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Educomp Solutions Ltd.
Mixed Headline Dec-10; Results; Maintain UW on Lack of Clarity on Profitability of Core SmartClass Business
Quick Comment: We maintain our UW rating on
Educomp. Reported results were better than expected.
However, there was little clarity on revenue and EBIT
margins for the core SmartClass business. We are not
clear what percentage of its core profits are generated
from the core recurring SmartClass business versus the
EBIT contribution from revenues transferred from F2010
due to one-time transfer of schools under old contracts
to the new model and new schools signed under the new
revenue model.
Mixed Dec-10 results: Educomp reported revenue in
line while EBIT margins and net income was ahead of
our and consensus estimates. Revenue was Rs3.57bn
(+29% qoq, +38% yoy). SmartClass revenue (70% of
total revenues) grew to Rs2.5bn (+67% qoq) while
revenue from all other businesses declined 15% qoq.
EBIT margin improved to 40% (+1004bp qoq, +63bp
yoy). Net income was Rs967mn (+67% qoq, +58% yoy).
Maintains F2011 guidance: Educomp maintained its
F2011 revenue guidance of Rs13-13.5bn (+25-30%
yoy) and PAT guidance of Rs3.3bn (+22% yoy). The
implied 4Q revenue growth would be 23-36% qoq. We
estimates the 4Q implied PAT growth would be 44% qoq
and 130% yoy.
Financials and valuations: We expect revenue growth
of 10-11% in F2012 and single-digit net profit growth.
The stock currently trades at 15x F2011e and 14x
F2012e, and could stay volatile in the near term due to
steep correction in the run-up to results and strong
reported headline numbers. However, we would wait for
the pressure on revenue in the SmartClass segment to
dissipate and seek more clarity on profitability of the
core SmartClass business before looking to accumulate
the stock.
Key Results Highlights
1) Reported SmartClass revenues grew 34% yoy to Rs5.4bn
in F9M11 despite 194% yoy growth in new school additions
over the same period.
2) Other businesses remain drag: Revenue growth in all
other businesses excluding SmartClass have been a drag for
Educomp and grew 6% yoy in F9M11 with profit of Rs270mn
(-8% yoy).
3) Management indicated that its vocational and raffles JV and
the online, supplemental business segments are likely to
remain in investment mode for next 18 months.
4) Educomp announced that it has finalized the second vendor
(first vendor being Edusmart) for providing the maintenance
services and is likely to go operational in April 2011.
5) Management expects effective tax rates of 10% in F2011
and ~35% in F2012.
Company Description
Incorporated in 1994, Educomp provides education technology
solutions for the K12 segment. Educomp creates and delivers
digital content to schools. It also provides training to
professionals, and its retail business includes online tutoring
portals. It has also ventured into running preschools and K-12
schools at various locations in India. Apart from India, Educomp
is present in similar business segments in Singapore, the US,
and Canada.
India Education Services
Industry View: Attractive
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Educomp Solutions Ltd.
Mixed Headline Dec-10; Results; Maintain UW on Lack of Clarity on Profitability of Core SmartClass Business
Quick Comment: We maintain our UW rating on
Educomp. Reported results were better than expected.
However, there was little clarity on revenue and EBIT
margins for the core SmartClass business. We are not
clear what percentage of its core profits are generated
from the core recurring SmartClass business versus the
EBIT contribution from revenues transferred from F2010
due to one-time transfer of schools under old contracts
to the new model and new schools signed under the new
revenue model.
Mixed Dec-10 results: Educomp reported revenue in
line while EBIT margins and net income was ahead of
our and consensus estimates. Revenue was Rs3.57bn
(+29% qoq, +38% yoy). SmartClass revenue (70% of
total revenues) grew to Rs2.5bn (+67% qoq) while
revenue from all other businesses declined 15% qoq.
EBIT margin improved to 40% (+1004bp qoq, +63bp
yoy). Net income was Rs967mn (+67% qoq, +58% yoy).
Maintains F2011 guidance: Educomp maintained its
F2011 revenue guidance of Rs13-13.5bn (+25-30%
yoy) and PAT guidance of Rs3.3bn (+22% yoy). The
implied 4Q revenue growth would be 23-36% qoq. We
estimates the 4Q implied PAT growth would be 44% qoq
and 130% yoy.
Financials and valuations: We expect revenue growth
of 10-11% in F2012 and single-digit net profit growth.
The stock currently trades at 15x F2011e and 14x
F2012e, and could stay volatile in the near term due to
steep correction in the run-up to results and strong
reported headline numbers. However, we would wait for
the pressure on revenue in the SmartClass segment to
dissipate and seek more clarity on profitability of the
core SmartClass business before looking to accumulate
the stock.
Key Results Highlights
1) Reported SmartClass revenues grew 34% yoy to Rs5.4bn
in F9M11 despite 194% yoy growth in new school additions
over the same period.
2) Other businesses remain drag: Revenue growth in all
other businesses excluding SmartClass have been a drag for
Educomp and grew 6% yoy in F9M11 with profit of Rs270mn
(-8% yoy).
3) Management indicated that its vocational and raffles JV and
the online, supplemental business segments are likely to
remain in investment mode for next 18 months.
4) Educomp announced that it has finalized the second vendor
(first vendor being Edusmart) for providing the maintenance
services and is likely to go operational in April 2011.
5) Management expects effective tax rates of 10% in F2011
and ~35% in F2012.
Company Description
Incorporated in 1994, Educomp provides education technology
solutions for the K12 segment. Educomp creates and delivers
digital content to schools. It also provides training to
professionals, and its retail business includes online tutoring
portals. It has also ventured into running preschools and K-12
schools at various locations in India. Apart from India, Educomp
is present in similar business segments in Singapore, the US,
and Canada.
India Education Services
Industry View: Attractive
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