Pick of the week:
Educomp Solutions Ltd; Banking on Very Strong Business Model
BSE Code: 532696
EPS: Rs.53.61
Dividend: 25%
Market Cap: Rs.3608.95 Cr
Educomp Solutions Ltd; Banking on Very Strong Business Model
BSE Code: 532696
EPS: Rs.53.61
Dividend: 25%
Market Cap: Rs.3608.95 Cr
Introduction: Set up in 1994, Educomp Solutions Ltd is India's largest provider of technology driven education Solutions Company. It provides end to end solutions for K12 through licensing
of digital content to enhance the teaching process. It aims to be a comprehensive provider of solutions in Indian school education economy and has expanded its offerings to cater to pre schools, online tutorials and professional development for teachers, etc.Educomp Solutions Ltd is one of the fastest growing companies in the space in which it operates. Key positives include growing adoption of technology based education amongst K-12 (Kindergarten to Class12) private schools, low market penetration of fewer than 5 percent amongst private schools in India and increased spending by state governments on technology adoption in public schools. Besides revenue visibility is high as company enters in to 5 year contracts with private school. Educomp has now emerged as full service education provider.
Even assuming moderation in growth in Smart Class and government school business and zero additions to brick and mortar school projects, earnings downside is limited to 11% and 26% in FY10 and FY11E and we can only see around 15%--17%, downside risk to stock prices from current levels on PEG basis in 12 months to 18 months time frame.
Shareholding Pattern: The promoters hold 55.04% while the general public holds 44.96%. Among the General Public, FIIs hold 35.59%, while the mutual funds hold 1.9%.
Financials: For Q2FY09, the total income of the company came out to be Rs.103.65 Cr as compared to Rs.48.62 Cr in the same period previous year. The Profit before depreciation & tax of the company for Q2FY09 stood at Rs.54.5 Cr as against Rs.25.81 Cr in the same period previous year.
The net profit of the company for Q2FY09 came out to be Rs.25.4 Cr as against Rs.13.62 Cr in the same period previous years. This increase in net profit is inspite of higher tax and depreciation. The EPS of the company for
The net profit of the company for Q2FY09 came out to be Rs.25.4 Cr as against Rs.13.62 Cr in the same period previous years. This increase in net profit is inspite of higher tax and depreciation. The EPS of the company for
Investment Rationale:
1. The total number of schools under contract for the company’s Smart Class segment has reached 1267 schools comprising 1.43 Million students. The total number of schools under contract for the company’s ICT Solutions segment has reached 8915 schools comprising over 5 million students.
2. Historically company has observed the following seasonality i.e. Quarter I amounts to approximate 10 to 12% of the total revenue. Quarter II amounts to approximate 18 to 20% of the total revenue, Quarter III amounts to approximate 25 to 30% and Quarter IV amounts to approximate 38 to 47% of the total revenue. Since the last two quarters amount to higher amount of revenues, we could see the company achieving growth targets going forward.
3. Even considering a worst case scenario we can expect 32% CAGR, FCF turns positive: Even assuming Smart Class school additions to be at 600 schools p.a, 33% lower than FY09E and no further expansion in K-12 schools, the FY10E and FY11E estimates would be a CAGR of 32% (FY09-11E). Free cash flow though would turn positive from FY10E versus earlier assumption of FY12E.
4. Strong performance continues; Could raise guidance in Q3: Educomp reported strong 120% Y-o-Y growth in PAT (including forex losses on Foreign Convertible Bond) led by 151% % Y-o-Y growth in revenues. It added 231 schools in Smart Class versus MLE of 129 and could up guidance in third quarter.
5. Strong domestic growth story: With nearly 80% of the revenues of the Company coming from domestic market and presence in non discretionary education market, there is virtually very little risk to earnings.
6. Growth momentum continues: The Company added 231 schools in Smart Class as against to an earlier expectations of 129 schools. Cumulatively Educomp has now added 334 schools in 1H FY09 vs 172 last year. Since, as mentioned earlier Q1 and Q2 are seasonally weak quarters, Educomp could exceed their guidance of 767 school additions during the year. Management plans to conduct 140 sales seminars across 80 cities during H2 FY09.
7. Guidance: The Company hopes to maintain a Full year consolidated guidance of Rs.5.5-5.8 bn and PAT of Rs.1.4 bn-1.45 bn for FY09 despite forex loss of Rs.200 mn during 1H FY09.
8. Premium Valuations of the stock: There are ample reasons to believe that premium valuations of the scrip around 30x FY10E are fair, considering a superb 68 percent earnings growth over FY08-11E and de-risked revenue model, focused on non discretionary education spend and high exposure to domestic economy.
1. The total number of schools under contract for the company’s Smart Class segment has reached 1267 schools comprising 1.43 Million students. The total number of schools under contract for the company’s ICT Solutions segment has reached 8915 schools comprising over 5 million students.
2. Historically company has observed the following seasonality i.e. Quarter I amounts to approximate 10 to 12% of the total revenue. Quarter II amounts to approximate 18 to 20% of the total revenue, Quarter III amounts to approximate 25 to 30% and Quarter IV amounts to approximate 38 to 47% of the total revenue. Since the last two quarters amount to higher amount of revenues, we could see the company achieving growth targets going forward.
3. Even considering a worst case scenario we can expect 32% CAGR, FCF turns positive: Even assuming Smart Class school additions to be at 600 schools p.a, 33% lower than FY09E and no further expansion in K-12 schools, the FY10E and FY11E estimates would be a CAGR of 32% (FY09-11E). Free cash flow though would turn positive from FY10E versus earlier assumption of FY12E.
4. Strong performance continues; Could raise guidance in Q3: Educomp reported strong 120% Y-o-Y growth in PAT (including forex losses on Foreign Convertible Bond) led by 151% % Y-o-Y growth in revenues. It added 231 schools in Smart Class versus MLE of 129 and could up guidance in third quarter.
5. Strong domestic growth story: With nearly 80% of the revenues of the Company coming from domestic market and presence in non discretionary education market, there is virtually very little risk to earnings.
6. Growth momentum continues: The Company added 231 schools in Smart Class as against to an earlier expectations of 129 schools. Cumulatively Educomp has now added 334 schools in 1H FY09 vs 172 last year. Since, as mentioned earlier Q1 and Q2 are seasonally weak quarters, Educomp could exceed their guidance of 767 school additions during the year. Management plans to conduct 140 sales seminars across 80 cities during H2 FY09.
7. Guidance: The Company hopes to maintain a Full year consolidated guidance of Rs.5.5-5.8 bn and PAT of Rs.1.4 bn-1.45 bn for FY09 despite forex loss of Rs.200 mn during 1H FY09.
8. Premium Valuations of the stock: There are ample reasons to believe that premium valuations of the scrip around 30x FY10E are fair, considering a superb 68 percent earnings growth over FY08-11E and de-risked revenue model, focused on non discretionary education spend and high exposure to domestic economy.
Risk: Risks to the valuation model discussed earlier, are delays in execution of contracts in government schools, acquisition related risks and managing multiple growth initiatives.
Chart-Check: The scrip after coming near Rs.2250 in late November, 2008, it fell back only to rise again almost to the identical levels in early December, 2008. The stock is on a downward channel now and could find its intermediate support around Rs.1950 and final support to the current downtrend at around Rs.1750.
This rock solid support should be considered as ultimate buying point in any correction in the scrip price. The stock is currently trading near its 10 and 20 SMA. Its 100 day SMA is around Rs.2800. The stock’s 200 day and 50 day EMA is around Rs.3000 and Rs.2250 respectively, which could be broken on the upside within the next 12 months time frame. MACD, Stochastic (Fast and Slow), and Bollinger bands though are currently in buy mode, I would prefer to buy the stock on any bounce around Rs.1950-Rs.2000 range, or near 20 day SMA. The Candle Stick Chart Pattern however, indicates that a little pain is left in the stock before it starts to move up.
Hence on Monday one can buy the stock after it has finished the initial correction phase and starts to move up. To sum up all, the stock should be purchased only above Rs.1950 and in bounces only. The stock should be exited around Rs.1750.
This rock solid support should be considered as ultimate buying point in any correction in the scrip price. The stock is currently trading near its 10 and 20 SMA. Its 100 day SMA is around Rs.2800. The stock’s 200 day and 50 day EMA is around Rs.3000 and Rs.2250 respectively, which could be broken on the upside within the next 12 months time frame. MACD, Stochastic (Fast and Slow), and Bollinger bands though are currently in buy mode, I would prefer to buy the stock on any bounce around Rs.1950-Rs.2000 range, or near 20 day SMA. The Candle Stick Chart Pattern however, indicates that a little pain is left in the stock before it starts to move up.
Hence on Monday one can buy the stock after it has finished the initial correction phase and starts to move up. To sum up all, the stock should be purchased only above Rs.1950 and in bounces only. The stock should be exited around Rs.1750.
Conclusion: Educomp Solutions Ltd is one of the best stocks in the space in which it performs and outsmarts it competitors by miles. It works in the niche segment of the IT-Education segment whose valuation model will improve going forward due to the spread of computer education in urban as well as in rural schools. The stock should be purchased around Rs.1950—Rs.2000 range with an upside potential of around 45%--50% in the next 12 months time frame, piggybacking on a strong 54% earnings CAGR over FY09-11E. The stock in the range of Rs.1750---Rs.1950 has limited buying considering that over 80% revenues emerge from non discretionary K-12 education spend. With presence in Pre School, Kindergarten to class 12 (K-12) schooling/content, online/offline tutoring and vocational training (Raffles) Educomp Solutions Ltd has now emerged as full service education provider.
Even assuming moderation in growth in Smart Class and government school business and zero additions to brick and mortar school project the stock could reach a target of Rs.4000 by the end of FY11.
Even assuming moderation in growth in Smart Class and government school business and zero additions to brick and mortar school project the stock could reach a target of Rs.4000 by the end of FY11.
Note: This was the research report sent to the Paid Groups (Premium and Quickie) on 14th December, 2008. The stock gave more than 20% return in less than 7 (seven) days.
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