>EVERONN SYSTEMS LTD. (HDFC SECURITIES)

Q4FY09 Results – A disappointing performance
Everonn Systems’ Q4FY09 results were much below our expectations. Revenues came in 22% below our estimates while EBITDA and Net Profit were 44% and 45% below our estimates. The company also missed its annual revenue guidance of Rs1,850 Mn and net profit guidance of Rs290 Mn by significant 22% and 24% respectively.

The main reason for this was the fact that the company added just 80 schools in Q2FY09 and could not manage to add a single school in the ICT segment in last 2 quarters. The total schools under this segment still stand at 4,442 (3,164 schools in FY08). The average revenue per school in this segment also came down by 41% YoY to Rs1.24lakh (Rs2.11lakh in FY2008), reflecting significant pricing pressure in this segment.

ViTELS revenues also decline on a quarterly basis
In Q4FY09, the ViTELS segment recorded revenues of Rs179 Mn (down 15.9% QoQ) and this was the prime reason for underperformance in overall revenues. However, for FY09, ViTELS segment recorded a growth in revenues and PBT of 98% each YoY. In the ViTELS segment, revenues from schools are annual in nature and the company added only 37 schools in Q4FY09 taking the total number to 557, while in the college segment, where revenues are non-annual in
nature the company added 185 colleges during the quarter taking total number to 800. While in FY09, the revenue and profit growth was driven by higher than estimated addition of colleges, to sustain growth in this segment going forward, faster additions has to be made in schools to make revenues and profits predictable.

Margins contract in the quarter due to revenue decline
In Q4FY09, Everonn’s operating margins contracted by 1,443 basis points YoY due to higher operating costs. In FY09 the company recorded a 105 basis points YoY decline in operating margins due to higher employee costs. Employee costs as a percentage of revenues rose by 618 basis points during the year.

Outlook & Valuation
At the CMP of 384, the stock is trading at a P/E of 17.7x and 14.6x our estimated EPS of Rs21.7 and Rs26.4 for FY10 and FY11 respectively. We have revised our estimates downwards to factor in slower growth in the ICT segments as seen in the last three quarters. We now expect Everonn to record revenue and net profit CAGR of 45% and 34.3% respectively over FY09 to FY11E. We now rate Everonn Systems a ‘Market Performer’ as against a ‘Buy’ rating earlier, with a target price of Rs326 based on 15x its estimated FY10 EPS of Rs21.7.

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