>EDUCOMP SOLUTIONS (ICICI SECURITIES)

Educomp Solutions’ standalone revenues grew lower than expectations at 56% YoY and 27% QoQ to Rs1.84bn (I-Sec: Rs1.94bn). With higher admin costs, depreciation and interest, operating profits before taxes (OPBT) declined 9% QoQ to Rs500mn. OPBT margin declined 10.7ppts QoQ to 27.2% (I-Sec: 34.3%). PAT rose 73% to Rs545mn after Rs369mn write-back of forex loss on MTM of FCCBs (as per the option provided in amended AS11). The management has guided for Rs10-10.5bn FY10 consolidated revenues and Rs2.1-2.2bn PAT, implying 58-66% YoY growth, broadly in line with market expectations. With lower-than-expected Q4FY09 results and in line FY10 guidance, we expect the stock to be under pressure in the short term. Educomp’s diversified business model is less prone to slowdown with strong annuity-based cashflows providing high and sustainable growth visibility in the long term. We believe robust growth momentum will continue in Smart_Class and K-12 schools, which are the key growth drivers for the company, while ICT and other businesses/acquisitions would supplement the strong growth. The management expects better financial performance from subsidiaries/acquisitions in FY10. We expect 43% CAGR each in consolidated revenues and PAT over FY09-11E. Maintain BUY with Rs2,950 price target (at FY10E P/E of 26x).

■ Strong traction in Smart_Class, with 120% YoY revenue growth to Rs1.1bn in Q4FY09. Educomp added 258 schools to its Smart_Class portfolio, taking the total to 1,737 (surpassing its guidance of 1,700) and covering +1.98mn students. The management has guided for healthy Smart_Class school additions (to cover 2,800- 2,900 schools) in FY10. To ensure continued robust growth in Smart_Class, Educomp plans to: i) add 40 sales personnel to the existing 180, ii) increasingly provide hardware upfront to the schools, thereby reducing cashflow requirements, iii) improve logistic facilities and iv) outsource resource co-ordinators. We expect
strong 53% CAGR in Smart_Class revenues over FY09-11E.

■ K-12 initiatives on track. At present, Educomp has 14 operational schools with 14,000+ students. Admissions have started for six more schools and three schools would be added by June ’09. Educomp has visibility for 20 more schools in FY10. We expect 46% revenue CAGR from K-12 initiatives over FY09-11E.

■ ICT and other businesses/acquisitions. Educomp has guided to add 5,000 schools in ICT for FY10. Pre-school brand, Roots to Wings, is present in 169 centres, while Eurokids has more than 450 pre-schools; the management intends to have presence in >1,000 pre-schools in the next two years. Raffles Millennium International Institute is operational in Delhi and would also be started in Bangalore.

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