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Educomp Solutions (EDSL IN) Rating: 1
No immediate threat to the market share of Smart Class
What has changed?
• In recent quarters there have been decent rises in the number of classrooms
using Smart Class, which is on course to meet our forecast of being rolled out in
28,144 classrooms by the end of FY11 from 19,144 as at the end of 3Q FY11.
Impact
• The Smart Class product, which accounts for 70% of revenue and 95% of
EBIT, is being marketed aggressively, which is enabling the company to enter
many mid-market new schools in the major cities and many of the second- and
third-tier cities. By the end of FY11, we forecast Smart Class to be used in
6,634 schools, and for 4,500 to be added (taking it to 11,134 schools) by the end
of FY12 and for it to be in another 4,900 schools by the end of FY13.
• Our assumption that the company would be able to increase its classroompenetration rate per school (for Smart Class) in its existing school base has not
materialised. The average number of classrooms/school declined from eight for
2Q FY11 to 7.5 for 3Q FY11. Besides, the average fee per student/month fell to
Rs141 for 3Q FY11, from Rs150 for 2Q FY11.
• As a result of adjusting down our assumptions for the number of
classrooms/school and fees/student per month for Smart Class, we have revised
down our revenue forecasts from Smart Class by 52.8% for FY11, 50.2% for
FY12, and 55.3% for FY13 (see table below). As a result, we have revised
down our net-profit forecasts by 14.1% for FY12 and 25.1% for FY13. Net
profit is now forecast to rise 16.8% for FY12 and 18.2% for FY13.
Valuation
• We believe investors are concerned about the company investing in building
schools and in businesses with a long gestation period. Consequently, over the
past 16 months the share price has fallen by 15% in absolute terms. Due to the
downward revision to our earnings forecasts, we have lowered our six-month
target price to Rs620, from Rs750, now based on a PER of 15.5x our FY12 EPS
forecast (16.7x previously). We maintain our 1 (Buy) rating.
Catalysts and action
• For a significant re-rating, we believe the company needs to improve its
disclosure standards. Market concerns about competition for the Smart Class
product have yet to ease significantly.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Educomp Solutions (EDSL IN) Rating: 1
No immediate threat to the market share of Smart Class
What has changed?
• In recent quarters there have been decent rises in the number of classrooms
using Smart Class, which is on course to meet our forecast of being rolled out in
28,144 classrooms by the end of FY11 from 19,144 as at the end of 3Q FY11.
Impact
• The Smart Class product, which accounts for 70% of revenue and 95% of
EBIT, is being marketed aggressively, which is enabling the company to enter
many mid-market new schools in the major cities and many of the second- and
third-tier cities. By the end of FY11, we forecast Smart Class to be used in
6,634 schools, and for 4,500 to be added (taking it to 11,134 schools) by the end
of FY12 and for it to be in another 4,900 schools by the end of FY13.
• Our assumption that the company would be able to increase its classroompenetration rate per school (for Smart Class) in its existing school base has not
materialised. The average number of classrooms/school declined from eight for
2Q FY11 to 7.5 for 3Q FY11. Besides, the average fee per student/month fell to
Rs141 for 3Q FY11, from Rs150 for 2Q FY11.
• As a result of adjusting down our assumptions for the number of
classrooms/school and fees/student per month for Smart Class, we have revised
down our revenue forecasts from Smart Class by 52.8% for FY11, 50.2% for
FY12, and 55.3% for FY13 (see table below). As a result, we have revised
down our net-profit forecasts by 14.1% for FY12 and 25.1% for FY13. Net
profit is now forecast to rise 16.8% for FY12 and 18.2% for FY13.
Valuation
• We believe investors are concerned about the company investing in building
schools and in businesses with a long gestation period. Consequently, over the
past 16 months the share price has fallen by 15% in absolute terms. Due to the
downward revision to our earnings forecasts, we have lowered our six-month
target price to Rs620, from Rs750, now based on a PER of 15.5x our FY12 EPS
forecast (16.7x previously). We maintain our 1 (Buy) rating.
Catalysts and action
• For a significant re-rating, we believe the company needs to improve its
disclosure standards. Market concerns about competition for the Smart Class
product have yet to ease significantly.
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