EDUCOMP SOLUTIONS- Focusing on K-12; Edelweiss

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􀂄 Results marginally below expectations
Educomp’s Q2FY11 PAT, at INR 582 mn (up 2% Y-o-Y and 60% Q-o-Q), was
marginally below our and Street’s estimates. The variance was account of lowerthan-
expected EBITDA margins which was countered by below estimated tax rate.


􀂄 EBITDA margins improve Q-o-Q
Consolidated EBITDA margins improved 700bps Q-o-Q, to 37%; margin
expansion, however, remained below estimates. We believe the improvement can
be attributed to two key factors – (a) benefit from second year revenue
recognition from Smartclass (of INR 420 mn), which has higher EBITDA margins;
and (b) revenues from ~1,000 classrooms (~19% of the total classrooms
implemented in Q2FY11), for which costs had been recognised in Q1FY11, but
revenues were recognised only in the current quarter.

􀂄 Number of school additions decline
The number of classroom additions, of 5,309, was down 21% Q-o-Q, though on a
higher base; in Q1FY11, the company had a carryover from unimplemented
Smartclass from Q4FY10. The management, however, maintained its guidance of
25,000-30,000 classrooms in FY11.

􀂄 Securitisation benefits lower debtor days; capex up in K-12
While the company’s debtor days increased to 249 days as of September 30th; the
management indicated that due to INR 3bn tranche of securitization after the
quarter ending reduced debtors to 149 days (versus 183 days in Q1FY11).
In the current fiscal, capex in the K-12 segment has increased substantially with
additional funding of INR 2.4 bn, of which, INR 1.5 bn has been directly invested
by Educomp. We note that there has not been any increase in Educomp’s stake in
EDSL. On a consolidated level, capital employed in the K-12 segment is now
nearly 56% of the total capital employed.

􀂄 Outlook and valuations: K-12 segment vital; maintain ‘HOLD’
The management maintained its full year topline and bottomline guidance of INR
13.0 bn and INR 3.3 bn, respectively. While the current quarter was marginally
disappointing, we maintain our EPS of INR 34 and INR 43 for FY11E and FY12E,
respectively. The stock has sharply corrected in the past quarter and is trading at
15x FY11E and 12x FY12E EPS. However, we remain concerned on the rising
competitive intensity in the Smartclass segment and execution risks in the capitalintensive
K-12 segment. We maintain ‘HOLD’ on the stock.