Visit http://indiaer.blogspot.com/ for complete details Expansion plans to add value
In Q1’11, Educomp Solutions experienced a 17.6% yoy growth in top line to
Rs. 2.28 bn, driven by robust growth across all the segments. However, the
EBITDA margins plunged 13.8 pps (percentage points) to 30.4% in Q1’11
mainly on the back of higher salary cost and accounting for hardware for Smart
Class for which revenues has not been booked. Going forward, we expect the
Company to grow at a CAGR of ~24% over the period FY10-12E on account of
increase in allocation and emphasis by the government on the Education
sector during the Union Budget 2010-2011 which is currently pursuing newer
initiaves in the sector. Besides, our DCF valuation gives a target price of
Rs. 758, which provides an upside of 19.4% over the CMP. Consequently, we
give a Buy rating to the stock.
Strong operational efficiency in SLS and other segments: Educomp’s
robust revenue growth was mainly driven by a 15% yoy growth in School
Learning Solutions (SLS) business comprising of Smart Class and ICT
Solutions. Other segments of the company also contributed towards the
revenue with K-12 and Higher Learning Business registering a growth of 37%
and 32%, respectively. Moreover, the Company in order to reduce costs in the
future have changed the business model for Smart Class from BOOT model to
the Securitization based Edusmart model which leads to transferring of old
schools from current model to new one. Educomp is on a move to upgrade its
education distribution systems by developing quality courseware and
multimedia in regional languages and providing training to teachers in ICT,
which will improve the overall education system.
Expansion plans to drive revenues further: In addition to the aggressive
expansion plans in the Smart Class segment, the Company is also investing a
considerable amount in newer initiaves, in terms of setting up its own K-12 high
schools, and has embarked on expanding its On-line Supplementary business.
Moreover during the quarter, the Company has also entered into a Joint
Venture with Lavasa Corporation, to set up International Residential school in
its Hill City near pune.
Result Highlights
Net Sales
· In Q1’11, Educomp saw a 17.6% yoy revenue growth to Rs. 2.28 bn backed by
growth in all the segments of the Company. The K-12 and Higher Learning
Business registered an individual growth of 37% and 32%, respectively.
EBITDA margin
· EBITDA margin contracted by 13.8 pps yoy to 30.4% in Q1’11 impacted by
higher salary cost and accounting for hardware for Smart Class for which
revenues has not been booked. EBITDA declined by 19.2% yoy to Rs. 692.7
mn.
Net Profit
· The Company’s net profit appreciated 6.6% to Rs. 364.8 mn. The net profit
margin also declined to 16.0% in Q1’11 as compared to 17.7% in Q1’10.
Segment Highlights
· For the quarter, the School Learning segment revenues grew 15% at Rs. 1.59
bn, contributing 70% to the net income.
· The K-12 segment revenues grew 37% at Rs. 305 mn contributing 13% to the
sales.
· The Higher Learning segment’s revenue at Rs. 89.6 mn, contributed 4% to the
total revenues with a growth of 32%.
Key Events
· Educomp Solutions, through its Singapore subsidiary, Ask Learn has signed an
agreement with China Distance Education Holdings (CDEL) to license and
distribute its products in China. The Company has granted CDEL exclusive
rights to license and distribute Educomp`s Smart Class, Edulearn and Wiz
learn products in the people’s Republic of China.
Valuation
The stock is currently trading at forward PE of 18.0x and 15.6x for FY11E and
FY12E. Moreover, using DCF valuation (assuming a WACC of 18.5%, Rf of
7.52%, and terminal growth of 5%), we arrive at a fair value of Rs. 758,
suggesting an upside of 19.4% over the CMP. Consequently, we assign a ‘Buy’
rating to the stock.
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