CMP: Rs. 200.70; Buy at Rs. 198 levels.
Medium to Long Term Target – Rs. 250; STOP LOSS – Rs. 182.16; Market Cap: Rs. 1,927.27 cr; 52 Week High/Low: Rs. 492.50 / Rs. 162.00; Total Shares: 9,60,27,630 shares; Promoters : 4,75,53,645 shares –49.52 %; Total Public holding : 4,84,73,985 shares – 50.47 %; Book Value: Rs. 167.26; Face Value: Rs. 2.00; EPS: Rs. 27.90; Div: 30 % ; P/E: 7.19 times; Ind. P/E: 11.18; EV/EBITDA: 4.86.
Medium to Long Term Target – Rs. 250; STOP LOSS – Rs. 182.16; Market Cap: Rs. 1,927.27 cr; 52 Week High/Low: Rs. 492.50 / Rs. 162.00; Total Shares: 9,60,27,630 shares; Promoters : 4,75,53,645 shares –49.52 %; Total Public holding : 4,84,73,985 shares – 50.47 %; Book Value: Rs. 167.26; Face Value: Rs. 2.00; EPS: Rs. 27.90; Div: 30 % ; P/E: 7.19 times; Ind. P/E: 11.18; EV/EBITDA: 4.86.
Total Debt: 671.37; Enterprise Value: Rs. 2,618.09 cr.
EDUCOMP SOLUTIONS LTD: The Company was founded in 1994 and is based in Gurgaon, India. Educomp Solutions Limited provides education solutions to schools, learners, and educators in India. The company’s products comprise SmartClass - an education content and technology solution; QuEST - Quality Education for Students and Teachers, which provides various services, including professional development programs for educators and students, whole school development programs, parents empowerment programs, mathematical lab kits, and parents empowerment programs; Mathguru - a math-help program; WiZiQ - a Web learning platform, which connects students and teachers worldwide; LearnHub - a social learning network; ETEN - a tele-education network; and MagiKeys - a software application that allows government school students to surf the Web, email, chat, and write documents in their mother tongue. Its products also include Educomp O3 - an one on one learning system; Pave - an alpha phonics and reading program; EduLearn - a learning management system; Wizlearn - an advanced learning platform; Singaporelearning.com - a learning portal for parents and students mainly from Singapore; Aha!Math - a Web-delivered supplemental math curriculum for grades K-5; EasyTech - a Web-delivered K-8 technology literacy curriculum; Aha!Science - a supplemental science curriculum for grades 3-5; and Millennium Learning System - a learning delivery system. In addition, the company operates Leap learning centers; Learning Hour tutoring centers; IndiaCan vocational training centers; EduSchools and higher education institutions under Raffles Millennium International, JRE Group of Institutions, and Millennium Academy of Professional Studies brand names. Further, it provides various services, such as professional development; education infrastructure implementation, teacher training, and content development projects; EduIgnite career guidance program; and TechLiteracy Assessment to measure and report technology literacy. As of 2011, the Educomp Solutions Ltd held portfolio of over 15 direct subsidiaries and approximately 25 indirect subsidiaries in India, Singapore, the United States and Canada. In February 2011, the company acquired majority stake in Gateforum Educational Services Pvt Ltd. EDUCOMP SOLUTION is locally compared with Everonn Education Ltd and with Ichishin Holdings Company Ltd and Riso Kyoiku Co. Ltd globally.
Investment Rationale:
Educomp Solutions has steadily moved up the value chain‐from an Instructional Communication Technologies (ICT) provider to one of the largest school chains in the country. The company has proved its execution skills and is well placed to take advantage of the new opportunities in the education sector. The ICT business gives it access to PPP (Public Private Partnership) projects envisaged for government schools. Smartclass has helped Educomp to develop a differentiated pedagogy (a study of being teacher or process of teaching) for its K‐12 (Kindergarten to Class 12) schools and have proved its execution skills in the K‐12 section. The base for the company’s future expansion into the vocational/ higher education space is this Smart Class. However, the past two quarters have seen a massive detoriation in the profitability of its core segment i.e. Smartclass. This is a key concern from the near to medium term perspective as the other businesses that can drive growth growing forward are still at nascent stages. Educomp’s business is capital intensive due to upfront investments required in the K‐12 segment or BOOT model for smartclass. The capex requirements are set to increase by threefold, particularly for its plans in K‐12 schools (Educomp provides facilities and technology to schools). The school business, as per regulations, cannot be a profit making enterprise So most companies have avoided this regulatory hassles by creating subsidiaries that charge schools for infrastructure and services provided, while the schools themselves operate at breakeven. Many state governments have set up regulatory bodies to regulate fees charged by schools; any increase in fees will require such a body’s prior approval. So, Educomp has a first mover advantage in smartclass and has been able to move quickly to establish itself in schools. Though margins are attractive in smartclass, with no strong barriers to entry in this sector - a competition is expected. However FITCH Rating a rating agency has affirmed its rating on Educomp to stable as they see the affirmative factors like Educomp's first mover advantage, its innovative business offering, market leadership in multimedia education and a diversified presence across all segments of the education sector covering pre schools, K-12 education, multimedia and online learning to higher education/vocational skills. Also Educomp is expected to benefit from the strong renewal rates in smart class business.The contracts in smart class are typically for 5 years and come up for renewal thereafter.
Outlook and Valuation:
Union Budget is very close and I think Educomp Solutions will see a run up as government trends to increase spending on education sector as this sector is important for the core and sustainable development of the country. A growing economy, growing income, increasing urbanization, improving lifestyle and the determination of the young and educated couple to provide better and best quality higher education to their kids will result in higher penetration of ICT market in India. India enjoys good growth in Per capita income where more and more parents tries to provide best of the education to their kids. Further Government's Sarva Shiksha Abhiyan is the area to watch for as government tends to increase emphasis on PPP in education and ICT implementation in schools which would benefit firms like Educomp. Also due to FITCH Rating Educomp may see any private equity infusion or other initiatives such as disinvestment, if used for debt reduction or reduced off balance sheet corporate guarantees debt which leads to reduction in financial leverage to 2x or below its consistent basis. Educomp continued its good show in the SmartClass business with 6,818 classroom additions (up 28% YoY) in Q2FY12. Management has maintained its FY12 guidance of 40,000 ‐ 45,000 classroom additions (12,000 in H1FY12), which is aggressive. They have built in 34,000 additions in FY12, implying 45 % YoY growth in H2FY12. After incurring heavy capex in the past many quarters (and significantly higher than Street expectations), the capex have dipped during Q2FY12, as guided by management and no capex was incurred in higher learning versus the capex of Rs. 105 Cr which incurred in Q1FY12. Further, the K‐12 capex was Rs. 48 Cr versus Rs. 115 Cr in Q1FY12. Management has guided for even lower capex in H2FY12, which is a positive. Educomp’s Q2FY12 PAT of Rs. 12.80 Cr (including MTM forex loss of Rs. 37.40 Cr) was significantly below expectation, on back of higher losses in online and higher learning segments. Though SmartClass performed well during the quarter, management’s FY12 guidance is aggressive, in the broader view. It is expected that it can report 8 % ‐ 13 % below consensus on FY12‐13 EPS estimates and expect the earnings downgrade cycle to continue. While a dip in capex in Q2FY12 is a key positive, sustaining it for a few more quarters is important for any re‐rating of the stock. Educomp stock prices fell substantially after the IT raids on its premises but the company clarified that it was the survey conducted by IT department and was not a raid, however due to this sort of negative news gives a good opportunity to enter & accumulate the stock at lower prices. At the current market price of Rs. 200.70, the stock is trading at a PE of 6.78 x FY12E and 4.98 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 29.60 in FY12E and Rs. 40.30 in FY13E. One can buy EDUCOMP SOLUTION with a target price of Rs. 250/share for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 210.00 from the day of budget.
| KEY FINANCIALS | FY10 | FY11 | FY12E | FY13E |
|---|---|---|---|---|
| REVENUES (Rs. Crs) | 1,039.50 | 1,350.90 | 1,514.00 | 1,917.60 |
| NET PROFIT (Rs. Crs) | 275.90 | 336.60 | 244.40 | 383.70 |
| EPS (Rs.) | 29.30 | 35.10 | 29.60 | 40.30 |
| PE (x) | 6.00 | 5.00 | 5.90 | 4.30 |
| P/BV (x) | 1.00 | 0.80 | 0.70 | 0.06 |
| EV/EBITDA (x) | 4.30 | 4.90 | 4.80 | 3.50 |
| ROE (%) | 27.40 | 17.80 | 12.60 | 15.10 |
| ROCE (%) | 17.60 | 13.90 | 13.10 | 16.70 |
I would buy EDUCOMP SOLUTIONS LTD with a price target of Rs. 250 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 182.16 on every purchase.
