Thursday, August 12, 2010

>EDUCOMP SOLUTIONS LIMITED: 1QFY11 results weaker than expected; SmartClass, K-12 schools traction continues to be strong - ALERT

1QFY11 results came in lower than expected: Revenues of Rs.2,279m came in 6% below our estimates, driven by lower ICT and preschools business revenues missing our estimates. EBIT margins of 20.4% were below our estimate of 24% mainly driven by lower margins in the SLS (SmartClass and ICT) businesses. However, sharp reduction in tax rates led to net profit (Rs. 366m) coming in just 5% below our estimates.

SmartClass segment: Educomp implemented SmartClass solutions in 6,750 classrooms in 1QFY11 - on track to achieve the high end of its FY11 guidance of 25,000-30,000 implementations. However, margins were hit by 1) induction of 160 additional sales & marketing personnel taking the sales team size to 380 people; 2) Increase in COGS due to hardware costs for partial SmartClass deployments where revenue has not been recognized – we believe this should reverse in 2QFY11.

■ ICT segment: Surprisingly, Educomp did not implement any new schools in ICT segment – leading to 27% Q/Q decline in ICT revenues. EBIT margins also declined to 17.7% vs. our expectation of 30% and 4QFY10 levels of 37.7%.

K-12 segment: Schools revenues came in at Rs. 205m (up 37% Q/Q, 71% Y/Y). Revenue decline in pre-schools segment (Eurokids and R2W) led to flat revenues Q/Q for the overall K-12 segment at Rs. 305m. EBIT margins were strong at 38% driven by better margins in the schools

Other segments: Investments in Raffles JV, Pearson JV (IndiaCan) and online ventures (Savvica, Authorgen, LearningHour etc.) amounting to Rs. 104.3m in the quarter.

Tax rate change: 1QFY11 tax rate was lower than expected (MAT rate) - the company attributed this to tax benefits arising from higher tax paid in FY10 on the school contracts transferred from BOOT to EduSmart model. As a result, management expects effective tax rate to come down to 18% in FY11 and return to corporate tax rate (30%) in FY12. We would seek further clarity on this from the management.

To read the full report: EDUCOMP SOLUTIONS

>LAKSHMI ENERGY & FOODS LIMITED: Q3FY10* margin disappoints

To read the full report: LAKSHMI ENERGY

>NTPC LIMITED: Muted operational performance

To read the full report: NTPC

>MERCATOR LINES: Valuation compelling…

MLL reported considerable improvement in operating performance in Q1FY11 with dry bulk division performing reasonably well. The company has also ramped up its coal business (mining as well as trading) which would increasingly contribute to the topline for the company. Freight rates are expected to be volatile over the next one year which could lead to fluctuations in the operating performance of the company going ahead. But MLL is well placed to ride the volatility of shipping business on account of inherent advantages such as diversified revenue stream, presence across segments, long term charter contracts, comfortable debt equity ratio and strong
management capability.

MLL posts very strong performance in Q1FY11
MLL reported 24.3% q-o-q rise in revenue at Rs 599.3 crores. The rise in topline was led by a surge in revenue from coal trading and coal mining which constituted 38.2% i.e. Rs 599.3 crores of the total revenue for the quarter. Singapore subsidiary which handles dry bulk business of the
company reported revenue of Rs 179.4 crores with improvement in operating days to 1251 days and TCE to $ 30001 per day. EBITDA margin improved to 33.1% from 29.0% in the immediately preceding quarter. The company posted net profit of Rs 61.7 crores in Q1FY11 which was higher than the profit made by the company in entire FY10.

MLL is trading at a significant discount to its global peers and almost at 0.5 x times its FY10 book value which provides an appropriate entry point for long-term investors. We have valued MLL on P/BV and P/E multiple basis to arrive at a price target of Rs 56 and recommend BUY rating on the stock.

To read the full report: MERCATOR LINES

>OPTO CIRCUITS LIMITED : Sensing strong growth ahead

Medical Equipment Industry to grow in double digits : According to Global consulting firm Capgemini, The global medical equipment industry, valued at USD 280 billion in 2009, is forecast to grow by more than 8% annually for the next seven years to exceed USD 490 billion in 2016. Some of the subsegments like orthopedic and cardiology are growing at a CAGR of 15-20%. Medical devices and supplies market in India is expected touch USD 1.7 billion in 2010, growing at the rate of 23% annually in the coming years from the current Rs. 5750 crores.

New product launch with aggressive marketing will lead to turnover growth: Eurocore GmbH, (acquired in 2006) has added invasive products ( Stents and Catheters) to Opto’s product portfolio. Eurocore’s products are CE certified and have market potential of USD 4bn. Once USFDA approval is obtained by December 2010, additional USD 6 bn market potential will be added. It sells its products in 26 countries. Criticare Systems Inc(acquired April 2008) has established product and technology leadership in anaesthetic gas monitoring, vital signs monitoring, gas and agent analysis and central station monitoring systems.

Cost cutting measures will lead to margin enhancement : Opto Circuits has shifted around 70% of the assembly and sub assembly works of Criticare Systems International Inc to Bangalore from USA. This will lead to improvement in operating margin of Criticare Inc. Recently, they have acquired N S Remedies Ltd, a Kolkata based manufacturer of medical and interventional products. This company has got CE certification for its stainless steel and cobalt chromium stent. Shifting of some of the production from Eurocore’s German facility will further enhance bottomline of the company by 65-80 basis points.

Product patent ,additional money spinner : Opto has got more than 40 product patents which provide them flexibility in product design and development. Additionally they can monetize this patent by leasing it to other interested parties .The company and its subsidiaries have recently entered contractual terms to private –label its gas analysis, vital signs and pulse oximetry modules for a few Fortune 500 medical devices companies.

To read the full report: OPTO CIRCUITS