>EVERONN EDUCATION (EDELWEISS)

■ Numbers in line with estimates; Eduresource grew substantially: Everonn Education (Everonn) reported consolidated sales of INR 731 mn, up 70% Y-o-Y, in Q2FY10. A substantial portion of the incremental revenues was contributed by its hardware trading subsidiary Eduresource that grew 2.4 times Yo-Y. Revenues in its Vitels segment grew 67%, to INR 348 mn, while ICT segment grew by a marginal 6%, to INR 139 mn.

■ EBITDA up; drop in ICT margins cause for concern: EBITDA for the company was higher by 74% Y-o-Y; EBITDA margin was, however, lower by 510bps Q-o-Q, as a substantial portion of the incremental revenues originated from Eduresource – an extremely low-margin business. Also, the ICT segment, despite reporting 6% Y-o-Y growth in revenues, posted 18% drop in PBT. We believe margins in the ICT business could continue to remain under pressure as competition intensifies amongst the existing players.

SCALING UP

■ Plans to move up the education value chain; execution key concern: Everonn has announced an ambitious plan of venturing into management of education institutions (schools & colleges) through its ‘Educating India’ project. Currently, the project is at the conceptual stage, with the exact timelines and business model still unclear. We believe execution will remain a key challenge in this venture, especially since Everonn has little experience in managing educational institutions.

■ Outlook and valuations: Risk-reward favourable; maintain ‘BUY’: We maintain our revenue and sales estimate for Everonn and expect a consolidated topline CAGR of 47% and net profit CAGR of 68%, over FY10-11E. Everonn is currently trading at P/E of 17x FY10E and 11x FY11E. Adjusting for aggressive revenue recognition (refer risk factors), the company is trading at a P/E of 13x FY11E. The Vitels segment remains key driver for the company’s valuation. We believe continued strong performance will drive a re-rating in the stock. We maintain ‘BUY’ on Everonn.

To see the full report: EVERONN EDUCATION