>EDUCOMP SOLUTIONS (CITI)

Sell: Q1 Results – No Major Surprises

■ Standalone results – Net profit higher due to other income — Net income was Rs363m, higher than our forecast of Rs288m, due to higher-than-expected other income of Rs124m (CIRA exp: Rs40m). Revenues increased ~113% yoy to Rs1.5bn; EBITDA margins declined more than 400bps yoy. However, Q1 contributes to only a small part of full-year numbers for Educomp.

■ School learning solutions – good growth but margins? — Educomp has reclassified segmental data – Smartclass and I have been merged as School Learning Solutions (SLS). SLS reported a growth of ~150% yoy but margins declined more than 1300bps yoy.

■ Consolidated results — Consolidated net profits came in at Rs342m, despite a high other income of Rs153m (Rs118m due to gain from stake sale in vocational business to Pearson Inc). Higher depreciation and interest costs (not surprising given the sharp ramp up) resulted in PBT (ex other income) growing at ~74% yoy vis-à-vis revenue growth of ~125%.

■ Key issues to focus on — (a) Margin trajectory for SLS – post a 13%+ decline yoy; (b) Smartclass school adds going forward – only 173 additions this quarter; (c) Capex and operational cash flows – net debt increased by ~Rs800m qoq. Educomp also raised ~Rs6b from QIP post Q1.

■ High valuations – needs positive surprises — Educomp trades at premium valuations of ~34xFY10E (~100% premium to the Sensex) and needs positive surprises for the stock to move up meaningfully. We continue to remain Sellers.

To see full report: EDUCOMP SOLUTIONS