Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Educomp Solutions Ltd-----------------------------------------------------Maintain OUTPERFORM
High near-term capex is negative surprise
● Educomp’s quantum of investments into K-12 school segment has
surprised negatively for the last two quarters – these are primarily
going into acquiring land and constructing new schools which are
happening at a faster pace than expected.
● While management is hopeful of this capex intensity coming down
from next year due to tie-ups with investor partners, we believe
there will be challenges in this aspect and believe Educomp will
have to bear most of the capex on its books. Our capex numbers
for the company thus increase 60% and 40% over two years.
● On the other hand, the core business continues to perform well – both
on Smartclass (extending lead over rivals) as well as new businesses.
● With these changes, our EPS estimates go down 21%/12% over
the next two years. Our DCF based target price goes down to
Rs360 (from Rs675). However, with recent correction in the stock
price, we see valuations cheap at 6x FY13 P/E and retain our
OUTPERFORM rating on the stock.
Investments into K-12 schools accelerate
Over the last two quarters, Educomp’s consolidated capex was at
Rs4.6 bn versus our estimate for the whole of FY3/12 at Rs2.9 bn. We
are thus negatively surprised by the capex intensity.
Our recent discussions with management (post 1Q FY12 earnings
call) indicate that 1) most of the investments are going into the K-12
school business – to acquire land and construct schools. 2) By next
year, management expects nearly half of K-12 capex to be shared by
partners. 3) And the capex intensity could come down in coming
quarters. We believe that getting partners to invest into schools
business will be challenging, and expect the company to bear most of
the capex for the next three years in the school business. Thus, we
increase our capex estimates by 60% and 40% for FY12 and FY13.
Core business running intact
We believe that Educomp’s core Smartclass business continues to
perform well – with the company maintaining its lead over rivals with
investments into sales force and product innovations. Our recent
channel checks showed that the company is expanding beyond
CBSE/ICSE curriculum schools to state board curriculum schools.
Further, on the securitisation model, we have come across
agreements with banks where the corporate guarantee level is ~15%
(less than the 20% level indicated by company last year) – giving
comfort on the upfront revenue recognition. We largely retain our
revenue estimates in Smartclass, but build lower margins estimates,
as the company has guided investments into content upgrades for the
year (~Rs350 mn).
New businesses ramping up strongly
The recent quarters have shown strong growth in new businesses for
Educomp, as seen below. This is being driven by strong ramp up
across businesses like pre-schools, on-line portals, higher/vocational
education etc. We increase our revenue growth estimates in these
segments (as shown in fig. 2).
Reduce target price to Rs360
With higher depreciation and finance charges (driven by accelerated
capex), our EPS estimates for Educomp come down by 21% and 12%
for FY12 and FY13, respectively. Note that our FY12 PAT estimates
are below management guidance of Rs4 bn, as we are NOT building
in the expected gains from stake sale in subsidiaries (any such stake
sale would be an upside to our numbers). While the reported EPS
growth this year is lacklustre – this is due to a step up in tax rate. The
like-for-like FY12 EPS growth in our model is ~37%.
With accelerated capex, our DCF-based target price comes down to
Rs360 (from Rs675). At 8x/6x FY12/FY13 P/E after recent correction, we
believe the stock looks attractive. We retain our OUTPERFORM rating
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Educomp Solutions Ltd-----------------------------------------------------Maintain OUTPERFORM
High near-term capex is negative surprise
● Educomp’s quantum of investments into K-12 school segment has
surprised negatively for the last two quarters – these are primarily
going into acquiring land and constructing new schools which are
happening at a faster pace than expected.
● While management is hopeful of this capex intensity coming down
from next year due to tie-ups with investor partners, we believe
there will be challenges in this aspect and believe Educomp will
have to bear most of the capex on its books. Our capex numbers
for the company thus increase 60% and 40% over two years.
● On the other hand, the core business continues to perform well – both
on Smartclass (extending lead over rivals) as well as new businesses.
● With these changes, our EPS estimates go down 21%/12% over
the next two years. Our DCF based target price goes down to
Rs360 (from Rs675). However, with recent correction in the stock
price, we see valuations cheap at 6x FY13 P/E and retain our
OUTPERFORM rating on the stock.
Investments into K-12 schools accelerate
Over the last two quarters, Educomp’s consolidated capex was at
Rs4.6 bn versus our estimate for the whole of FY3/12 at Rs2.9 bn. We
are thus negatively surprised by the capex intensity.
Our recent discussions with management (post 1Q FY12 earnings
call) indicate that 1) most of the investments are going into the K-12
school business – to acquire land and construct schools. 2) By next
year, management expects nearly half of K-12 capex to be shared by
partners. 3) And the capex intensity could come down in coming
quarters. We believe that getting partners to invest into schools
business will be challenging, and expect the company to bear most of
the capex for the next three years in the school business. Thus, we
increase our capex estimates by 60% and 40% for FY12 and FY13.
Core business running intact
We believe that Educomp’s core Smartclass business continues to
perform well – with the company maintaining its lead over rivals with
investments into sales force and product innovations. Our recent
channel checks showed that the company is expanding beyond
CBSE/ICSE curriculum schools to state board curriculum schools.
Further, on the securitisation model, we have come across
agreements with banks where the corporate guarantee level is ~15%
(less than the 20% level indicated by company last year) – giving
comfort on the upfront revenue recognition. We largely retain our
revenue estimates in Smartclass, but build lower margins estimates,
as the company has guided investments into content upgrades for the
year (~Rs350 mn).
New businesses ramping up strongly
The recent quarters have shown strong growth in new businesses for
Educomp, as seen below. This is being driven by strong ramp up
across businesses like pre-schools, on-line portals, higher/vocational
education etc. We increase our revenue growth estimates in these
segments (as shown in fig. 2).
Reduce target price to Rs360
With higher depreciation and finance charges (driven by accelerated
capex), our EPS estimates for Educomp come down by 21% and 12%
for FY12 and FY13, respectively. Note that our FY12 PAT estimates
are below management guidance of Rs4 bn, as we are NOT building
in the expected gains from stake sale in subsidiaries (any such stake
sale would be an upside to our numbers). While the reported EPS
growth this year is lacklustre – this is due to a step up in tax rate. The
like-for-like FY12 EPS growth in our model is ~37%.
With accelerated capex, our DCF-based target price comes down to
Rs360 (from Rs675). At 8x/6x FY12/FY13 P/E after recent correction, we
believe the stock looks attractive. We retain our OUTPERFORM rating
No comments:
Post a Comment