BoA ML: EduComp: Buy Target Rs 850

Educomp recently released its Annual report for the year-end March 2010,
the first audited report post appointment of Haribhakti & Co as joint
auditors. Key highlights:
􀂄 CFO in core business improves
Cash flow from operations of stand-alone financials increased by 3x during FY10,
reflecting the benefit from a shift in business model in Smart Class, leading to
accelerated revenue recognition. Stand-alone accounts reflect financials of core
operations, i.e., Smart Class & Government (ICT) business, and likely indicate the
actual impact of the shift in business model in Smart Class.
Significant capex in K-12; profit contribution to double
Capital expenditure during the year increased by 12% yoy to Rs7bn. Nearly 70%
of capital expenditure was deployed in K-12 school business, up from 50% last
year. However, K-12 contributed 9% to operating profit during FY10. We expect
contribution from K-12 to double over the next 2-3 years.
Net debt including corporate guarantee down yoy
FY10 balance sheet improved significantly, with net debt-to-equity reducing to
0.2x from 1.6x last year. Including corporate guarantee provided for third-party
securitization loans to banks, net debt/equity stood at 0.6x. Cash & cash
equivalents stood at Rs7.8bn during FY10
33% earnings CAGR; Retain Buy
We retain our Buy given a strong earnings CAGR of 33% over FY10-12E and our
view that PAT guidance is conservative and likely to exceed. Valuations at 16x
FY11E and 13x FY12 are attractive.