Friday, June 8, 2012

>EDUCOMP SOLUTIONS: Pricing revives in Smart Class

Educomp Solutions’ (Educomp) Q4FY12 EBIT at Rs1.2bn and PAT at Rs0.6bn were in line with our expectations, though lower than the management’s guidance which was sharply cut a quarter ago. The management has guided for 25-30% revenue growth in FY13 and EBITDA margin improvement of 150-250bps YoY. However, it refrained from providing PAT guidance. We expect FY13 recurring PAT to be flat YoY mainly due to expected surge in interest cost by 53% YoY owing to likely refinancing of US$110mn FCCB maturing in July 2012 including premium which was not getting charged off earlier. While the volume growth momentum in the core business of Smart Class remains strong, pricing and hence margins are likely to remain under pressure because of intense competition. Other businesses like K- 12 schools and supplemental education are in nascent stage and in investment mode. Educomp is unlikely to turn FCF positive over the next two years. The stock has corrected 40% since our downgrade last quarter and is down 70% YoY, and with valuations at FY13E P/E of 8.6x and EV/E of 6x, we believe that the downside
is limited. Hence, we upgrade the stock to REDUCE from SELL with a revised target price of Rs148 (6x average FY13-14E EV/E), however, it is still not the time to accumulate the stock. Higher-than-expected Smart Class additions and any stake sale of assets are the key risks to our negative stance.

  FY13 – a year of consolidation – unlikely to regain investor’s confidence. We cut our FY13E EBITDA by ~8% due to lower than expected margins in Smart Class and PAT by 25% owing to likely higher interest costs. We now factor in revenue and EBITDA CAGR of 20% and recurring PAT CAGR of 10% over FY12-14E.

  Educomp unlikely to turn FCF positive over next two years: In spite of full securitisation of Smart Class receivables in FY12, DSO days remained high at 252 days and the same is unlikely to reduce significantly in the medium term. While absolute capex in K-12 schools is likely to come down, 43 new schools (21 greenfield schools and 22 schools under asset-light JVs) are likely to be constructed and the existing 69 schools would require upgradation and maintenance.

  Pricing revives in Smart Class, but margins declined: Smart Class pricing went up 10% QoQ in Q4FY12 to Rs0.37mn per classroom after a 17% QoQ fall in the prior quarter. Average classrooms per school also went up to 6.8 vs 5.3 in Q3FY12. In spite of this, the EBIT margin declined 60bps QoQ to 39% owing to higher marketing expenses. The company added a massive 17,815 classrooms in Q4FY12 and ~40,000 classrooms (guidance of 40,000-45,000) in FY12 vs ~27,000 classrooms in FY11. The company securitised all its FY12 Smart Class receivables amounting to Rs6.9bn under the reduced guarantee model and received Rs6.33bn till March 2012.

To read report in detail: EDUCOMP SOLUTIONS