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Educomp Solutions Ltd.
Strong Smart class adoption
„Strong Smart Class adoption; Retain Buy
While we cut earnings by 5% for FY11 & FY12 and lower our PO to Rs760 to factor
higher interest costs & cut in Smart Class room adds assumptions for the year
(30500 vs. 31900 earlier), we retain our Buy recommendation given our view that
adoption levels for Smart Class offerings across schools remain strong as reflected
by 3x jump yoy in wins during the quarter. Addition of second outsourcing vendor,
further reduction in debtors & recent success in securing limited recourse funding
should help re rate the stock. Forecast EPS CAGR of 27% (FY11-13e).
In line profits, revenues lower than expected
While 3Q PAT increased 60% yoy and was in line with our estimates, revenues
came in ~10% lower BofAMLe, driven by 8% miss in Smart Class & ~38% miss in
ICT given lack of deal closures in government school business. EBIT margins at
40% were in line with our estimate. Smart Class revs grew by 50% yoy.
Lower avg classroom adds; likely to trend up
While average class rooms signed in Smart Class slipped marginally during the
quarter from 8 to 7.5, it added nearly 950 schools (vs. 355 last year) indicating
strong adoption of its product. Given scope to increase penetration levels with
existing schools, we believe average class room adds will trend up in FY12/13.
3Q : progress on multiple fronts
As highlighted by management earlier, it has added an additional 3rd party vendor
for hardware implementation in Smart Class. It also plans to launch 3D content for
schools, further differentiating its offering & securing leadership position in
content. During the quarter Educomp also set up an advisory board comprising
eminent individuals such as Gurcharan das (Ex P&G CEO) & Dr Naresh Trehan
(founder Medanta Medicity).
Progress on multiple fronts; Buy
While we cut earnings by 5% for FY11 & FY12 and lower our PO to Rs760 to
factor higher interest costs & cut in Smart Class rooms adds for the year (30500
vs. 31900 earlier), we retain our Buy recommendation given our view that
adoption levels across schools remain strong as reflected by 3x jump yoy in
school wins during the quarter.
Success in securing limited recourse funding for Smart Class, reduction in
debtors & addition of second outsourcing vendor should help re rate the stock.
Forecast EPS CAGR of 27% (FY11-13e).
Strong adoption levels in Smart Class….
During the quarter Educomp added 7085 Smart Class rooms vs our expectation
of 7800. While number of Smart Class rooms added fell short of our expectation,
number of schools signed at 949 jumped 3x as compared to last year, indicating
strong acceptance of the product across the country. We have now factored
30500 Smart Class room additions for the year vs. 31900 earlier. Management
retained its guidance to add 25000-30000 class rooms for the full year.
….expect avg class adds to trend up
Though avg class rooms implemented at 7.5 was lower than 8 in previous
quarters we note that scope to increase penetration levels with in each school
remains and we expect average class room adds to trend up next year.
Larger investor concerns getting addressed
Over last two quarters Educomp reported significant progress in Smart Class
operations. Key improvements include:
1) It roped in additional 3rd party vendor for hardware implementation in
Smart Class. The new vendor would be operational from 1st April 2011.
Management highlighted that it intends to create an eco system of
vendors where multiple vendors would be roped in over next few years.
2) Deals with banks for limited recourse funding for securitization in Smart
Class. It now provides for 20% corporate guarantee as against 100%
earlier.
3) DSO days further improved during the quarter. DSO days improved from
149 days in 2Q FY11 to 141 currently
ICT .. deals wins yet to materalise
Management remains cautious on ICT business. While it has participated in
20000 school tenders, deal closures are yet to happen. ICT revenues came in
much lower than anticipated during 3Q and consequently we have cut our
revenue assumptions for ICT.
Inline profits, revenues lower than expected
While 3Q PAT was line with our estimates, revenues came in ~10% lower than
expected, driven by 8% miss in Smart Class & ~38% miss in ICT given lack of
deal closures in government school business. EBIT margins at 40% were in line
with our estimate.
Other key highlights
„ During the quarter Educomp also set up an advisory board comprising
eminent individuals such as Gurcharan das (Ex P&G CEO), Ms Indu Shahani
(Sheriff Mumbai), Madhur Bhandarkar (Film director), Dr Naresh Trehan
(founder Medanta) Rajita Kulkarni (Banker) to name a few.
Price objective basis & risk
Educomp Solu (EUSOF)
Our PO of Rs760 is based on a 2-year PEG of 0.8x and implies a target multiple
of 18x FY12e. Our PO reflects potential de-rating given that the Smart Class
revenue stream is now likely to be volatile. We retain our Buy given the strong
27% CAGR in earnings FY11-13E, and the turnaround in FCF on shift to new
business model. Besides Educomp remains the only listed education service
provider with offerings in K-12 and is a emerging player in vocational/
supplemental education.
Risks to our valuation are higher losses in new initiatives, higher-than-anticipated
cut in Smart Class pricing, acquisition-related risks and managing multiple growth
initiatives.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Educomp Solutions Ltd.
Strong Smart class adoption
„Strong Smart Class adoption; Retain Buy
While we cut earnings by 5% for FY11 & FY12 and lower our PO to Rs760 to factor
higher interest costs & cut in Smart Class room adds assumptions for the year
(30500 vs. 31900 earlier), we retain our Buy recommendation given our view that
adoption levels for Smart Class offerings across schools remain strong as reflected
by 3x jump yoy in wins during the quarter. Addition of second outsourcing vendor,
further reduction in debtors & recent success in securing limited recourse funding
should help re rate the stock. Forecast EPS CAGR of 27% (FY11-13e).
In line profits, revenues lower than expected
While 3Q PAT increased 60% yoy and was in line with our estimates, revenues
came in ~10% lower BofAMLe, driven by 8% miss in Smart Class & ~38% miss in
ICT given lack of deal closures in government school business. EBIT margins at
40% were in line with our estimate. Smart Class revs grew by 50% yoy.
Lower avg classroom adds; likely to trend up
While average class rooms signed in Smart Class slipped marginally during the
quarter from 8 to 7.5, it added nearly 950 schools (vs. 355 last year) indicating
strong adoption of its product. Given scope to increase penetration levels with
existing schools, we believe average class room adds will trend up in FY12/13.
3Q : progress on multiple fronts
As highlighted by management earlier, it has added an additional 3rd party vendor
for hardware implementation in Smart Class. It also plans to launch 3D content for
schools, further differentiating its offering & securing leadership position in
content. During the quarter Educomp also set up an advisory board comprising
eminent individuals such as Gurcharan das (Ex P&G CEO) & Dr Naresh Trehan
(founder Medanta Medicity).
Progress on multiple fronts; Buy
While we cut earnings by 5% for FY11 & FY12 and lower our PO to Rs760 to
factor higher interest costs & cut in Smart Class rooms adds for the year (30500
vs. 31900 earlier), we retain our Buy recommendation given our view that
adoption levels across schools remain strong as reflected by 3x jump yoy in
school wins during the quarter.
Success in securing limited recourse funding for Smart Class, reduction in
debtors & addition of second outsourcing vendor should help re rate the stock.
Forecast EPS CAGR of 27% (FY11-13e).
Strong adoption levels in Smart Class….
During the quarter Educomp added 7085 Smart Class rooms vs our expectation
of 7800. While number of Smart Class rooms added fell short of our expectation,
number of schools signed at 949 jumped 3x as compared to last year, indicating
strong acceptance of the product across the country. We have now factored
30500 Smart Class room additions for the year vs. 31900 earlier. Management
retained its guidance to add 25000-30000 class rooms for the full year.
….expect avg class adds to trend up
Though avg class rooms implemented at 7.5 was lower than 8 in previous
quarters we note that scope to increase penetration levels with in each school
remains and we expect average class room adds to trend up next year.
Larger investor concerns getting addressed
Over last two quarters Educomp reported significant progress in Smart Class
operations. Key improvements include:
1) It roped in additional 3rd party vendor for hardware implementation in
Smart Class. The new vendor would be operational from 1st April 2011.
Management highlighted that it intends to create an eco system of
vendors where multiple vendors would be roped in over next few years.
2) Deals with banks for limited recourse funding for securitization in Smart
Class. It now provides for 20% corporate guarantee as against 100%
earlier.
3) DSO days further improved during the quarter. DSO days improved from
149 days in 2Q FY11 to 141 currently
ICT .. deals wins yet to materalise
Management remains cautious on ICT business. While it has participated in
20000 school tenders, deal closures are yet to happen. ICT revenues came in
much lower than anticipated during 3Q and consequently we have cut our
revenue assumptions for ICT.
Inline profits, revenues lower than expected
While 3Q PAT was line with our estimates, revenues came in ~10% lower than
expected, driven by 8% miss in Smart Class & ~38% miss in ICT given lack of
deal closures in government school business. EBIT margins at 40% were in line
with our estimate.
Other key highlights
„ During the quarter Educomp also set up an advisory board comprising
eminent individuals such as Gurcharan das (Ex P&G CEO), Ms Indu Shahani
(Sheriff Mumbai), Madhur Bhandarkar (Film director), Dr Naresh Trehan
(founder Medanta) Rajita Kulkarni (Banker) to name a few.
Price objective basis & risk
Educomp Solu (EUSOF)
Our PO of Rs760 is based on a 2-year PEG of 0.8x and implies a target multiple
of 18x FY12e. Our PO reflects potential de-rating given that the Smart Class
revenue stream is now likely to be volatile. We retain our Buy given the strong
27% CAGR in earnings FY11-13E, and the turnaround in FCF on shift to new
business model. Besides Educomp remains the only listed education service
provider with offerings in K-12 and is a emerging player in vocational/
supplemental education.
Risks to our valuation are higher losses in new initiatives, higher-than-anticipated
cut in Smart Class pricing, acquisition-related risks and managing multiple growth
initiatives.
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