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Results in line with expectations
Educomp Solutions’ (Educomp) Q3FY11 results were broadly in line with
estimates. Revenue, at INR 3.6 bn, was up 38% Y-o-Y, driven largely by
SmartClass revenues that increased 52% Y-o-Y, to INR 2.5 bn. EBIT margin for
SmartClass dipped to 66% for the quarter versus 71% in Q3FY10. However,
overall EBIT margins have remained flat at 40%. PAT, at INR 1 bn, was up 56%
Y-o-Y, broadly in line with estimates.
Strong SmartClass classroom additions
Educomp added 949 schools during Q3FY11 versus only 355 in Q3FY10 and 664 in
Q2FY11, taking the total number of schools covered to 5,534. Classroom additions
for the quarter came in at 7,085, implying a dip in average number of classrooms
per school to 7.47 versus 8 earlier. Management maintained its guidance of
25,000-30,000 classroom additions in FY11; we believe they are on track to
achieve that. Pricing at INR 3.81 lacs per classroom was marginally lower than
guidance (INR 3.9 lacs) and INR 4.04 lacs in the sequential quarter. No new
schools were added in ICT, in continuation of the 1H trend. The number of K12
schools operational stood at 50, up from 46 in the previous quarter. In online and
supplemental education, new registration (at 0.34 mn) remained flat, taking the
total online user base to 2.5 mn.
Introduction of second vendor, 3D interactive multimedia
As earlier indicated by management, Educomp added another independent vendor
for hardware implementation (apart from EduSmart). The company also
announced the introduction of 3D interactive multimedia content from FY12. It
also plans to launch 3D content for schools, which will further enhance its
leadership in content. While the company is yet to formally disclose the name of
the vendor and strategy, it already has a ready target market with presence in
more than 5,534 schools, ~65,000 classrooms and 3.9 mn students.
Outlook and valuations: K-12 segment vital; maintain ‘HOLD’
Management is on track to meet its full year topline and bottomline guidance of
INR 13.0 bn and INR 3.3 bn, respectively. At CMP of INR 483, the stock is trading
at P/E of 14.2x and 11.4x FY11E and FY12E earnings, respectively. However, we
remain concerned about rising competition in the Smartclass segment and
execution risks in the capital-intensive K12. We maintain ‘HOLD’ on the stock.
Company Description
Incorporated in 1994, Educomp is one of India’s leading providers of technology-enabled
education solutions and services for the K-12 (Kindergarten to Class 12) segment. It has
products targeting both schools and students. The company’s product portfolio includes pre
schools, K-12 schools. animated course content for the K-12 segment to aid teachers in
instruction, computer literacy programmes and professional development courses, Higher
education courses, vocational courses, and retailing of educational products
Investment Theme
Educomp Solutions has steadily moved up the value chain-from an ICT provider to one of the
largest school chains in the country. The company has proved its execution skills and is well
placed to take advantage of the new opportunities in the education sector. The ICT business
gives it access to PPP projects envisaged for government schools, smartclass has helped it
develop a differentiated pedagogy for its K-12 schools and proven execution in the K-12 lays
the base for the company’s future expansion into the vocational/ higher education space.
However, the past two quarters have seen a massive detoriation in the profitability of its core
segment i.e. Smartclass. This is a key concern from the near to medium term perspective as
the other businesses that can drive growth growing forward are still at nascent stages.
Key Risks
Capital intensive nature of business
Educomp’s business is capital intensive due to upfront investments required in the K-12
segment or BOOT model for smartclass. The capex requirements are set to increase
manifold, particularly if the company’s plans in K-12 schools materialise.
Regulatory concerns
The school business, as per regulations, cannot be a profit making enterprise. Most
companies have avoided regulatory hassles by creating subsidiaries that charge schools
for infrastructure and services provided, while the schools themselves operate at
breakeven. Many state governments have set up regulatory bodies to regulate fees
charged by schools; any increase in fees will require such a body’s prior approval.
Pricing pressure may set in; renewal rates may decline
Educomp has had a first mover advantage in smartclass and has been able to move
quickly to establish itself in schools. Though margins are attractive in smartclass, with no
strong barriers to entry we expect competition. Competition has already eroded margins
significantly in ICT, forcing out a few players from the market. Further, contracts in
smartclass are typically for five years and come up for renewal thereafter. If renewal
rates are lower than expected, our thesis could be at risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Results in line with expectations
Educomp Solutions’ (Educomp) Q3FY11 results were broadly in line with
estimates. Revenue, at INR 3.6 bn, was up 38% Y-o-Y, driven largely by
SmartClass revenues that increased 52% Y-o-Y, to INR 2.5 bn. EBIT margin for
SmartClass dipped to 66% for the quarter versus 71% in Q3FY10. However,
overall EBIT margins have remained flat at 40%. PAT, at INR 1 bn, was up 56%
Y-o-Y, broadly in line with estimates.
Strong SmartClass classroom additions
Educomp added 949 schools during Q3FY11 versus only 355 in Q3FY10 and 664 in
Q2FY11, taking the total number of schools covered to 5,534. Classroom additions
for the quarter came in at 7,085, implying a dip in average number of classrooms
per school to 7.47 versus 8 earlier. Management maintained its guidance of
25,000-30,000 classroom additions in FY11; we believe they are on track to
achieve that. Pricing at INR 3.81 lacs per classroom was marginally lower than
guidance (INR 3.9 lacs) and INR 4.04 lacs in the sequential quarter. No new
schools were added in ICT, in continuation of the 1H trend. The number of K12
schools operational stood at 50, up from 46 in the previous quarter. In online and
supplemental education, new registration (at 0.34 mn) remained flat, taking the
total online user base to 2.5 mn.
Introduction of second vendor, 3D interactive multimedia
As earlier indicated by management, Educomp added another independent vendor
for hardware implementation (apart from EduSmart). The company also
announced the introduction of 3D interactive multimedia content from FY12. It
also plans to launch 3D content for schools, which will further enhance its
leadership in content. While the company is yet to formally disclose the name of
the vendor and strategy, it already has a ready target market with presence in
more than 5,534 schools, ~65,000 classrooms and 3.9 mn students.
Outlook and valuations: K-12 segment vital; maintain ‘HOLD’
Management is on track to meet its full year topline and bottomline guidance of
INR 13.0 bn and INR 3.3 bn, respectively. At CMP of INR 483, the stock is trading
at P/E of 14.2x and 11.4x FY11E and FY12E earnings, respectively. However, we
remain concerned about rising competition in the Smartclass segment and
execution risks in the capital-intensive K12. We maintain ‘HOLD’ on the stock.
Company Description
Incorporated in 1994, Educomp is one of India’s leading providers of technology-enabled
education solutions and services for the K-12 (Kindergarten to Class 12) segment. It has
products targeting both schools and students. The company’s product portfolio includes pre
schools, K-12 schools. animated course content for the K-12 segment to aid teachers in
instruction, computer literacy programmes and professional development courses, Higher
education courses, vocational courses, and retailing of educational products
Investment Theme
Educomp Solutions has steadily moved up the value chain-from an ICT provider to one of the
largest school chains in the country. The company has proved its execution skills and is well
placed to take advantage of the new opportunities in the education sector. The ICT business
gives it access to PPP projects envisaged for government schools, smartclass has helped it
develop a differentiated pedagogy for its K-12 schools and proven execution in the K-12 lays
the base for the company’s future expansion into the vocational/ higher education space.
However, the past two quarters have seen a massive detoriation in the profitability of its core
segment i.e. Smartclass. This is a key concern from the near to medium term perspective as
the other businesses that can drive growth growing forward are still at nascent stages.
Key Risks
Capital intensive nature of business
Educomp’s business is capital intensive due to upfront investments required in the K-12
segment or BOOT model for smartclass. The capex requirements are set to increase
manifold, particularly if the company’s plans in K-12 schools materialise.
Regulatory concerns
The school business, as per regulations, cannot be a profit making enterprise. Most
companies have avoided regulatory hassles by creating subsidiaries that charge schools
for infrastructure and services provided, while the schools themselves operate at
breakeven. Many state governments have set up regulatory bodies to regulate fees
charged by schools; any increase in fees will require such a body’s prior approval.
Pricing pressure may set in; renewal rates may decline
Educomp has had a first mover advantage in smartclass and has been able to move
quickly to establish itself in schools. Though margins are attractive in smartclass, with no
strong barriers to entry we expect competition. Competition has already eroded margins
significantly in ICT, forcing out a few players from the market. Further, contracts in
smartclass are typically for five years and come up for renewal thereafter. If renewal
rates are lower than expected, our thesis could be at risk.
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