Tuesday, January 17, 2012

>EDUCATION SECTOR: Price performance of Career point, Everonn Education, Educomp & NIIT

Growth momentum intact

We expect the companies to register strong growth during Q3FY12 on the back of seasonality . We believe the growth in topline would be largely driven by multimedia solutions to private schools, vocational courses and IT training segments. We expect Educomp Solutions to register strong growth in sales in Q3 driven by the school segment. NIIT is expected to report a decline in topline as it sold the Element K business. Within the space, we like NIIT considering attarctive valuation and better prospects of improving its margin profile in FY13E.

■ Topline growth to continue: We expect the growth momentum to continue for companies given the opportunity in the space and also because Q3 is seasonally a better quarter. Segments including multimedia solutions to private schools and vocational business would be key drivers.

 Operating margin to improve: Better topline would result in improvement in margin during Q3. NIIT would witness better margin on a like to like basis, though the individual learning segment is in the process of integration. We believe that NIIT would see margin expansion in FY13E on the back of better sales mix in favour of individual learning solutions and school
learning solutions.

 Prefer NIIT in the space: We prefer NIIT in the space considering attractive valuations and prospects of margin expansion in FY13E. Our belief is that NIIT rerating is contingent upon FY12E financial performance i.e growth with margin expansion. Hence, NIIT becomes a long-term bet. Also, we believe that stock price of Educomp factors in all the concerns including FCCB payout, high capex in formal education and free cash flow generation. Some of the triggers for the stock would be: 1) monetization of subsidiary(s) and 2) further announcement of securitization deal with 20% recourse.

Career Point (Rating – Under Review)
  • We expect Career Point to post Rs189mn in revenue in Q3FY12 on the back of an increase in realisation per student. We expect student enrollment to be flat or marginally decline this year.
  • We expect the operating margin to be 30% in the quarter on higher salary expense.
  • We expect net profit at Rs61mn on the back of higher other income. As the company has IPO proceeds in its books which are unutilized, it has invested surplus funds in tax saving schemes which reduces effective tax rate.

Educomp Solutions (Rating – Hold; Target Price – Rs220)

  • We expect Educomp to register 20% YoY revenue growth in Q3FY12 on the back of strong growth in School Learning and Higher Learning segments.
  • We expect the company to report an operating margin of 43.7% at the consolidated level driven by better sales mix.
  • We expect net profit to decline by 11.4% to Rs856mn. We assumed full tax rate as against effective tax rate of 20% in Q3FY11.

NIIT (Rating – Buy; Target Price – Rs81)

  • We expect NIIT to register 17.7% YoY revenue decline mainly due to sale of Element K business. We expect the company to post 14.8% growth (ex-corporate learning solution).
  • Operating margin is expected to expand marginally by ~30bp mainly due to better sales mix which results from the sale of Element K business. The margin profile is not going to change in FY12E and margin expansion would be more visible in FY13E.
  • We expect net profit to grow by 26.6% YoY on the back of savings from interest expenses and higher other income from the sale of Element K business.