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Educomp Solutions (EDSL)
OW(V): 3Q revs & profits inline with full-year guidance
3Q revenues and profits inline with full-year guidance
Lower TP to INR625 from INR740 (led by both multiple and
estimate cuts)
Reiterate OW(V) as long-term prospects remain positive and
we expect strong recovery in FY13
3Q consolidated revenues/profits inline with guidance: Educomp reported revenues of
INR3.6bn, up 37% y-o-y, and net profit of INR967m, up 58% y-o-y, and is well in on track to
achieve full-year guidance (revenues of INR13-13.5bn and net profits of INR3.3-3.35bn).
K-12 disclosures improved: Educomp has started providing further granular data on its K-12
division. By end-December 2010, 50 schools were operational, with 30 green-field Educomp
schools, 9 on dry management and 11 Euro-schools. Of the 30 green-field schools, 13 have still not
completed one year of existence and therefore are reporting negative EBITDA. We expect the
number of operational schools to increase to 71 by the end of FY12.
SmartClass reported revenue growth of 52% y-o-y, yielding revenues of INR2.5bn.
However, we assume nearly one-third of reported revenues are deferred revenues. The
company added 7,085 classes across 949 schools in 3Q (7.5 classes per school, lower than our
modelled 8) and is well on track to achieve its guidance of full-year addition of 25,000-30,000
classrooms. In the first 9MFY11, the company has added 19,144 classes and we expect further
addition of nearly 8,000 classes in 4QFY11. The company has contracted with its second
vendor to provide maintenance services for its SmartClass installation base and is scheduled to
launch its 3D content on 1 April 2011.
Estimate revision: We have cut our FY12/13 revenue estimates by 10% and 14% respectively,
EBIT forecasts by 20% for both the years and EPS forecasts by 29% and 28%. Key factors
influencing this downward revision are 1) increase in tax in FY12 than earlier guided by the
company, 2) lower EBITDA margin in the year 0/1 for K-12 schools than we modelled earlier, 3)
investments in R&D and 4) cut down in ICT (government school) business.
Valuation: While FY12 is expected to see a muted growth due to base effect, we expect strong
20% revenue growth from FY13. We continue to remain positive on Educomp in the long-term and
see it as the best proxy to play the Indian education sector and favourable demographics. We rollover our valuation year to FY13 and now value the stock at 15x FY13e EPS at INR625 (from
INR740 earlier). The stock is currently trading at 15x FY12e EPS and we believe it will continue to
trade at these valuations
Valuation: While FY12 is expected to see a muted growth due to base effect, we expect strong 20%
revenue growth from FY13. We continue to remain positive on Educomp in the long-term and see it as
the best proxy to play the Indian education sector and favourable demographics.
We value the company on P/E basis. We roll-over our valuation year to FY13 and now value the stock
at 15x FY13e EPS at INR625 (from INR740 earlier). We have cut down our target multiple from 17x to
15x to factor in a slower recovery in earnings growth and the near-term uncertainty around pick-up in the
K-12 business and long-term sustenance of the SmartClass business.
Risks: Execution risks in the K-12 business, increased competition in the SmartClass business, and
requirement of higher capital to grow K-12 business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Educomp Solutions (EDSL)
OW(V): 3Q revs & profits inline with full-year guidance
3Q revenues and profits inline with full-year guidance
Lower TP to INR625 from INR740 (led by both multiple and
estimate cuts)
Reiterate OW(V) as long-term prospects remain positive and
we expect strong recovery in FY13
3Q consolidated revenues/profits inline with guidance: Educomp reported revenues of
INR3.6bn, up 37% y-o-y, and net profit of INR967m, up 58% y-o-y, and is well in on track to
achieve full-year guidance (revenues of INR13-13.5bn and net profits of INR3.3-3.35bn).
K-12 disclosures improved: Educomp has started providing further granular data on its K-12
division. By end-December 2010, 50 schools were operational, with 30 green-field Educomp
schools, 9 on dry management and 11 Euro-schools. Of the 30 green-field schools, 13 have still not
completed one year of existence and therefore are reporting negative EBITDA. We expect the
number of operational schools to increase to 71 by the end of FY12.
SmartClass reported revenue growth of 52% y-o-y, yielding revenues of INR2.5bn.
However, we assume nearly one-third of reported revenues are deferred revenues. The
company added 7,085 classes across 949 schools in 3Q (7.5 classes per school, lower than our
modelled 8) and is well on track to achieve its guidance of full-year addition of 25,000-30,000
classrooms. In the first 9MFY11, the company has added 19,144 classes and we expect further
addition of nearly 8,000 classes in 4QFY11. The company has contracted with its second
vendor to provide maintenance services for its SmartClass installation base and is scheduled to
launch its 3D content on 1 April 2011.
Estimate revision: We have cut our FY12/13 revenue estimates by 10% and 14% respectively,
EBIT forecasts by 20% for both the years and EPS forecasts by 29% and 28%. Key factors
influencing this downward revision are 1) increase in tax in FY12 than earlier guided by the
company, 2) lower EBITDA margin in the year 0/1 for K-12 schools than we modelled earlier, 3)
investments in R&D and 4) cut down in ICT (government school) business.
Valuation: While FY12 is expected to see a muted growth due to base effect, we expect strong
20% revenue growth from FY13. We continue to remain positive on Educomp in the long-term and
see it as the best proxy to play the Indian education sector and favourable demographics. We rollover our valuation year to FY13 and now value the stock at 15x FY13e EPS at INR625 (from
INR740 earlier). The stock is currently trading at 15x FY12e EPS and we believe it will continue to
trade at these valuations
Valuation: While FY12 is expected to see a muted growth due to base effect, we expect strong 20%
revenue growth from FY13. We continue to remain positive on Educomp in the long-term and see it as
the best proxy to play the Indian education sector and favourable demographics.
We value the company on P/E basis. We roll-over our valuation year to FY13 and now value the stock
at 15x FY13e EPS at INR625 (from INR740 earlier). We have cut down our target multiple from 17x to
15x to factor in a slower recovery in earnings growth and the near-term uncertainty around pick-up in the
K-12 business and long-term sustenance of the SmartClass business.
Risks: Execution risks in the K-12 business, increased competition in the SmartClass business, and
requirement of higher capital to grow K-12 business.
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