>EDUCATION SECTOR: Q1FY13 Results Preview

Seasonally weak quarter


Education companies are likely to deliver lower growth in Q1 as it is a lean period from a business stand point. However, we expect the companies under active coverage to register flat growth during Q1FY13 due to the seasonality factor. In the coverage universe, Navneet Publication is likely to post strong growth of 16%. But, NIIT and Educomp will register lower growth due to the seasonally weak quarter. Within the space, we like Navneet Publication and NIIT considering attractive valuations, strong topline growth and better prospects of improving theirmargin profiles in FY13E.


 Topline growth to remain subdued on seasonality factor: Q1 is seasonally a weak quarter. Educomp and NIIT will consequently report lower growth. In the case of Navneet, revenue is likely to grow 16% YoY on the back of strong growth in the publication segment. Career Point, on the other hand, is facing challenges due to the change in entrance exam pattern.  


 Operating margin too is likely to remain weak: NIIT’s margin would be subdued as the individual learning segment is in the process of integration and lower topline growth will put pressure on margin. We believe that NIIT’s margin will expand in FY13E on the back of better sales mix in favour of individual learning solutions and school learning solutions.


 Prefer Navneet Publication and NIIT in the space:We prefer NIIT in the space considering attractive valuations and prospects of margin expansion in FY13E. Within the Publication space, we like Navneet Publication given its strong growth momentum for FY13E/14E and margin expansion and improvement in return ratios.



Career Point (Rating – Neutral; Target Price – Rs158)
 We expect Career Point to register 8.1% YoY revenue decline in Q1FY13 on the back of a drop in enrollment. Changes in entrance exam pattern and delay in AIPMT counseling are prime reasons for lower enrollments.
 We expect the company to report an operating margin of 23.4%, higher by 400bp despite lower sales as the marketing spend is likely to be lower and the company has curtailed its spending on uniforms and study material.
 We expect net profit to decline by 5.1% to Rs44mn mainly due to lower other income on YoY
basis.


Educomp Solutions (Rating – Buy; Target Price – Rs203)
 We expect Educomp to register 9.9% YoY revenue growth driven by 13.6% YoY growth in
school learning solutions which contributes 64% to the total revenue. Q1 is seasonally a weak
quarter for the company.
 Operating margin is expected to contract marginally to 31.6% on YoY basis mainly due to lower
margin in smart class segment as pressure on realization due to stiff competition.
 We expect net profit to decline by 48.5% YoY on the back of higher depreciation and interest
expenses.


Navneet Publications (Rating – Buy; Target Price – Rs75)
 We expect Navneet Publications to register 16.2% YoY revenue growth on the back of 17% YoY growth in the publication segment. Q1 is a strong quarter for the company.
 Operating margin is expected to expand marginally by ~100bp to 32.6% on YoY basis mainly
due to better sales mix in favor of the publication segment.
 We expect net profit to grow by 17.3%YoY on the back of higher EBITDA. NIIT (Rating – Buy; Target Price – Rs54)
 We expect NIIT to register 25.7% YoY revenue decline mainly due to the sale of Element K
business during Q3FY12. We expect the company to post 6.4% growth (ex-corporate learning
solution).
 Operating margin is expected to contract by 130bp to 8.3% on YoY basis mainly due to lower
sales in individual learning solution and relatively higher fixed cost. The margin profile is likely
to expand in FY13E with better sales mix in favor of individual learning solution.
 We expect net profit to decline by 24.1%YoY on the back of lower EBITDA.

RISH TRADER