of MST Group becoming part of NIIT. The revenue visibility now stands at $409 million versus $388 million at the end of last quarter and $368 million at the end of same quarter last year. Back to a little more color on the financials. Depreciation and amortization was at INR 184 million versus INR 181 million last quarter. This includes a notional amortization charge of INR 32 million related to St. Charles consolidation and a new charge of INR 21 million due to the MST Group acquisition. Net other income.
Was negative $89 million. As compared to negative $40 million last quarter and negative $38 million last year, same quarter. I'll invite now Sanjay to walk us through. Provide more color on other income.
Thanks, Sapnesh. Net other expense, in a way, was contributed by lower treasury income at $74 million this quarter, as it is $125 million the previous quarter and $117 million in the same quarter last year. We had strategy growth and acquisition expenses, which were about $120 million this quarter, as compared to $112 million previous quarter. The major scheme-related expenses are at $2 million, which were $5 million in the previous quarter. Other income, which is negative $41 million. The treasury income includes the impact of MDM on fixed income investments due to interest rate volatility. During the quarter, the tax came at $223 million. The tax was higher, marginally higher, due to transaction and notional consolidation charges that are not tax deductible, and the withholding tax on dividend from a foreign subsidiary during the quarter, which we declared for the shareholders in this quarter.
Thanks, Sanjay. Given some of the non-operating, transaction-related transitory expenses, as well as mark-to-market charges that Sanjay explained, our PAT was at INR 470 million, and the EPS was at INR 3.43. Our balance sheet and cash flows continue to remain strong. DSO stood at 66 days. Cash and cash equivalents were at INR 8,079 million. The CapEx for the quarter was INR 99 million, as we continue to invest in GenAI. Operating cash flow was INR 777 million, with free cash flow at INR 677 million. The net cash position was at INR 5,917 million. I wanted to spend a minute on our guidance before I get into providing a view on our strategy and overall market update. We continue to see a robust contract pipeline, and we are continuing to execute and convert that pipeline into contracts, as you noticed for the previous quarter.
We are also in the process of ramping up new customers. For Q3, our constant currency growth is expected to be between 2%-3% quarter-on-quarter. For the full year, we expect constant currency growth to be around 12.5%-13% year-on-year, and our margins are expected to be in the 20%-21% range for the full year, as well as for Q3. For the full year, we have retained our guidance as we provided previous quarter. Overall, like I have said earlier, market volatility continues to heighten. The emphasis on cost optimization prompting increased client engagement on large-scale cost takeout and transformation initiatives, although I would point out that decision cycles for these initiatives tend to be long. AI and its profound impact on practice of learning and development is real and is starting to become visible, as you noticed from our numbers.
Early adopters are starting to take advantage of AI with our assistance. We think that this has potential to become a multi-year growth opportunity for NIIT. We believe NLSL is well-positioned to capture a disproportionate share of these opportunities underpinned by continued investments in AI, consulting and advisory services, as well as sales and marketing. A strong brand as a trusted and reliable market leader. A deal pipeline, as mentioned earlier, continues to be robust with active opportunities across large deals across technology, automotive, life sciences, and DFSI sectors. However, we would like to point out that due to the significant market uncertainty, the decision-making cycles are starting to stretch beyond what we would consider today. We continue to make disproportionate investments in new capabilities and go-to-market strength. We saw that demonstrated by our investment in acquiring MST to penetrate the DACH region.
As well as the German market in a more significant way. We will continue to make such investments to improve the capability and the value that we are able to bring to our clients. Generative AI is becoming increasingly central in our client discussions, though broader adoption at enterprise scale for L&D remains cautious. Nonetheless, we are rapidly expanding our use of AI across multiple workstreams. Where deployed, we are becoming more ambitious in delivering measurable learning outcomes for our clients, while also realizing notable efficiency gains. A minute on reminding everyone on MST becoming part of NIIT. We announced on July 9th, we completed the acquisition of MST Group based out of Munich in Germany through NIIT Ireland. The transaction aligns with our strategy to invest in new capabilities, geographies, and verticals. MST strengthens our presence in the DACH region and brings more heft to the industrial vertical that.
We serve. This combination unites MST's local agility and sector depth in industrials with NIIT MTS's global scale and AI-enabled solutions, positioning us as a partner of choice for enterprise learning transformation. With that, I'll hand the conversation back to Vijay. We could open it up for questions.
I think we can open it up for Q&A now.
Sure. Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask questions may press Star and 1 on their touchstone telephone. If you wish to remove yourself from the question queue, you may press Star and 2. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from Rahul Jain from Dolat Capital. Please go ahead.
Hello. Hope my line is okay.
The little muffle is on.
Your voice is a little muffled.
Yeah. Is this any better?
Yeah. It's much better.
Yeah. Sorry for that. So yeah, I have a few questions. Firstly. How are we planning to account the MST revenue? If I remember the number that we shared at that time in the filing was EUR 17 million, and there was an adjusted-to-expense revenue of EUR 10.6 million. So what is the run rate that we would account for? And what is the number of days' contribution from MST in this particular quarter?
From an accounting perspective, we would continue to book their net revenue and consolidate net revenue into our accounts. Like I pointed out, this was a truncated quarter and a quarter with a lot of vacation in most of Germany. The revenue that came in, which contributed to about 2.5% in terms of growth, was not what you would consider run rate revenue. Their run rate revenue would start from this coming quarter.
Sure. There is one large account which we were expecting to come to rest. Is that finally accounted for in this quarter? Is there further more left which could go down in Q3?
No. Like I pointed out, we have completed the transition and teach-out of the North American real estate contract. I'm guessing that's what you're referencing.
Yes. Yes. Okay. To your commentary on expecting 12.5%-13% growth is what I could hear from your papers and Mark. Just to understand that, what we have already seen in the past, our run rate in terms of addition has been pretty strong. Is there an element of conservatism already input given that we have seen 10%-20% sometime for some reason or the other, or there could be risk to that level given the kind of macro we are in?
You were breaking up, but what I took away from your question was whether the projection or the guidance that we provided is conservative or there may be an element of risk. I would say what we provided is what we can see. It is inclusive of organic growth that we guided for our 10-plus, as well as the 2.5%-3% that MST is likely to add to our overall growth for the year. That said, there is a risk in the market, and we are not immune to that risk, but we feel that we have the potential to meet the guidance.
Understood. Just last bit from my side. You have shared this additional input that AI-enabled revenue grew to about 10% in Q2. Any color, if you could share in terms of what—I mean, what is the precise nature of it? Is it, when we include this, are we also counting where it has used from a delivery perspective, or the final outcome of the output that we have given is AI-powered? How are we defining this and what opportunity do we see here? Thank you.
This is the first time we are providing this metric, and over time, we will provide more color. At the outset, what I would want to say is the AI-enabled revenue is inclusive of use of our AI Studio for creating works or work products that our customers are likely to consume. Those work products, it's possible, may have AI attached to those products and therefore would have live AI interactions as they are consuming those products, as well as those products could have been built using our AI Studio. It's a combination of both. As we start to measure and provide more qualitatively this revenue, we will start to provide a little more color.
What we are really enthused about is the fact that about 10% of our business is now AI-enabled, and we are starting to see significant growth opportunity in that percentage increase.
Yeah. Thanks for that color, Sapnesh. Just to, if I could. Like you start on this. So the both aspects of it, one is you said using your AI Studio. So that. In your opinion. Enhancing that growth, or is it more about the productivity side of it? If yes, then what is the. Value that we are driving there? And secondly, when it is more. AI live consumption, even at the product level. I think the experience of systems getting enhanced significantly. Do you think by doing that, you are opening up a larger opportunity and also competitive edge? Any color on that would be great.
Sure. Personally, and I've mentioned this in the past, we don't think efficiency will add a huge amount of value to our clients. I think what will add a lot of value in terms of use of AI is the effectiveness of training that we build for our clients. That's the majority of what we do. Your second point about are we embedding or attaching AI interactions, which the clients could continue to use as they are consuming the content? Yes. Part of that 10% is that, and we expect that that 10%, or that part, will grow faster and create a significant line of business for us.
That may be continuing revenue.
That would be continuing revenue. While a large part of our revenue is delivered on a work-for-hire basis, there is an element of subscription revenue that AI brings, which could be continuing and which could create a significant growth opportunity. Again, we are starting to track this metric. We have been tracking it for a couple of quarters now, and we thought that it would be useful to share it with our analysts and stakeholders. Over time, we will provide more color.
Right. Right. Just a small feedback. It would be great if we could also keep disclosing, whenever we would do, with whatever frequency, the breakup of both sides. One is on the production side versus on the consumption side for the customer. Because I think the latter is what is more powerful differentiation. Of course, both are equally relevant.
Yeah. I would say at least for our clients, both are very valuable.
Okay. Great. Thank you. Thank you so much.
I wanted to feedback. Thank you.
Thank you. Next question is from Deepan Sankara Narayanan from Trustline Holdings. Please go ahead.
Good evening, everyone, and thanks a lot for the opportunity. Firstly, congratulations for strong double-digit growth in revenues year on year. We could see that excluding management consulting and other segments, the revenue growth was strong by 30%. What is the key reason for this 22% Q1-Q decline in consulting and professional services? When do we expect recovery in growth of this segment?
Thanks. Thanks for pointing that out. There is some amount of seasonality across the management consulting and professional services clients. Unlike the large majority of our clients who work off of a calendar year fiscal, some of our clients in management consulting and professional services have mid-year year-ends, and that tends to distort the picture where their consumption increases towards the end of their fiscal years. That is really the reason for quarter-on-quarter. I think a better metric to review performance in management consulting and professional services segment is to look at the year-on-year. I think we are starting to bottom out and starting to look at growth coming back to that segment.
Okay. Okay. Considering now the top-line growth is visible, do we expect higher operating leverage playing out in coming quarters with the margins improvement? This line item of expenses like professional and technical outsourcing, that has gone up substantially high, right? Will it stabilize at these levels, or will it fall from here?
I think you asked two or three questions. Let me see if I can respond to most. I think your first question was, do we expect to gain operating leverage? I would say what I've said in the past, that we continue to see very significant opportunity. The market is underpenetrated. We will continue to over-invest in capability building as well as sales and marketing, rather than pulling out. Operating leverage. I think. What was the second question? Professional and technical services. Yeah. You mentioned that there is an increase in variable cost or professional services expenses. Mostly, that's a measure that we use when the market environment is volatile. Again, this is something that I've mentioned in the past. We do not want to be a firm who increases headcount not knowing with certainty the utilization.
Our expectation is that only when certainty comes back will we add headcount and increase our fixed cost. Till then, we continue to rely on our partner network and rely on variable cost to deliver the business that we are gaining.
Okay. Okay. Considering our strong positioning as number two among specialized learning outsourcing firms worldwide and huge opportunity in terms of outsourcing penetration increasing, what are the challenges even currently we are facing in scaling this revenue growth to higher growth rates? Over even medium to long term?
Yeah. I think we are starting to grow faster, you may have noticed. That acceleration is testament to the value proposition that we bring to our clients. The market environment is very uncertain. However, there are parts of this uncertainty that work in our favor. If you go back into time, you'll notice that whenever there has been high uncertainty or high inflation or high volatility, there has been a remarkable increase in outsourcing. We expect to experience the same over the next several quarters. I think also there is a flip side to that where at times of uncertainty, decision-making slows down. I think we think that we have a positive here. A large number of enterprise clients are focused on improving their cost basis and.
Figuring out how in such a volatile and fast-changing environment they can provide better learning outcomes to their employees and extended enterprise employees. They see NIIT as a viable choice. I think overall, we have a strong growth opportunity. It will take time given the environment, but we think that from a long-term perspective, we have a strong growth opportunity.
Thanks a lot, Sapnesh
We have a pole position, as pointed out by our clients who have renewed their contracts year on year with us, as well as what Fosway Group pointed out, like Vijay mentioned, where our investments in building capability are becoming visible not just to our clients but to analysts as well.
Sure. Thanks a lot, Sapnesh.
Thank you.
Thank you. Next question is from Sankaranarayanan S from IThought PMS. Please go ahead.
Good evening. My first question is regarding the AI-enabled revenue. Is it related to one of our major services, content creation, or are we providing broad-based use cases from this AI-enabled service?
I really can't hear what you are saying. You're coming in very faint. Can you say your question one more time, please?
Am I audible now?
Yeah. Yeah. Much better.
Yeah. I was asking whether this AI-enabled revenue, is this business contributing more from a content creation service perspective?
I would say it's a combination of content creation, embedded AI interactions in the learning materials that we provide, as well as assistance to learning delivery by way of expert coaching that helps our instructor teams deliver better outcomes in classes. It is more broad-based than just content creation.
Got it. From a margin perspective, is it same compared to the overall business, or how is it?
Like I pointed out, we have started tracking this recently, and we'll provide color and more qualitative information over a period of time.
Got it. One more question. Let's say one of our clients is doing massive layoffs, how will that unutilized budget of outsourced L&D spend move forward? Will they take back those budgets to themselves, or do we get those incremental wallet share from them?
Yeah. I think nobody wants to give up their budgets. That's a basic rule in most enterprises. That having been said, I think the layoffs are happening because there is an imbalance of skills in an enterprise. It's not an imbalance of people. It's an imbalance of skills where, given the rapid change of relevant skills that are needed by an enterprise to grow, they find that parts of their employee base do not have those skills, and it will be hard for them to train those employees on the new skills that are needed, and therefore they decide to lay off those employees. However, on the flip side of it, given the rate of change of skills that are needed for growth, the consumption of training is likely to go up.
Like I pointed out, we've seen some improvement with respect to consumption of training over the last couple of quarters. We think that as the rate of change of skills needed to grow changes rapidly, we think that this will improve the opportunity we have.
Understood. Last two questions. One is our professional and technical outsourcing expense. Is it mostly towards getting the new trainers or working professionals to be deployed in a project? This is my first question. Unlike IT companies who are winning deals for the last two, three quarters, broadly, from an L&D outsourcing perspective, the last two, three quarters have been muted in terms of winning deals. Why do you think this is? There is a difference between outsourcing IT or prioritizing IT first and then prioritizing L&D first? What is your thought on this on outsourcing?
Sure. To answer your first question, I think I mentioned it earlier. Given the volatile environment, we do not want to add to our fixed costs and are relying on variable costs to deliver against growth that we have seen. As we see the volatility subside, we will start thinking of adding to our fixed cost. At this point in time, we want to contain our fixed costs and deliver the growth through using variable costs, be it trainers, be it other professionals, and so on and so forth. I think your second—what was your second question? Just say it again.
I was just comparing the deal wins or winning by the top IT companies on a broad industry. Yeah. How is it different from outsourcing their L&D?
Yeah. I think. If there was a pecking order, IT, followed by DPO, followed by training in terms of priority with respect to outsourcing. Part of it is just the amount of spend. The second part of it is, a lot of times, IT is more deeply and directly connected with business as compared to L&D, which is one step removed.
Got it. Do you see any impairment that you will do in Sentinel Subsidy Consulting, considering its muted revenue growth?
At this point in time, we have retained the opportunity to grow that business. For professional services firms, people are their product. And given the rate of change of skills, it's likely that that expense will—that business will grow. We also are starting to see early signs of growth in that business. We will take these decisions at an annual cycle towards the end of the year.
Got it. Thank you, and wish you the best of luck.
Thank you.
Thank you.
Next question is from Ganesh Shetty, who's an individual investor. Please go ahead.
Congratulations for good revenue growth during the quarter. I just want to have some— Hello. Hello?
Yes. Yes. Thanks, Ganesh.
Yeah. I want to just have some more information on MST. That MST Group, we have acquired, and they have some nearshore capabilities. Will it enhance our operational efficiency in delivering to the European countries? From that perspective, there can be some operational efficiency and operational margin improvement. Can you please throw some light on this?
Absolutely. That was one of the reasons for looking at MST as a viable opportunity. The nearshore capability in Eastern Europe would be very helpful for helping our clients, especially as costs become critically important for our clients in Europe. How soon we will realize cost savings is to be determined, but over a period of time, it would be very beneficial.
My second question is regarding our sector exposure. In the recent past, we have emphasized our intention to enter into other sectors like new energy or automobile, which is also catered by MST. Is there any progress in that matter? The capability building from our end, how it is all we are moving ahead?
Thanks. I think that's a great question. As you have seen, we have expanded in the energy sector, in the aerospace and aviation sector, as well as in the mining sector. From this quarter onwards, we've consolidated these into an industrial segment that we are starting to report. In the industrial segment, given MST joining NIIT, we've also included the automotive segment. I think each one of these segments as part of industrials creates a growth opportunity for us. It's a very significant segment of the market. With the capability and the geographical closeness that we have with the acquisition of MST, as well as the skills that we have developed over a period of time, or the capability that we have developed over a period of time addressing energy, mining, and aerospace, keeps us in good stead to grow in the industrial segment.
That's what it would be about, 41%. Overall, industrials are now at about 21% of our total business.
Yeah. My third question is regarding our sectors which we are catering mainly, that is life sciences and technology. Technology and telecom is facing a lot of stresses. Is there any decrease in discretionary spending, or there is another part of it that the skilling may be required in a very enhanced position? These two are things which are contradictory, whether it is helping our business, that is one thing. Second thing regarding life sciences, we had a great run in life sciences after acquiring Legal Solutions. Is there any good improvement in the client mining? Can you please explain this? All that is for the future. Thank you.
Thanks. I think both are great questions. In technology and telecom, we are continuing to see growth, mostly because of adding and ramping up new clients, as well as, as you can imagine. Technology is one area that's changing rapidly, and it's causing change globally. We expect that we will continue to see growth in the technology and telecom segment. You're right in pointing out that we've had a good run with life sciences. Almost eight or nine of the top 15 pharma companies are our clients. As we add to our capabilities, both geographic as well as in the work that we have to offer, we should see continued growth in the life sciences segment.
That's all from me, sir. Thank you very much.
Thank you. Thank you for your kind words.
Thank you. Next question is from Varun Gulati from Dalal & Broacha. Please go ahead.
Yeah. Thank you for the opportunity. Sir, I just wanted to understand that. I just wanted a clarification on the guidance that you've given of 12-13%. Is that organic growth guidance or overall guidance?
Overall.
Okay. So are we again guiding for organic?
Yeah. Yeah. We are retaining our guidance of 10%+ for organic.
Sir, I just wanted to understand that our run rate, I mean, the real growth for our MST Group is going to start in the next quarter. Are we being somewhat conservative with our guidance? Because I would expect that because the European market is strong in Q3, you would see higher growth contribution from that in the third quarter.
It's still early days for us with MST, and what we are able to see is what we are guiding. We think that it has opportunity, and we'll see that opportunity over time. Like I pointed out, we've had one truncated quarter, which was really a holiday quarter in most of Germany and the DACH region. As we have more under our belt, we will probably become more accurate in providing that guidance.
Got it. Got it. Sir, would it be possible to give a broad view on how MST as a business on a standalone basis is growing? How has been the year-on-year growth for MST?
We've had them for less than one quarter. We will keep you posted on their growth opportunities as they spend more time with us.
Got it. Got it. Sir, would you be able to mention going forward how are we planning to grow inside a tough macro environment? What exactly is our strategy going forward? What verticals are we going to focus more on? What services are we more—because I see that delivery service has been showing us good levels of growth. Are we going to continue to see growth continuing in the delivery vertical, or how are our services also helping us to grow?
Yeah. I think. Like we've said. With MST, we have added to our capabilities in the industrial sector. Over time, we should see growth. Right now, with tariffs, there is uncertainty, and that might result in more outsourcing. It is also possible that decision-making cycles will take a little bit longer. Technology and telecom is growing well for us, and we have an opportunity to do more. Life sciences is where we've gained significant traction. Notwithstanding tariff-related uncertainty, we might have growth opportunities there as well. From a sector perspective, I think we have opportunities in a number of the sectors where we do a lot, inclusive of banking, financial services, insurance. In terms of practices, while we've seen significant growth in learning delivery, given what we are doing with AI, we think that the practice growth will also become more widespread.
From a medium term, maybe not in the short term, but in the medium term, do we see any margin benefits which we could get from AI revenue as it starts contributing more to our revenue as a percentage? I mean, maybe not a guidance, but somewhat if you can give a broad direction about how it would turn out to be.
It is possible. However, as a strategy, we have a strategy of disproportionate investments in sales and marketing as well as capability building. Like we mentioned, we think 20% profitability is good for our business, and we would like to stay there. As we gain more leverage, whether it is through products that have higher profitability or operating leverage, we would like to invest that to accelerate growth.
Got it. Thank you. That's it from my side.
Thank you.
Thank you.
Next question is from Vinay Nadkarni from Hathway Investments. Please go ahead.
Yeah. Thank you. Just wanted to know the new three logos that you have had, those are from which sector?
Three logos from which sector? Give me a second. One of them was from technology, or actually two of them were from technology, and one was from industrials.
Okay. Secondly, on this MST revenues, we had last year full revenue was around EUR 10 million. Am I right?
See, that's why I did not want to make specific comments on it. They have become part of NIIT for less than a quarter now, or maybe if we were to count from July, maybe a quarter and a little bit at this time. There is a gross revenue and a net revenue for MST. What we provided was our view based on our review of their documents. We would want to reserve our comments on exactly what the numbers will be with respect to net revenue as we look ahead.
Okay. Fine. They would contribute only in automobile sector, is it, to begin with? I mean, that's what their core competency is.
Their clients tend to be in what we are now calling industrials, which is inclusive of energy and automotive.
Okay. Lastly, you said that.
We are calling it industrials.
Okay. Lastly, you said that the real estate contract of North America, it was completed in first quarter this year. Second quarter does not have any revenue of that, right?
No. What I pointed out was that we had teach-out and transition. And so there was some P&L impact of that contract in Q2 as well. Going forward, you will not see P&L impact from the North American real estate contract.
Okay. Thank you. Thank you. That's all.
Thank you.
Thank you. Next question is from Pooja Doshee, who's an individual investor. Please go ahead.
Hi. Thank you. I do need clarification. My understanding is roughly 50% of your training is mandatory and largely at L1 level. I believe this could be susceptible to AI-driven learning tools-related challenges. Firstly, if that understanding is correct, what strategies are you putting in place to safeguard or differentiate at the L1 training level? That is number one. Number two, around 10% of your training portfolio, I think, is immersive in nature. How do you see the mix changing? Of this, how much is one-time delivery versus recurring program? Yeah, these two things.
Okay. Mentioned that about 50% of our business is L1 training. I don't think that is right. I would say only about 15% of our business could be categorized as L1 training. I would say that the reason why organizations do L1 training is not because they don't know that the effectiveness of L1 training is a lot less than L2 or L3. It is because that's all that they can afford for a set of roles or skills. As AI becomes more mature and as AI starts to show benefits, our clients are likely to graduate most of their training to L2 and L3 training. We think that one of the biggest benefits that our clients will gain by using AI is not to improve the cost of the training that they are able to use, but to use better training for most of their use cases.
Today, if you think about it. If you look at an airline, there is a very significant and steep pyramid on the quality of training. The pilots and the cabin crew get the best training. You could argue that the customer service agents, which there are a lot of, or the ground crew do not get the quality of training that they get, is not as good. That is really because it is not that the airline does not want to offer great training to customer service agents. It is because that is all that they can afford. I think by using AI, our clients will be able to offer way better training than they are able to offer today. I think that is really what we are betting on. We are not betting on the fact that it will cost less to create L1 training.
We think that most organizations will use AI to build better training. At the end of the day, the cost of training is less than 5% of the cost of the employees who spend time to take that training. The return on good training is almost infinite. It is the difference between being able to do something and not being able to do something or making mistakes while you are doing something. I think our clients are well aware of this. It has been unfortunate that they have not been able to spend what they needed to in the past to create great training. I think with AI and our investments in AI, a larger and larger part of their training will be great training. It could be that the percentage of training that they consume will be mostly L2 and L3.
I think that's where we have a great opportunity.
Okay. Understood. Could you give me a mix between L1, L2, and L3 training if it's possible? Rough numbers will also do.
It's very hard to speculate, and I would rather not speculate. I would not be able to provide you rough numbers.
Sure. No worries.
This is not a declared metric. What Sapnesh pointed out, that this is less than L1 is less than 15%.
Okay. Understood. My second question regarding 10% of your training being immersive in nature. How much of that would be one-time delivery versus recurring program? How do you see the mix changing over time?
I would say all of our training is recurring training. Nobody buys training to use it once. Employees and their roles are continuously changing. Our clients are not static organizations, and they do not invest millions of dollars to use training once. The training that we create has continuous use, continuous opportunity. I think as we create better training and more immersive training, the likelihood of people and their employees coming back to that training to benefit from it would only increase.
Okay. Thank you so much. That's all that I have to ask.
Thank you.
Thank you.
I think we are coming close to the time. Maybe one or two more questions.
Sure. We take the next question from Pranaya Jain from Banyan Tree Advisors. Please go ahead.
Thank you for the opportunity, sir. Good evening. Most of the questions are answered. A couple of questions. One is on, sir, what would be our effective tax rate? Apart from what that were there during the quarter? From a sustainable perspective, what should be the tax rate that we should account for?
I'll give my Sanjay Mall to answer that.
Thanks, Sapnesh. We tend to be in the first half at the rate of about 32%. This is primarily because of certain expenses which are non-admissible or deductible, as well as certain intercompany movements, including dividends, which we have declared to the shareholders. Going forward, we should see about 29% or so if there are no one-offs kind of.
Got it. The second question is, due to the acquisition, we have also added debt on our books. Any plans on repaying the debt? Any color on that would be helpful.
We have a brutal mix of debt and equity for our inorganic opportunities. We have been using for our overseas acquisitions a mix of that. Of course, the mix is in the range of 50-60% debt, the balance is the equity contribution. We do not see any repayment as such because I think we will need more and more capital for the growth, especially in the inorganic. This debt is being paid as per. This debt is taken for each transaction, each transaction, and is linked to, and that works out more effective use of capital. Yeah. It is a better return on capital.
Understood. Thank you. That was useful. All the best.
Thank you.
Thank you. Next question is from Deepak.
One more question.
Sure. We'll have the next question as the last question. Next question is from Deepak Kumar from Sundaram Mutual Fund. Please go ahead.
Yeah. Am I audible?
Yes.
Yeah, sir. I just had one question regarding MST Group. I just wanted to understand, do you see a risk to the growth number going forward? Now, why I'm asking you that is, as you are also aware that first, there was this tariff uncertainty, which was causing a ripple across supply chain in the globe, right? Now you have a tussle between the European Union and China with regard to the chips, right? If you see, most of the vehicles in Europe, they carry some amount of chips, which is exported by the Chinese plant of Nexperia, right, which is owned by Wingtech. Recently, there was an ouster of the Chinese CEO at the Netherlands or wherever the headquarters is, the Dutch.
Because of this, a lot of auto companies have pointed out that there could be a slowdown in the production if this tussle goes on for a couple of months, right? As MST Group is also benchmarked to the automobile sector, do you see that risk to the growth number from MST?
Yeah. I think tariffs is a much bigger issue. What you pointed out is a small segment. All market segments that we address are prone to tariffs and prone to macroeconomic environment. Uncertainty is not good. From an overall perspective, like I pointed out earlier, uncertainty results into cost actions. Cost actions often result in outsourcing. From an overall perspective, cost actions is favorable to outsourcing. When there is uncertainty, organizations look at variabilizing their cost basis and look at outsourcing. We think that given that, it is going to be an environment where we'll have an opportunity to grow.
Okay. Will it be possible for you to quantify what is the revenue contribution of the automotive sector of MST Group?
Like I pointed out, we are going to provide color around industrials, and we will continue to report out on industrials, which is built up of automotive, mining, energy sector, and aerospace sectors for us. For the next two or three quarters, we will also provide you with organic as well as consolidated results. You should be able to tell how MST is performing.
Okay. Thank you, sir. All the best.
On a standalone basis. Thank you. Maybe one more question if there is.
Yes, sir. Sure. The next question is from Vinay Nadkarni from Hathway Investments. Please go ahead.
Yeah. Just quick. What is the total acquisition cost that would be written off in this year from the MST acquisition?
The acquisition cost written off?
I couldn't quite understand your question.
Are you saying what is the P&L impact of the acquisition which is showing in this quarter?
It's not in this quarter. For this F26.
For FY26?
Yes.
I think it will be a run rate of $21 million per quarter. We have had a. There is an interest cost. There is. We can send that to you separately. I do not think it is readily available.
Okay. Secondly, the MST acquisition would be a bit accurate in the F2027?
It will be a bit accurate in FY 2026 itself.
Okay. Thank you very much. Thanks a lot.
Thank you. Thanks for all your questions and taking the time to join our call. Vijay, if you have any closing comments. Thank you very much for your very supportive words as well as your questions. As usual, we learn a lot from your questions, and this sets our mind to think and helps us clarify our own strategy. I do know it should be the results season for you to have spent the time to spend with us. We truly appreciate. We continuously look forward to your feedback, your support, your guidance, and your criticism as well. It makes us better each time in each interaction. Look forward to meeting with you in the upcoming investor meets, which are happening, and conferences which are happening.
If you would like to reach out to any one of us, please do contact Kapil Saurabh, and he'll set it up for you. Thank you very much for your participation. Good night. Thank you.
Thank you very much.
It was on. Sure.
On behalf of NIIT Learning Systems Limited, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.