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History and Business Model
Established in 1994, Educomp Solutions Ltd is India's largest integrated education
company. They offer education products and solutions for K-12 in the country,
coupled with a large footprint in preschool, vocational and higher education. The
company also has a strong global footprint spanning US, Singapore, Sri Lanka and
Canada and operates through its various subsidiaries, including AuthorGen
Technologies Pvt Ltd, Educomp Learning Hour Pvt Ltd, Learning Internet Inc, USA,
Ask'n'Learn Pte Ltd, Singapore and Savvica Inc in Canada. Their products include
Smart class, a teacher-led content delivery system; Roots to Wings, a pre-school
learning system, and Mathguru.com, an online learning initiative.
Financials
The Company has been growing at a steady rate with revenue and profit CAGR of
68% and 69% resp. over 2008-2011. For the year FY11, net sales of Rs 1351
crores was reported, i.e. a Y-o-Y increase of 30%. Net profit increased to Rs 343.8
crores , an Y-o-Y increase of 22%. Net sales Q1FY12 grew by 28% at Rs 292
crores against Rs 228crores in Q1FY11. It reported PAT at Rs 40crores, an
increase of 9% on Y-o-Y basis. The increase in sales was supported by a growth of
72% by subsidiaries; though they still continue to report a net loss to the tune of Rs
3.5crores in Q1FY12. The subsidiaries reported a growth in sales supported by K-
12 segment. Educomp recorded an addition of 5288 classrooms for Q1FY12. The
company has maintained its FY12E guidance of 40,000-45,000 classroom
additions with a per classroom realization of Rs 0.39-0.4 crores.
Growth Drivers
• Education in India: Education is the biggest expense for the middle class of
India after food and groceries. India has the world’s largest population in the age
group of 0-24 years. Despite this, India reports low rate of enrolment at school
levels which continues to decrease from primary to secondary level education.
The Education services sector of India is expected to grow at a 6%CAGR to
~Rs370000crores by FY13E. The Government’s annual spending of
USD3000crores would facilitate this growth.
• Leading the educational space: Educomp is the leader in most of the
segments it operates in within the highly fragmented Indian education space.
• Smart Class: Educomp Smart Class, a range of interactive digital lessons with
animations and graphics continues to dominate the segment with a significant
share in the face of emerging competition.
• K-12 space: Within the Education space, K-12 is the largest annuity source
though gestation periods are long and Educomp has exhibited strong execution
in K-12 educational space. The management indicated that schools older than 3
years have recorded an attractive ROCE of 35%. Educomp is planning an
aggressive strategy to expand further in the K-12 space by FY13E.
• Pre-School business: India has the world’s largest population in the age group
of 0-24years. Given this demographic profile, Pre-school poses as an attractive
business. Educomp had 220 pre-schools under Roots to Wings and 579
preschools operational under Eurokids.
• Divestment a possibility in future: Educomp has created a good portfolio of
businesses which could provide an opportunity for divestment in the future.
Valuations:
At CMP of Rs 249.9, stock trades at PE of 7.2x and 5.7x its FY12E and FY13E
earnings of Rs 36.7 and Rs44.1 respectively as per Bloomberg estimates. We
maintain a positive outlook on Educomp Solutions. Its wide presence in the number
of schools offers a strong growth potential and opportunity.
Technicals
Once a darling stock, this script has lost more than 80% in last two years. The
secular bear trend in this stock has reached to levels where volume buildup is not
visible. This indicates that the selling interests at these levels are diminishing. The
Fibonacci retracement from the 2009 high till lows gives us 38% level at Rs 507
which would be our eventual target. The levels Rs 280 & Rs 450 would provide
some resistance during the upward journey.
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