Educomp Solutions 4QFY2010 performance highlights and results update

It is worth notice that VSAT based IIT JEE/AIEEE coaching by educomp is currently making losses (apparently due to investment phase) but as per the following report, expected to become profitable (They are targeting 2500 crore market in this segment).

Educomp Solutions 4QFY2010 performance highlights and results update

Date: 28 May 2010
Contributed by Angel Broking

By Angel Broking

Educomp reported a robust quarterly performance in 4QFY2010, recording a 47.1% yoy growth in its Top-line and a 9.1% yoy increase in its Bottom-line, aided by an EBIDTA Margin expansion of 729bp to 55.4% (on a reported basis). However, after eliminating the Impact of the Transfer of existing schools and the EduSmart Model (securitisation), the 4QFY2010 revenue was down by 3% yoy, while the PAT was up by 90% yoy. The management has guided towards a revenue growth of 25-30%, at Rs1,300-1,350cr, and a PAT of Rs330-350cr, based on the reported numbers. The increased allocation and renewed emphasis by the government on the Education Sector during the Union Budget 2010-11 augurs well for Educomp, which is currently pursuing newer initiatives in the Sector. We maintain a Buy on the stock.


Performance once again driven by strong Operational efficiency in SLS: Educomp’s robust revenue growth (on a reported basis) was mainly driven by a 61.5% yoy growth in the School Learning Solutions (SLS) Business, comprising of Smart Class and ICT Solutions (ICT), with the former clocking a growth of 117.5% yoy, and the latter clocking de-growth of 49.7% yoy. However, if we were to eliminate the impact of transfer of the existing Smart Class contracts and the EduSmart model, the revenues in the overall Smart Class grew by 18% yoy to Rs122cr. EBITDA Margins expanded by a strong 729bp yoy, following strong improvement in SLS Margins. In spite of the excellent operational performance, Bottom-line growth was restricted to only 9.1% yoy, on account of higher interest costs, tax rate and lower other income.


Outlook and Valuation: In addition to the aggressive expansion plans in the Smart Class Segment, the company is also investing a considerable amount in newer initiatives, in terms of setting up its own K-12 high-schools, and has embarked on expanding its On-line Supplementary business. We have pruned our estimates as well as reduced our Target multiple in view of the capex intensity (K-12 business), D/E of 0.6x, increased competition and concerns over the future outcome of its initiatives in Raffles/E-learning and other businesses. We have valued Educomp at 16x FY2012E EPS of Rs45.9. We expect the company to log CAGR of 44% and 27% in Top-line and Bottom-line, respectively, over FY2010-12E. We maintain a Buy on the stock, with a revised Target Price of Rs734 (Rs926).











SLS and K-12 segments continue to drive the Top-line


Educomp Solutions recorded a 47.1% yoy growth in its consolidated reported revenues in 4QFY2010, driven by the strong growth recorded by its SLS and K-12 Segments. The SLS Business, comprising Smart Class and ICT Solutions (ICT), recorded a strong 61.5% yoy growth in consolidated Revenues, with the former clocking a growth of 117.5% yoy, and the latter clocking de-growth of 49.7% yoy (on reported basis). However, if we were to eliminate the impact of transfer of the existing Smart Class contracts and the EduSmart model, the revenues in the overall Smart Class grew by 18% yoy to Rs122cr. The company signed 720 new schools and implemented 503 under the Smart Class Business, during the quarter, taking the total number of schools to 3,077 (with the total student count reaching 3.1mn). In the ICT Business, Educomp signed in 600 new schools during the quarter, taking the total to 15,426 schools (with total students touching 8.2mn). K-12 business revenues, comprising of Educomp’s owned and Eurokids High Schools, Pre-schools of Eurokids and Roots to Wings, grew by27.1% yoy.



The Higher Learning Solutions (HLS) Segment, however, de-grew by 10.9% yoy as the new JVs, Raffles and Pearson, are still in investment mode. The Online, Supplementary and Global Segment (comprising of Online Supplementary products from its subsidiaries, Learning.Com USA, Ask n Learn Singapore, AuthorGen, Learnhub.com and Learninghour.com, which provide career and work-related counseling initiatives) continued to de-grow and was down by 4.7% yoy, as most of these products are also currently in investment mode.




Educomp has strong growth plans for its K-12 business segment. The company has signed 69 high schools through its subsidiary Educomp Infrastructure and Services Management Limited (EISML) as on date, of which 29 schools are already operational and another 14 Euro-schools are operational under Eurokids, serving over 24,000 students. To expand its high school business through partnerships and collaborations, Educomp has also recently signed a joint venture with the LAVASA Corporation to set up international schools in Lavasa. Additionally, the company’s pre-school initiatives, Eurokids and Roots To Wings, are also witnessing strong traction, with the former having 555 pre-schools, of which 30 are owned by Eurokids, and rest are franchisee-based, and the latter running 220 franchises, covering 5000 students, as on date.


The company’s Online, Supplementary and Global business segment is in expansion mode, with new initiatives on the platter, including the launch of India’s first VSATbased Engineering Preparation program, under the brand LEAP, through which Educomp aims at seizing an estimated Rs2,500cr worth of market opportunity of the IIT-JEE and AIEEE. Educomp will open LEAP centers across Tier-II and Tier-III cities in India, to allow students access to high quality coaching through VSAT. This segment is currently in the investment phase and is witnessing losses. However, these newer initiatives in the Supplementary business are expected to deliver strong Revenue inflow over the next few years, as consumer spending in this area of Education is expected to be 2x than that on the schools and colleges education spend.





Strong Margin expansion continues, with a reduction in the Cost of Goods


Educomp’s EBITDA Margins registered an expansion of 729bp yoy during 4QFY2010 to 47.7%, on the back of the 1,190bp yoy reduction in the Cost of Goods sold in the consequent quarter. The staff costs were also down by 55bp yoy. However, SG&A costs increased by 516bp and restricted a further improvement in margins. The company’s newer initiatives in HLS and Online, Supplement businesses, which are currently in investment mode, impacted the overall Margins. Moreover, the K-12 segment, which is a highly capital intensive business, is in its initial years of commencement and is witnessing margin pressures. However, a strong improvement in the SLS Margins cushioned the pressure on the overall Margins.





Higher interest costs and tax, and lower other income restricts PAT growth


The depreciation cost during the quarter was down by 29.3% yoy; however, the interest costs spurted by 60.3%, while the other income declined by 73.3% yoy, and the tax rate moved up from 39.7% to 55.4% yoy. Thus, despite the excellent top-line and margin performances, the Bottom-line growth was restricted to only 9.1% yoy.




Reconciliation eliminating Impact of existing schools and EduSmart


If we were to eliminate the impact of the transfer of existing schools and the Edusmart model, the 4QFY2010 revenue was down by 3% yoy, while the PAT was up by 90% yoy. Similarly, for the full year FY2010, after eliminating this impact, the revenue was up by 41% yoy, while the PAT was up by 71% yoy.




Outlook and Valuation


In FY2010, Educomp has successfully moved from the earlier SmartClass BOOT model to the securitization-based Edusmart model, to re-align the capital intensive structure of Smart Class to a free cashflow generating business, and to leverage the strong potential opportunities in the segment.


For FY2011E, the company has guided towards adding 25000-30,000 classrooms in the SmartClass business, and to clock revenues in the range of Rs850-900cr, of which ~Rs600cr would be organic revenues, while the balance would be the content revenues deferment of the previous year (on account of the transfer of schools). The company has also guided for over 20,000 schools in the next 6-7 years, translating to over 300,000 classrooms in Smart Class. In the ICT Segment, the company plans to curtail its exposure to the low-Margin and long pay cycle projects, and would get selective, to improve its Operational performance. In 4QFY2010, the company had sanctions of Rs415cr of securitisation funding, and for FY2011E it has tied up for Rs500cr of securitisation funding for schools to be added.


The company’s overall Revenue guidance for FY2011E is in the range of Rs1,300- 1,350cr, while the PAT guidance is at Rs330-335cr, translating into a growth of 29.7% & 23.5%, respectively, with focus on growth engines like SmartClass and K12 schools. We feel that such high growth guidance is a little optimistic, considering the scale and diversity of the business model.



We have pruned our estimates as well as reduced our Target multiple in view of the capex intensity (K-12 business), D/E of 0.6x, increased competition and concerns over the future outcome of its initiatives in Raffles/E-learning and other businesses. We have valued Educomp at 16x FY2012E EPS of Rs45.9. We estimate the company to record CAGR of 44% and 28% in Top-line and Bottom-line respectively, over FY2010-12E. We maintain a Buy on the stock, with a revised Target Price to Rs734 (Rs926).