निनदीभ्यां स्नातेः कौशले

Operational rule vidhi

ष् is substituted for the स् of स्ना after नि and नदी when the word so formed denotes 'dexterous'.

Word by word (padaccheda)

Left context नि- नदीभ्याम् pañcamī · dvivacanaTarget स्नातेः ṣaṣṭhī · ekavacanaRight context कौशले saptamī · ekavacana

Left context Pañcamī (5th case): "after X", the operation applies to what follows (1.1.67 तस्मादित्युत्तरस्य). Also used for limits and sources.
Target Ṣaṣṭhī (6th case): names what gets replaced, "in place of X" (1.1.49 षष्ठी स्थानेयोगा).
Right context Saptamī (7th case): "when X follows", the operation applies to what precedes (1.1.66 तस्मिन्निति निर्दिष्टे पूर्वस्य). Also a condition or domain ("in the sense of").

Full reading

नि-नदीभ्याम् स्नातेः कौशले

Pāṇini leaves out words that carry over from earlier sūtras. Expand to see the rule as a reader actually understands it.

Commentary

ष् is substituted for the स् of स्ना after नि and नदी when the word so formed denotes 'dexterous'.
Thus निष्णातः कटकरणे । निष्णातो रज्जुवर्त्तने । नद्यां स्नातीति नदीष्णः ॥ This last word is formed by the affix क added to स्ना preceded by the upapada नदी under sutra 3.2.4.

Why do we say when meaning dexterous? Observe निस्नातः, नदीस्नातः (नद्यां स्नातः) ॥

Śrīśa Chandra Vasu, The Ashtadhyayi of Panini (1897), via ashtadhyayi.com.