>EDUCOMP SOLUTIONS LIMITED (JP MORGAN)

Leading the Indian education story, this is just the beginning

• We initiate coverage of Educomp Solutions Ltd with an Overweight rating and Jun-10 PT of Rs 5000: Educomp is the largest listed player in the huge, fast-growing and under-tapped Indian private education sector. With private initiatives in education just beginning to take off and its first-mover edge, we expect strong growth trajectory for Educomp (50%+) over the next few years. Hence, we are fundamentally positive on the company and would be buyers from a 12-18 month view.

• Indian education sector is a huge but inefficient system: This is due to limited private sector presence and a cultural mindset of running schools in the non-profit paradigm. However, government’s willingness to allow private participation in education seems to be changing and we
believe that this would lead to large addressable market size of US$25B/$35B for private players by 2012/2015 just in key segments (K-12, Multimedia and ICT).

• We expect growth to remain strong: Despite its small size (FY09 revenue of US$140MM), Educomp is one of the largest private players in the education space (showing lack of private participation). With its first-mover edge in multimedia (SmartClass) and K-12 segments,
Educomp has delivered 140%/100% revenue/EPS CAGR over FY07-09. We expect EPS growth to remain strong (50% EPS CAGR over FY10E- 12E) as Educomp continues to scale, helped by government policies.

• Valuation and key risks: Educomp trades at FY10E P/E of 40x, which is not cheap on an absolute basis but reasonable given the growth prospects. Our price target assumes one-year forward P/E of 28x. Risks to our thesis and price target are: (1) managing growth and delivering on already high consensus expectations; (2) high capex requirements for all segments could lead to higher leverage on balance sheet (current net debt-to-equity is 0.4x) or equity dilution; (3) presence in too many small segments that stretches management bandwidth; and (4) disclosure levels to be improved.

To see full report: EDUCOMP SOLUTIONS