Buy Educomp says UBS

Career Point listing could rerate Educomp
􀂄 Career Point is a tutorial services provider operating in a US$6bn market
Career Point provides tutorial services to high school and post high school students
for various competitive entrance examinations in India. We estimate that this
market represents a US$5.5bn revenue opportunity by 2015, a CAGR of 16% over
2001-2015.
􀂄 Career Point has grown at 30% revenue, 14% profit CAGR over FY07-10
Over FY07-10, Career Point has grown revenue at a 30% CAGR and net profit at a
14% CAGR. Operating margins have fallen from 60.7% in FY07 to 42.5% in
FY10. The company has reported enrolments of 28,626 so far in FY11, which
implies revenue growth of at least 30% in FY11 (based on average fee per student
at Rs30,000 per year—average price is based on the existing fee structure).
􀂄 Proposed PE at listing price is at nearly 50% premium to Educomp
At the proposed IPO band of Rs295-310, Career Point would trade at an FY10 PE
of 30.1x-31.6x FY10, a premium of 41-48% to Educomp’s current price. Given
Educomp’s superior growth rate (over 110% CAGR in revenue and profit over
FY07-10) as well as leadership presence in much larger markets, we believe that
Educomp’s discount to Career Point is unjustified.
􀂄 Valuation: maintain Buy; see opportunity for re-rating
We believe valuations remain relatively inexpensive at 19.3x FY11 and 15.1x
FY12 EPS estimates. We view strong listing gains for Career Point as a potential
near-term catalyst for the stock and maintain our Buy rating with a DCF-based
price target of Rs775.