Everonn Education - Adverse corporate event could have overhang on stock:: Credit Suisse,

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● The founder CEO/MD of Everonn, Mr P Kishore, was recently
arrested by Indian investigating agencies on charges of bribery
and tax evasion. The Chairman of Board has resigned and a new
CEO has been appointed from within the top management (a cofounder
of the company).
● While immediate business continuity may not be a concern, we
see risks to business prospects over the longer term.
● At the highest risk is the government business (18-20% of sales
currently). Further, the promise of the large NSDC contract (a JV
with a government entity, not in our estimates) may not fructify.
However, we see minimal risks to the non-government businesses.
● We reduce our revenue and margin estimates, leading to EPS
cuts of 8-17% over the next three years. We believe that the stock
multiples could derate because of the event. Our DCF-based
target price falls to Rs340.
● While the stock has corrected sharply (to below book value), we
see limited catalysts near term. We downgrade to NEUTRAL.
Recent negative events
The founding CEO/MD of Everonn, Mr P Kishore, was recently
arrested by the Central Bureau of Investigation (CBI) on charges of
bribery and tax evasion. CBI has alleged that Mr Kishore paid a bribe
of Rs5 mn to suppress taxable income of Rs600 mn of the company
(out of an alleged concealed income of Rs1.1 bn). In our discussion
with management post the event (the new CEO – see below), we
understand that the company was not aware of this amount prior to
the event happening. We note that the amount disclosed as contested
tax claims (under contingent liabilities) as of Mar-11 in the annual
report is only Rs14 mn.
The underlying business could be impacted
Following this event, the Chairman of Board, Mr JJ Irani, resigned
from this position. The board has now appointed another whole-time
director, Ms Susha John as the CEO. We would expect Kishore to
stay out of the company activities until the charges are resolved.
Ms John is one of the co-founders of Everonn along with Mr Kishore,
and brings with her 25 years+ of experience. A business council has
been formed to advise the CEO, with two veteran directors of the
company: (1) Mr R Sankaran (40 years+ experience including at Tata
Steel), (2) Mr Joe Thomas (23 years+ experience including at P&G).
Management explained that over the past couple of days, senior
management has contacted key customers, bankers and reached out
to employees. We see little risk to business continuity in the absence
of Mr Kishore.
While the immediate business fallout could be minimal, over the
longer term this event could have negative repercussions on the
company prospects.
We expect that the government businesses (18-20% of revenue)
could be at the highest risk (possible blacklisting of the company if
charges are found to be true). We are now building no new contract to
be won by the company in the government ICT business. A lot of
expectations were also built around the NSDC contract of Everonn
(cumulative revenues of Rs140 bn over ten years, not in our
estimates), which has a risk of being downsized/cancelled, in our view.
The impact on the private businesses could be limited, in our view.
Downgrade to NEUTRAL
Based on the above risks, we cut our revenue estimates for Everonn
for the near term, leading to 8-17% earnings cuts over the next three
years.
It is likely that there may be further management changes at Everonn.
The corporate governance issues raised by recent events may have
an overhang on the stock over the near term (leading to multiple
derating). Despite recent correction and stock trading at 0.9x book, we
see limited catalysts for stock performance in the near term. Our
target price decreases to Rs340 (21% potential upside to Monday’s
close), and we downgrade the stock to NEUTRAL.
The risk to our downgrade comes from possibility of a buyout.