Educomp Solutions: Buy: Business Line

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Investors with a two-year horizon can buy the shares of Educomp Solutions, a leading player in the school education space.

Continuing strength in its high-margin SmartClass business, selective participation in pure hardware deals and increasing visibility in its pre-school and K-12 segments are key positives for the company.

At Rs 605, the share trades at 14 times its likely FY12 per share earnings. This is well below the company's own historic valuations and at a discount to Everonn, despite Educomp's much larger scale of operations.

In the second quarter of this fiscal, the company saw its revenues expand by 21.5 per cent sequentially to Rs 276.8 crore, while net profits increased by 59.2 per cent to Rs 58.2 crore.

The second half generates more than 60 per cent of the overall business for Educomp for any given fiscal as most fresh installations happen before the start of the academic year, indicating that this fiscal could end up being quite robust for the company.

In FY10, Educomp reported revenues of Rs 1,165 crore, an increase of 76.5 per cent over the previous fiscal, while net profits more than doubled to Rs 275.8 crore. The company's SmartClass segment, which contributes nearly 55 per cent of overall revenues, has been implemented in 5,309 classrooms across 664 schools in the country.

The number of schools where implementation has been completed has more than doubled in the last one year. The segment enjoys an EBIT margin of 54.3 per cent. The average selling price per classroom which witnessed an increase recently, is likely to remain stable at Rs 3.9 lakh. The demand from across private and other schools for tools helping in interactive and outcome based learning is likely to be the key and sustainable driver for growth in this segment.

Educomp has adopted a selective approach to its ICT division, which is hardware intensive and involves computerisation of Government schools. While the segment contributes over 15 per cent of overall revenues, the company is looking to target only those deals that deliver higher margins. Given the competitive nature of this segment, it may be a reasonable approach to maintain margins.

The company's presence in K-12 schools, which are run in partnership with leading schools nurturing holistic learning, is increasing and has turned profitable as has its pre-school division.

As these segments scale up over the next couple of years, it would enable Educomp to have a healthy-mix of revenues.

Although strongly positioned in the Smartclass segment, pricing pressure by peers such as Everonn and NIIT could hurt margins.

K. Venkatasubramaniam

BL Research Bureau