UBS: Buy EduComp: Target Rs 775

Strong growth potential; reiterate Buy
􀂄 Educomp has leadership in a market with estimated 48% revenue CAGR
Multimedia-based classroom learning aids are a relatively new product category in
India, which we estimate will grow at a 47.5% revenue CAGR over FY10-15.
Educomp’s leadership in this segment through its smartclass brand (60% FY10
revenue) is likely to help the company maintain strong medium-term revenue
growth rates and sustain margins.
􀂄 K-12 schools to provide further growth impetus, in our view
K-12 schools (10% of FY10 revenue) offer another strong opportunity for
Educomp given our estimate of demand for 3,000-4,000 new private schools in
India over the next five years. K-12 will also offer a higher annuity component to
Educomp’s business model and help improve future cash flows given the strong
cash generation likely in steady state schools.
􀂄 Margins and debtor performance in Q2 FY11 likely to shape investor view
The fall in operating margins in the smartclass segment and increase in debtor days
has lowered investor confidence in the smartclass business model. Educomp’s
management expects margins to revive strongly in Q2 FY11, and debtor days to
come down post securitisation of smartclass receivables. We view both of these
aspects as critical delivery points in Q2 FY11.
􀂄 Valuation: maintain Buy; valuations offer upside
Valuation remains relatively inexpensive at 19.3x our FY11 and 15.1x our FY12
EPS estimates. We view a strong performance in Q2 FY11 as a potential catalyst
for the stock and maintain our Buy rating with a DCF-based price target of Rs775.