>EDUCATION SECTOR (EDELWEISS)

Executive Summary

■ Demand-supply gap; growth opportunities abound
The education sector currently faces a huge quality and supply gap at all levels viz., higher education, vocational and k-12 segments. While demand for quality education surges on demographics (both income and age) as well as a change in the GDP structure, supply remains constrained on account of limited government budgets and lack of accountability in the public education system. These pressures will force regulatory changes that are likely to open up new vistas for the private sector.

■ Regulatory changes likely catalysts for growth
While the private sector plays an important role in the education space, it remains constrained by regulations. Recent policy statements from the new education minister give hope for a gradual acceptance of “for profit” education and a change in the government role to a facilitator (from a licensor). We believe these changes will lead to “cleaner” corporate structures and perhaps the presence of education chains. Further, the new policy statement opens new vistas through the Public Private Partnership (PPP) route. For instance, the model school scheme, which will allow private sector management of government schools, is a potential USD 4.7 bn opportunity.

■ Market size estimated at over USD 21 bn
We estimate the size of the Indian education space at USD 21 bn, which is slated to grow at a rate of 22% per annum. Growth is expected across segments, most prominently in k-12 and higher education, which we value at USD 9.4 bn and USD 7.1 bn, respectively. We believe, the growth rates could be higher incase regulatory changes are introduced. Further, private sector players will benefit disproportionately as the size of the pie available increases.

■ Educomp best placed but valuations a speed breaker
We initiate coverage on Educomp Soutions with a ‘HOLD’ recommendation. We like the company for its proven track record in project execution and strategic presence across the entire education chain. However, we believe the upsides in the near-term are limited on account of its high valuations (30x FY11E earnings). From a medium to long term perspective, the company is likely to offer strong growth opportunities, we recommend adding on dips.

Everonn Systems’ (Everonn) business focus is somewhat more narrowly defined with fewer entry barriers. We initiate coverage on the stock with a ‘BUY’ recommendation largely on attractive valuations (it trades at a 60% discount to Educomp). Longer term growth for Everonn though will be dependent on an expansion of its product offerings.

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