UBS: Educomp Solutions - Strong 3Q validates robust growth model

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UBS Investment Research
Educomp Solutions
Strong 3Q validates robust growth model
�� 3QFY11 revenue and net profit beat estimates
Educomp reported a 37% YoY growth in revenues to Rs3.58bn, 7.6% ahead of our
estimates. EBITDA margins came in at 45.6%, in-line with our estimates. Net
profit increased 58% YoY to Rs967mn, higher than our estimate of Rs872mn. We
believe 3Q being seasonally strong quarter coupled with good execution
momentum drove earnings.

�� Smartclass margin bounce back after weak 1H
School Learning Solutions (smartclass +ICT) segment operating margins improved
15%-pts QoQ to 61%, contributing around 80% of revenue and entire profit in
3QFY11. We believe guidance for smartclass implementation of around 25,000 for
FY11 is on track. During the quarter over 7,000 Smartclass were implemented,
adding to a total of 19,144 classrooms in 9MFY11.
�� Balance sheet improves; debtor days moderating
Educomp’s debtor days declined to 168 days in 3Q post securitisation of smartclass
receivables, well on track to meet management guidance of 160-170 debtor days
by end FY11. We think enhanced disclosure in terms of segmental debtor days is
likely to build investor confidence.
�� Valuation: maintain Buy
Educomp trades at forward PE of 10.8x on our FY12 EPS estimates. We believe
continued execution on the asset-light business model is key to outperformance of
the stock. We maintain our Buy rating with a DCF-based price target of Rs775.


�� Educomp Solutions
Educomp Solutions (Educomp) is India's leading provider of multimedia course
content to private schools, as well as a leading education services provider to the
public education system. The company also has presence in the kindergarten to
twelfth grade and pre-school segments, with more than 40 schools operating
under multiple brand names. The company has recently entered the higher
education segment through its tie-up with Raffles Education Corp, a Singaporebased
provider of educational services. In addition to the above, Educomp has
also has interests in online tutoring and vocational training.

�� Statement of Risk
Any slowdown in the broader economy could affect spending levels on
education, in terms of inability to increase school fees, lower spending on outof-
school instruction etc. This in turn could impact revenue growth and
profitability for Educomp. Any incremental regulations on fee structures or
capacity constraints could also adversely impact the company.